Cl Q ^.A Bk. 
 
 Trinity College Library 
 
 Diirham, N. C. • 
 
 ■ - - - -- I 
 
 Rec’d i..i5?_br | 
 
THE 
 
 POSITIVE THEOEY OF CAPITAL 
 
 BY 
 
 EUGEN V. BOHM-BAWERK 
 
 COTOSELLOE IN THE AUSTRIAN MINISTRY OF FINANCE, AND HONORARY MMFESSOR OF 
 POLITICAL ECONOMY IN THE UNIVERSITY OF VIENNA 
 
 TRANSLATED WITH A PREFACE AND ANALYSIS 
 
 BY 
 
 WILLIAM SMART, MA. 
 
 LECTURER ON POLITICAL ECONOMY IN QUEEN MARGARET COLLEGE, GLASGOW 
 
 
 REPRINT i9‘J8 
 
 G. E. STECHERT A CO. 
 
 NFAV-YOHK 
 
Digitized by the Internet Archive 
 in 2017 with funding from 
 Duke University Libraries 
 
 https://archive.org/details/positivetheoryof01bohm 
 
3 5 
 
 TRANSLATOR’S PREFACE 
 
 In his Geschichte und Krilik der Kapitalzins-Theorieen (1884), -which 
 I translated in 1890 under the title oi Capital and Interest, Professor 
 Bohm-Bawerk, after passing in critical review the various opinions, 
 nractical and theoretical, held from the earliest times on the sub- 
 ject of interest, ended with the words : “ 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 phenomena of the formation of interest from the 
 simplest natural and psychological principles of our science.” The 
 Positive Theory of Capital, published in Innsbruck in 1888, and here 
 rendered into English, is the fulfilment of that promise. 
 
 The criticisms directed against the various theories of Interest 
 in the former work may be briefly summarised as follows. 
 
 The Productivity theories — those which, more or less explicitly, 
 attribute the existence of interest to the productive power of capital 
 — are dismissed as confusing quantity of product with value of pro- 
 duct, either in the way of tacitly assuming the identity oi-ihejwo, 
 or of fading to show any necessary connection between them. The 
 problem of capit al is a pr^ lem of surplus value, and value does not 
 come from the side of producliott-btrt-from the side of consumption. 
 Capital is productive, but interest is not its product. 
 
 The Use theories, which are a more or less scientific expan- 
 sion of the familiar formula, “ Interest is the price paid for the use 
 of capital,” are shown to base interest, which is notoriously an 
 income obtained from all kinds of capital, on an analogy drawn 
 from one special kind of capital, -viz. durable goods. The idea that 
 the use of capital is something distinct from the using-np of capital, 
 and interest something different from the price of the principal, 
 becomes untenable when the true economic nature of the “ good ” 
 is understood as the sum of its material uses or services. If con- 
 sumption is only a single exhaustive use, and use only a prolonged 
 consumption, the payment for “ use ” of Capital must be included 
 in the price of capitd. 
 
 In the Abstinence theory, which makes interest a compensation. 
 
VI 
 
 TRANSLATOR'S PREFACE 
 
 made to the owner of capital, for his renunciation of immediate con- 
 sumption, Bohm-Bawerk sees a confusion of the origin and accumu- 
 lation of capital with the source and cause of interest. Abstinence 
 will account for the owner having a sum to lend, but it will not 
 account for that sum growing 3% larger in a year’s time. 
 
 Lastly, the Socialist or Exploitation theory, which makes interest 
 simply a gain from exploited labour, is shown to be a theory which 
 could only arise on the negative basis of the unsatisfactory accounts 
 hitherto given, and on the positive basis of a mistaken value 
 theory. When an income obtained without work and without risk 
 was claimed as the reward of abstinence, and when all value was 
 ascribed to the action of material labourers, it was inevitable that 
 there should rise a reactionary theory proving that interest was 
 robbery. Thus the board was swept clean for the Positive Theory 
 
 A translator who does his duty must pass the work he renders 
 through his own mind. The necessity this imposes on him of 
 understanding his author, and getting at his point of view, should 
 make him peculiarly sensitive to certain diflBculties which are not 
 removed by simple translation. Modes of thought, arrangement, 
 manner of working, may remain foreign. A translator’s preface, 
 then, is not without justification if it anticipates some of the ques- 
 tions that are sure to arise in the minds of readers more accus- 
 tomed, perhaps, to English economics. Now as the main difficulty 
 of the present work is that alluded to by Professor Bohm-Bawerk 
 in his own Preface, that_the strikingly simple outlines of his theory 
 are o bscured by the very elaboration and completeness with which 
 it_js_ w:prked__ouL perhaps the best service I can do is to give a 
 short direct summary of the main argument, expanding on one 
 or two points which seem to me to require commentary. 
 
 Economic science being based on an analysis of the industrial 
 life, the first question in a theory of capital is one of terminology : 
 What do es tjm practical world mean, and what has it hitherto 
 meant, by the word Capital ? Here we find in common acceptance 
 not one but two conceptions, both based more or less on Adam 
 Smith’s old distinction between National Capital and Individual 
 Capital. It is quite necessary for scientific progress that the 
 exact distinction between these two conceptions should be fully 
 recognised, but it would be useless to refuse the name to either of 
 them : the practical world would not follow us. On looking closer 
 at the two, however, we can see that one of the conceptions really 
 includes the other, and that the difficulty may be avoided by adding 
 an appropriate predicate to each. Taking as basis the old root 
 idea of “an interest-bearing sum of money,” we may define 
 capital in its widest sense (or Acquisitive Capital), as the complex 
 of products destined to the Acquisition of goods. Under this, as 
 narrower category, we put the conception that came later in time, 
 
TRANSLATOR’S PREFACE 
 
 vii 
 
 but perhaps better deserves the name without predicate, that of 
 Social or Productive C^ita], comprising all products destined for 
 the production of fresl^wealthj briefly, the complex of Intermediate 
 Products. Thus we happily preserve in both conceptions the popular 
 idea of “ income bearing ” : society as a whole can only obtain 
 an income by “producing” new wealth, while the individual may 
 “ acquire ” it as well by the transfer of old wealth. 
 
 By these definitions Land a nd Labour are excluded from capital. 
 They have certain analogies, even close analogies, with it, but 
 scientific accuracy is not gained by making definitions so wide as to 
 conceal really discrepant elements. The definition of Social Capital 
 also excludes the Maintenance of Labourers ; for, obviously, to 
 include the direct and most obvious means of living would be to 
 take away all possibility of distinguishing between capital and con- 
 sumption wealth. 
 
 The subject, then, naturally divides itself into two parts; — Capital 
 in the narrower, but more widely important, meaning of the Instru- 
 ment of Production, and CapitaLas^the Source of Income. 
 
 First, of the I nstrument, of Production. In the economical 
 Avorld man finds himself a being of infinite want, confronted with a 
 universe full of potential wealth but with no tools except hands 
 and brains to give him possession of it. Incapabl e of creat ing any- 
 thing. he yet finds himself endowed with a powe r of moving things, 
 which, as he masters the secrets of nature’s working, gradually 
 enables him to imprison, impress, or suspend the action of her 
 powers, and so make her his servant. In various concrete ways he 
 adapts or rearranges nature — never, of course, changing her laws 
 or acting contrary to them, but varying the causal connection of 
 natural processes in such a way that, to a large extent, he remakes 
 the natural world to suit his purposes. Thus, between man and 
 his natural environment there gradually grows up a third term, 
 a machinery for the fuller satisfaction of man’s life, and to this, 
 in general terms, we give the name Capital. But, however the 
 growth of wealth and industry disuse the fact, in all production 
 of wealth there are only two original forces at work, nature’s 
 powers and man’s powers. Human powers, as always limited, 
 and as always put forth “ at the cost of ” brain or tissue, are all 
 “ economic ” ; but in the great treasury of natural forces there are 
 some powers so universal in their scope and working that they do not 
 enter into calculations of cost. As we say, using two phrases whose 
 full significance we do not always realise, we do not “ economise ” 
 the free gifts of nature — they “ cost ” us nothing ; although they 
 enter into the operations of all production, they do not enter into 
 “ economic ” consideration. The original factors of production, then, 
 are man and nature : the strictly economic factors of production 
 are labour and those natural forces (called by metonymy Laud) 
 
viii 
 
 TRANSLATOR'S PREFACE 
 
 which are limited and capable of being monopolised. But Capital, 
 however much credit it gets and deserves for its work in present- 
 day production, is no independent factor alongside of these. In one 
 aspect it may be called “ stored-up labour,” in another — and more 
 truly — “ natrff.al.force^stored_uix--by-4abour ” but in capital itself, 
 
 , alike in its origin and in its working, there is nothing that is not 
 accounted for by the other two factors. 
 
 We say, in its origin and its working, and it is advisable to 
 emphasise that these are distinct things. The origin of capital 
 is due to two factors, Indus try^ and Saving, both being indis- 
 pensable. It should be noted, however, that what is saved is 
 not capital but productive power. The primitive labourer works 
 overtime, produces a surplus subsistence, and spends it in making 
 tools : his saving is saving of strength to make tools. The modern 
 worker produces a surplus over his subsistence : gives that over to 
 banks and other agencies to be spent in building factories, erecting 
 machinery, etc.: what is saved is the natural forces thus put in 
 position to turn out consumption goods. But when we know 
 the origin of capital, we have stiU to ask : What is the nature 
 , and character of the production carried on by means of capital I 
 The answer may be put in the follovong way. The aim of 
 production is essentially the making or procuring of a living. 
 The animal finds a certain provision spontaneously offered it in 
 nature ; goes straight toward that provision ; and never gets 
 beyond it. Man, on the other hand, even in the simplest state, 
 takes an indirect course. He allies natural with his own (still 
 natural) forces; and he gets behind these natural forces, setting 
 them against each other, or co-operating with each other in carry- 
 ing out his instructions. He steals fire from heaven, and turns 
 I it against the gods. The end is always the consumption good — 
 
 ! the good which exhausts itself in ministering to man’s life in ' 
 its higher and lower forms; the factors are always labour and 
 nature ; but the way in which the end is reached is here indirect, 
 lengthy, and roundabout. From the rude spade, which the savage 
 first uses as a medium between his bare hai^jls and the fruits or 
 roots he lives on, down to the many years’ production process 
 stretching between the sinking of the shaft for coal or iron and 
 the flying shuttles turning out the cloth which finds its goal in 
 covering bare backs, is simply an evolution of the roundabout 
 method. The course of economic progress puts increasing inter- 
 vals between preparatory and finishing labour, decreasing the stock 
 by increasing the tools ; and at every new stage labour embodies 
 itself in further intermediate products or capital. The character- 
 istic result is twofold. As we should expect from the accumula- 
 tion and concentration of natural forces, this capitalist method is 
 immensely productive as compared with direct or unassisted labour. 
 
TRANSLATOR’S PREFACE 
 
 IX 
 
 On the other side, however, is to be put the sac:^cis_of Tinae 
 necessarily involved in the indirect process. The relation of these 
 two sides must be carefully noted. As time plays a greater part in 
 production — as the average period is extended — the absolute 
 productiveness of the capitalist process increases, but the relative 
 productiveness decreases. That is to say ; when the process has 
 reached a certain point, it becomes subject to a law of diminishing 
 returns. ^ 
 
 The fu nction, thei:^,_of capital in production may be said to be; 
 that of allowin g labour-and .natural powers to work out their(, 
 economic effects in p rocesses that take, time, or the utilisation of/ 
 natural forces in roundabout methods. Or, if we adopt the 
 peculiarly modern view that man is the economic Zidpunkt, we 
 may say that capital gives time to labour to avail itself of those 
 powers of nature which become available only at a considerable 
 sacrifice of time. 
 
 So mu ch for the function of capital, and one is apt to jump to 
 the conclusion that, having shown how capitalist industry produces 
 a great quantity of products as compared with unassisted labour, 
 the sole and sufficient origin of interest has been indicated. A little 
 consideration will show that we are yet on the threshold of that 
 inquiry. The concrete result — the raison d’etre — of a factory is the 
 mass of products it sends to market. These are the transformed 
 shapes of raw and auxiliary materials, machinery generally, and 
 labour ; and the price realised for them repays the outlay on 
 materials, keeps up the machinery, and pays the wages — including 
 all the wages of intellect. But beyond the repaying of all these 
 costs it is a familiar fact that, in normal production, the prices 
 realised leave a surplus. This surplus is not accounted for by pro- 
 fits, although often confused with them. Profit is either employer’s 
 wage (and is thus already included), or it is the chance of a happy 
 conjuncture that allows a higher price to be obtained than is 
 normal — which chance is continually being levelled down by com- 
 petition. But this surplus is recognised as something due to the 
 owner of capital without claim of personal work from him, and 
 it is a surplus of value which competition cannot wipe out. In 
 Bohm-Bawerk’s former book. Capital and Interest, it was exhaustively 
 proved that no theory had yet shown what capital does, or forbears 
 from doing, that it should get this surplus under the name of interest. 
 It is not a payment for the labour embodied in concrete capital, for 
 that labour is presumably fully paid for — say, by the machine maker 
 to his men and to himself — and does not warrant a further continuous 
 payment. It is not a payment for the working of natural forces 
 embodied in the machine, for the value of the machine consists in 
 nothing else than in the working of these forces, and in the price 
 is already paid all the forces that the machine will put forth and 
 
 h 
 
X 
 
 TRANSLA TOR’S PREFA CE 
 
 mediate. And it is not wear and tear, nor is it insurance against 
 risk, for in all normal undertakings these are provided for by 
 separate replacement and insurance funds. For proof of these 
 statements I must refer the reader to that book, or the brief 
 summary of it in the preface. What must be emphasised here 
 is that the explanation of capital as the Instrument of Production 
 y is exhausted when it is shown that it allows nature and labour to 
 \ work out their effects in lengthy processes. The source of interest 
 ^ will Q ot be found simply within the sphere of production, for the 
 reason that interest is a problem of surplus value, and value takes 
 us into the sphere of distribution. Thus we come to the next 
 division of the present work. Capital as it appears in the sphere of 
 Distribution, or Capital as the source of the income called Interest. 
 
 If we begin, as usual, by asking what business people under- 
 stand by interest, we shall be told practically that a sum of money 
 paid down now — say £100 — will buy a greater sum — say £103 or 
 £105 — this day twelve months. Or if I owe £100 now for goods 
 received, and do not pay the debt for a year, I have to add a 
 certain amount under the title of interest. 
 
 The most obvious fact here is that the payment of interest has 
 some very definite connection with the time when payment is 
 made. This suggests the general question : What is the place and 
 influence of time on the value of goods. And the answer is : It 
 f^is an empirical fact of undoubted universality that pres ent goods 
 / are valued more highly than future goods _of like kind and amount. 
 
 For this three causes may be given. . First, is the difference 
 between the circumstances of want and the provision for want in 
 present and in future. In any case, if want is pressing and pro- 
 vision is scarce, value is high. But the pressure of want in the 
 present is always with us, while as regards provision in the future 
 it is generally true mine ignotwn gno mirijico. Thus present goods 
 obtain a permanent importance from^ielt^jre^en^wants, and future 
 goods a permanent unimportance from anticipated future provision. 
 Most men, accordingly, — people in immediate distress and beginners 
 of all sorts being types — are willino-_j;o__pledge their future for a 
 really inadequate present sum. (^cond, is the general under- 
 estimate of the future, common to humanity, and traceable to want 
 of imagination, defect of will, or feeling of life’s uncertainty. 
 Children and savages are typical of the improvidence which is 
 more or less striking in all classes. It may be that this cause is 
 not on the same level with the first, and tends to less importance 
 with social progress. But, in the world as it is, it is certain that 
 the things of the ^iire are of less value to us simply because they 
 are future. A^f^ird, is the technical superiority of present goods. 
 As we have already seen, in the hands of labour wealth increases 
 enormously with the extension in time of the production process. 
 
TRAJVSLATOJ^’S PREFACE 
 
 Goods available now have accordingly the promise and potency of 
 being greatly multiplied in the future, while goods coming into our 
 disposal only in the future must undergo another period of pro- 
 duction before the same abundance is reaped. Of these three 
 causes the firs t two^ arei cumulative, the alternative. TheiJ 
 
 first group alone would account for a difference in value betweenf 
 jmesent and future goods : the appearance of the latter makes the* 
 difiference not only apparent but measurable. 
 
 If, then, from so many sides and classes — from the young who 
 expect to be better off, from the rich and improvident who wish to 
 enjoy the present, from the industrious who wish to add to their 
 wealth ; that is to say, from probably the majority of mankind — 
 there come s an underestimate of the future compared with the 
 present, it is easily explained why, as a rule, present goods have a 
 grea ter value than future goods of like kind atid amount. 
 
 I In this empirical and psychological fact, for the full treatment 
 j of which the reader is referred to Book V., our author finds the 
 I source of interest in its three principal forms. q. 
 
 The simplest case of interest is that in which it appears in the 
 loan for consumpt ion. Here we have a real and true exchange of 
 a smaller amount of present money, or present goods, for a larger 
 amount of future money or goods. The sum returned, “ principal ” 
 plus interest, is the market valuation and equivalent of the “ prin- 
 cii)al ” lent. The apparent difference in value is simply due 
 to our forgetting that £100 in our hands now is not the same 
 thing as £100 a year hence. This Agio on present goods is interest. 
 
 In other words, interest is a complementary part of the price ; 
 part equivalent of the “principal” lent. 
 
 In this simple case interest is more evidently the result of the 
 first two causes just mentioned. Apart altogether from an organ- 
 ised system of production this agio would emerge, and has emerged, 
 as something claimed by the saving from the unthrifty. But so 
 long as there was no organic production, the circumstances of 
 borrowers and lenders wei’e too diverse and arbitrary to allow of 
 a measured rate of interest. But when the third factor comes into 
 play, time becomes a condition of surplus product, and interest 
 becomes measurable in terms of time. ^ 
 
 The second and principal form assumed, then, by interest is that 
 in. whicFltappears as part of the so-called “profit of undertaking.” 
 
 A capitalist employer hires land, buys raw and auxiliary materials, 
 machinery, power, and labour. He sets these to co-operate in the 
 making of a product. The product is the new shape taken on by all 
 these productive goods, and we should naturally expect that the price 
 obtained for it would exactly cover and reimburse the value of all the 
 goods consumed in making it. But, as we know, after all ordinary 
 costs arc accounted for, the price obtained in normal economic circum- 
 
 / 
 
TRANSLATOR'S PREFACE 
 
 xii 
 
 stances shows a surplus of value. The explanation oi the surplus is 
 that productive goods, while materially and physically present, are, 
 to economical consideration, future goods : that is to say, they are 
 products in the making. The wants to which they minister, and 
 from which alone they get their value, are future wants. On the 
 admitted ground of equivalence between costs and products, then, 
 the value of the means of production must be the same as the value 
 of the goods into which they pass. But these goods being in the 
 meantime future goods, and suffering from the discount which, as 
 we have seen, is made on all future goods, the value of means of 
 production must suffer the same discount. The undertaker inten- 
 tionally turns his wealth into productive goods : that is to say, he 
 exchanges his money for raw materials, workshops, machinery, 
 '^labour. In the production process these ripen into present goods, 
 with the full value of present goods. The price he receives for 
 these recoups all his expenditure plus interest. Interest thus 
 V' proves itself, as before, the difference between the formerly future 
 and now present goods. 
 
 There is a third case of interest which has some features so puzz- 
 ling as to demand separate consideration : this is the case of income 
 obtained from Durable Goods, usually called Hire or Lease, and, in 
 one case. Rent. The distinction, between a perishable and a durable 
 good is that, while both are the sums of their respective uses or 
 services, the durable good is a sum extending over a period of time. 
 But on our theory the later services of such a good must have a less 
 value than the proximate services, and the total value of the good 
 will be a sum of diminishing amounts. The “ capital value ” of such 
 a good, then, will be to all appearance much less than the sum of the 
 values really obtained during its lifetime. Here, as in the former 
 cases, the services originally undervalued ripen to full present value 
 in the hands of the owner, and the difference between the past and 
 the present values, after providing for replacement of the good, is 
 Interest. Thus if the owner of capital throws his parent wealth 
 into the form of stone and lime, he possesses, in the durable shape 
 of a house, a sum of future uses discounted according to their 
 futurity. As each year passes one annual service is realised, and its 
 value is thrown off, while each service still to be realised is one year 
 nearer the present, and is thus one year more valuable. The house, 
 as now containing one rent less, is less valuable, and this loss falls to 
 , be deducted from the gross return as wear and tear. But what is 
 J lost, be it noted, is not one annual service estimated at present 
 value ; it is the last future service of which the good is still capable, 
 — for if all the s rvices have moved up one step in value it is the 
 value of the last service that drops off. The difference between the 
 present service realised (gross rent) and the last service now deducted 
 (economic wear and tear) is the net return of interest. Thus, 
 
TRANSLATOR'S PREFACE 
 
 xiii 
 
 again, we find that interest is the difference between the formerly 
 future and now present goods. This somewhat difficult point is 
 made clear from the concrete figures on pj). 342-345. 
 
 It will be seen that in this we have a theory, not only of durable 
 consumption goods such as houses, and of durable productive goods 
 such as machinery, factories, and fixed capital generally, but a theory 
 which carries us beyond our formal definition of Capital into the 
 k sphere of L and . In land we have a durable good whose services will 
 i\ be rendered to generations unborn : the “ last ” service is, therefore, 
 to the calculations of the present, nil : there is no economic wear 
 and tear— no need of any fund for replacement — and the gross 
 return suffers no deduction but is all interest. To put it concretely. 
 
 A man buys land as he buys fixed capital ; — to get an interest from 
 it. He buys its annual services or rents for a sum which represents 
 the future services diminished in perspective. In other words the 
 ‘‘ capitalised value ” is not an infinite number of years’ rents but so 
 many years’ purchase. In his hands the future uses ripen into 
 present : ^e gets the present value of what he bought as future 
 value j as there is no wear and tear, nothing of this need be set 
 aside for replacement : the whole gross rent is net interest. Ricardo, 
 in pointing to the “ original and indestructible powers of the soil ” 
 
 /as the cause of rent, was right so far as his explanation indicated 
 / why the gross return was also the net, but wrong so far as it indicated 
 / that rent was due to the productiveness of this peculiar kind of 
 / durable good. The interest on a mine and the rent from land are 
 j essentially the same, although the one should wear out in thirty 
 ' years while the other is “ indestructible.” 
 
 These are the simple outlines of the Positive Theory. By it 
 all three kinds of interest are traced to the one identical source, 
 the increasing value of what are, either naturally or economicallj^/^ 
 future goods, as they ripen into present goods. But when dealing 
 with the principal fonn of interest, that in which it appears as 
 part of the profit of undertaking, Dr. Bohm-Bawerk makes along 
 excursus into the relation of wealth to labour, which is not the least 
 suggestive and valuable part of the work. As it suffers somewhat, 
 however, from its position in the text, I shall take the liberty of 
 putting it in my own way. 
 
 There are three markets in which the particular kind of “ future 
 goods” known as means of production are exchanged against 
 finished present goods — practically against money ; these are the 
 Labour market, the Land market, and the market for Concrete 
 Capital. Taking the Labour market as the most typical and the 
 most difficult, its prominent features are these. On the one 
 side are the Capitalist Undertakers. These are men presumably 
 possessed of a surplus of wealth which they cannot advantageously 
 use in their own consumption ; to them personally, therefore, the 
 
XIV 
 
 TRANSLATOR'S PREFACE 
 
 present goods which constitute their surplus have per se no 
 advantage over future goods. But in this surplus they have 
 the means of waiting over lengthy processes of production As 
 their wealth increases the average period of production is ex- 
 tended, and with every extension the absolute productiveness of 
 the process increases. On the other side is the majority of the 
 population, the Wage-Earners. Their circumstances, as a class, are 
 such that they cannot engage in any independent production that 
 takes time. Even if they could, their production period would 
 necessarily be short, and in competition with the long process the 
 handicap would be too heavy. It may be assumed, therefore, 
 that they will rather take service as “ hands ” than risk independent 
 production. 
 
 Evidently the big battalions are on the side of the capitalist, 
 and in regard to this particular kind of present good. Labour, it 
 seems to need no further demonstration that the price of it, namely 
 Wage, Avill always be less than tliat of product, and thus allow the 
 employer an interest. This is, in general terms and in a more dis- 
 passionate way, the Socialist answer. But, while admitting, as we 
 very well may, that there is enough and to spare of exploitation in 
 profit generally, the question is by no means so simple as Socialist 
 theory would have it. If there is force on the one side there are 
 certain forces which work steadily on the other. The Trade Unions 
 give the labourers a certain power of waiting, and tend to force 
 employers, as a class, to give up at least that portion of profit which 
 is pure exploitation. Yet wage would not be explained if it were 
 shown to be, in many cases, the exploitation of profit ! The inter- 
 competition of capitalists, again, has surely been effective enough 
 of late decades to force the remuneration of capital towards an 
 economic — as distinguished from an exploitation — level. If there 
 is no economic level of interest, why has it not been wiped out of 
 existence altogether ? The argument is one that Socialism itself 
 often uses ; that, in some respects, the dependence of capital is as 
 absolute as that of labour. It is necessary even for the siaius 
 quo of wealth that the capitalist should bury his surplus in the 
 fertile womb of earth, or in the living powers of man. 
 
 But in the present state of economic development there is no 
 question of mere preservation of wealth — Jiere can scarcely be, 
 so long as the seed sown returns some thirty, some fifty, some 
 a hundred fold. The motive of the capitalist undertaker is 
 certainly not preservation but increase. He changes his wealth 
 into means of production in order that the value of the products 
 should be more than the value of the costs. He is warranted by 
 experience in assuming that, at the worst, the price realised will 
 contain a certain minimum rate of inte rest ; will, most probably, 
 contain also a good wage for himself as master workman ; and that. 
 
TRANSLATOR’S PREFACE 
 
 XV 
 
 possibly, a happy conjuncture may give him a “ profit ” besides. (Of 
 course I am speaking of the enlightened employer who knows that 
 “ wage,” tech^cally, is remuneration for work done, and does not 
 claim as wage more than, say, the remuneration of a Prime Minister.) 
 Where the employer and the capitalist are separate entities — as 
 they always are to economic consideration — the motives also are 
 distinct : the motive of the employer is wage and “ profit ” — using 
 that ambiguous word in the loose meaning of gain beyond wage of 
 superintendence and pure interest — while that of the capitalist 
 is interest — with perhaps a chance of “profit.” Now, as thus 
 separated, the competition of capitals with each other becomes 
 more intense; for capital becomes a suppliant, not only to the 
 labourer who demands the minimum wage, but to the class of 
 employers who expect a perhaps extravagant “ wage of superintend- 
 ence,” and a “profit” besides. In this state of sharpened competi- 
 tion the insufficiency of the exploitation theory becomes manifest 
 to experience. We are forced to see that there is a le vel of interest 
 which no a mount of competition normally levels away, and we 
 conclude that this is the economic level. Where the inter-competi- 
 tion of capitals is the fiercest, the owner of wealth has not to 
 content himself with the mere preservation and re-creation of his 
 wealth — much less pay a premium to labour for keeping it — but 
 gets his minimum 2f% or 3% of interest. 
 
 This explanation will be found if we turn from the question as 
 between labourers and employers^ and consider the larger question 
 as between owners of present goods on the one side, and labourers 
 and employers alike on the other. And here we come to Bbhm- 
 Bawerk’s enunciation of a proposition which seems to me one of 
 the most important in modern economics. It is that t he s upply 
 of _preseut .goods, available in any community either as means 
 of production to labourers or as subsistence to mere borrowers for 
 consumption, i s the sum of that comm unity’s existing wealth 
 exclusive of lan d. No one nowadays hoards wealth, drawing on it 
 as needed. Thanks to banking systems and facilities for invest- 
 ment, nearly all wealth that is not actually being consumed by the 
 owners is made available to supply this double demand. Disre- 
 garding as before the demand for consumption, the effect of which 
 is merely to lessen the amount of wealth available for productive 
 borrowers — and remembering in passing that the agio on present 
 goods is the joint result of these two collateral demands, we find 
 this wealth confronting the demand of labour, transmitted through 
 the employer^ for the means of subsistence during the production 
 period. Now, thanks to well-known motives, wealth in normal 
 circumstances increases faster than population. As it accumulates 
 it becomes possible for the labourers to extejid^ their processes. 
 Seed-time and harvest become separated, not by months but by 
 
XVI 
 
 TRANSLATOR'S PREFACE 
 
 years, aud the amount of wealth in a community, as enabling labour 
 to bridge over the long time of growth, becomes visibly^ the con- 
 dition of its average production period, and so o f its average pro- 
 ductiveness. Thus to him that hath much muclT is given : the 
 fich nation is the heir of the economic promises. 
 
 From this it is not diflScult to see that the value of m eans of 
 production must alwa ys lag behind that .of finished products. There 
 is always a demand for ampler means of living, and the condition 
 of obtaining ampler means is — time to extend the production pro- 
 cess. So long, then, as the wants of spiritual beings call for fuller 
 and finer satisfactions, and so long as the working life rises to 
 higher levels, so long .wilLdhere hn a premium put on the present 
 wealth which ma kes more ample wealth possible. Thus we are 
 justified in saying that t ^e demand for means of production will 
 a lwa ys be greater than the supply, and interest, a s th e agio on such, 
 will appear, in the price of products. 
 
 The superficial resemblance of this ^i ^sistence F und to the 
 generally discredited Wage Fund of the classical economists will 
 not mislead any one who enters into the heart of Bohm-Bawerk’s 
 theory. The difference between the two will be found in the few 
 pregnant sentences on pp. 419, 420. In case of misunderstand- 
 ing, however, two cautions may be given here. One is that by 
 “ means of . subsistence ” must be understood, not simply food, nor 
 even the common necessaries and comforts of life, but alljtha.h goes 
 to t he main tenance of th e worker s, whatever their various levels of 
 comfort It is not a certain wage fund, provided arbitrarily by 
 capitalist employers, that is available for the simple “ subsistence ” 
 of the working classes : it is the entire wealth of the community 
 that is available for the maintenance of all classes of workers. The 
 caution is much needed quite outside of this connection. I am 
 persuaded that many people think they have determined the 
 “ cost ” and due reward of labour when they have found how many 
 weekly wages of 20s. are contained in the community’s stock of 
 wealth. The mischief that this idea does, in making people think 
 that a rise of wages is a social calamity, is, to my mind, very great. 
 To economic consideration, however, the line is a vanishing one 
 which divides Hodge’s beer and bacon from Plugson’s venison and 
 champagne. Rightly considered, the prices of books, the stipends 
 of clergymen and teachers, the seats at theatres and concerts are 
 “expenses of subsistence,” just as much as the labourers’ bread and 
 cheese — unless we are to limit the category of “workers” to the 
 20s. a week class. 
 
 The oth^r caution is that this wealth available for subsistence 
 does not consist exclusively of goods already in the finished state. 
 To put all wealth into this form, indeed, would be the greatest 
 possible waste. What is required is, that the various means of 
 
TRANSLATOR’S PREFACE 
 
 xvu 
 
 subsistence should be ready when wanted, and this involves that, 
 at any given time, the wealth of a country consists of products at all 
 stages of maturity. To put it concretely : — At this moment the 
 wdieat'is'beln^own that will feed human beings after next harvest, 
 while the sapling is being planted that will not come to its full 
 growth for a century to come : at the same moment, perhaps, the 
 oak is being felled that began its growth a hundred years ago, and 
 to-morrow the wood of it will enter into the framework of a thresh- 
 ing-machine which will extend its life-work over a score of harvests : 
 sapling and tree, machine and wheat, are alike parts of that wealth 
 Avhich is available for the labourers’ demand in its continuity. 
 
 Eemembering these cautions we can see the full import of, this 
 conception . It defines the true relation of wealth to labour in 
 the following terms : The func tion of existing wealth is to subsist 
 t he \ yorkers during the interval between the beginning and the 
 end of the soc ial production period. This strikes us as strange 
 mainly because oE fhe'bourgedis idea that wealth is the end and 
 goal of labour, and the more vicious idea that labour is a tax on 
 life. For certain purposes of economic study we may think of 
 labour as the means, and consumption wealth as the end of pro- 
 duction, but the economist falls into error whenever he forgets that 
 economic life is an endless circle, where wealth, as subsistence, 
 passes into muscle and brain, and muscle and brain pass into wealth 
 again. Even when we rise — as the economist may do — to wider 
 conceptions, and point to man's full free life as the goal of economic 
 effort, we ought to recognise that the working life which, we lead, 
 and sho uld lead, is at once an, end, and a. mean. In working we 
 live, and in working we produce wealth : this wealth, again, permits 
 of freer work and fuller life. In correspondence with this, the type 
 of labourer is not the man who produces on one day to consume 
 on the next, but the man who consumes during his work day — who 
 consumes while he produces — and, moreover, whose consumption 
 increases with his production. The function of Avealth, then, we 
 say, is to support this Avorking life, with its increasing claims, 
 during its Avork. Thus instead of making Avealth the final cause 
 of industry — as the economist in virtue of his professional bias is 
 apt to do — or making it the beginning and limit of industry — as 
 the Wage Fund theory tended to do — t his c onception places Avealth 
 in the centre as the maintenance of the working world during its 
 rise_to higher and higher levels of j vorking life. In other words, 
 it puts the economic conception into line Avith the moral by making 
 Avealth simply the mean to the Avorking life. 
 
 If, then, interest is so purely a natural phenomenon, Avhy has it 
 met with so much covert dislike, and so much scientific opposition? 
 There are at least three reasons. First, the element on Avhich all 
 interest is based, namely ti me, has come to be a peculiarly important 
 
Kviii TRANSLA TOR'S PREFA CE 
 
 fa^lQr in modern production. All things come to him who waits, 
 and, in economic life, this describes the capitalist. But this fact 
 involves that the labouring classes who cannot wait, and cannot 
 compete ^vith the productiveness of lengthy processes, are put in a 
 position of peculiar dependence : hence the possibility of exploitation 
 of wage, of usurious rates of interest, of unjust rents. Second, from 
 a moral point of view, there is much that is objectionable in the fact 
 that interest allows certain classes to live without working and to 
 make^Eis possibility hereditary in their families. JThird, in this in- 
 come there is no ratio between gain and desert. Those who have little 
 must accept Savings Bank interest for their hard-earned shillings ; 
 those who have much have all the chances of bonds, mortgages, 
 joint-stock investments and the like. All the same, so long as men 
 do put a different valuation on present and future .goods, interest 
 cannot be prevented. Even a Socialist state could not prevent it : if 
 b^'^rc^ible means it were stopped between individuals, it would still 
 obtain between commune and labourer. The state in this case would 
 replace the capitalist, and “ exploit ” the worker in the same way — 
 although, it may be hoped, with a clearer view to the wellbeing of 
 the exploited — but no organisation could make interest into wage. 
 
 In Book VII. Dr. Bohm-Bawerk passes to the most difficult 
 part of the subject, the Bate of Interest. Here, however, we 
 shall find him using terms which are* scarcely intelligible without 
 some knowledge of the theory of value enunciated by Jevons and 
 Menger, and now held practically as the fundamental doctrine of 
 the Austrian school. The formulation of this theory, so far as 
 was necessary to the theory of capital, occupies Books III. and IV. 
 of the present work. It is not possible, unfortunately, in the 
 short space at my disposal, to give anything like an easy account 
 of this theory. I have already found difficulty enough in putting 
 it into the compass of my own Introduction to the Theory of Value, 
 and all I can hope to do here is, perhaps, to assist the reader who 
 finds any difficulty in the text. 
 
 The essential points are as follows. Value is altogether based 
 on utility, and the amount of value is determined, not by average, 
 but by final or marginal utility. The subjective value of a good, as 
 distinguished from its utility, lies in its being the indispensable 
 condition of some satisfaction of want : the ammnt of value it 
 obtains is determined by the last use to which it, or a similar good 
 of the stock, is put in the then circumstances of want and provi- 
 sion for want. Thus the utility of a bushel of corn is given it 
 by its power of supporting life : its value comes from the fact 
 that it is so limited that some human want depends on it for satis- 
 faction : the amount of its value is determined by the least use 
 to which the bushel is economically put in the circumstances of 
 the consumers on the one hand and the amount of the harvest on 
 
TRANSLATOR'S PREFACE 
 
 XIX 
 
 the other. Thus value has no absolute level ; it is neither intrinsic 
 nor relative to any personal or material average : it is always found 
 in the relation of these two determinants of Want and Provision. 
 
 P rice, or Ex change Yalue, again, is a superstructure on this 
 subjective value, determined by Jhe competition of buyers and 
 sellers with each othermid among themselves. Under a simple 
 barter system each party in a market would put a subjective value 
 on the goods changing hands, as having a direct bearing on his ovti 
 wellbeing, and would base the amounts offered and asked on this 
 valiiation. With organised industry comes the money valuation, 
 where the comparative use value of goods to people generally 
 becomes reflected on a money scale, and it becomes more definite 
 and intelligible to say a thing is worth so many shillings than to 
 say it is worth so many other things which admit of direct valua- 
 tion in terms of satisfaction of want. Buyers and sellers, then, 
 come together in markets with a definite valuation in their minds 
 of what the goods or the money is Avorth to them. Thanks 
 to the differences in subjective scales, it is the interest of both 
 parties, and it is possible for both parties, to get an advantage by 
 t he excha nge, although their interests diverge in regard to the 
 amount of advantage that each may get. In this competition the 
 goods pass from the “most capable” sellers to the “most capable” 
 buyers, and the price is fixed between the valuations of the two 
 “marginal pairs,” viz. the last buyer and seller and the first un- 
 successful buyer and^ s elle r. The level, again, of these marginal 
 pairs is determined by the relation of the wants of both parties to 
 their economical provision. It must be added that, in an organised 
 economy, “utility” becomes a more complex conception. In the 
 case of a manufacturer the utility of raw material is not the personal 
 uses to which he can put his own products, but the uses to Avhich 
 he, as a manufacturer, can put the raw material, and these, again, 
 are determined by the wants of his customers. The direct use of a 
 good is here replaced by the employment of the good, and the “ most 
 useful ” is translated into the “ best paying,” or “ most remunerative.” 
 And this emergence of the professional producer, who makes for 
 the market and to whom his produce has really no subjective value, 
 simplifies the calculation of the marginal pairs by eliminating 
 the subjective valuations of the sellers, and determines the price at 
 the valuation of the last buyer. 
 
 This law_ jioes not, as one would suppose, come into collision 
 with the old law that value is determined by costs of production. 
 The Law of Costs is one amply confirmed by experience as regards 
 the great mass of articles produced under free competition. But 
 this empirical law was never thought to determine the value 
 of goods produced under any other conditions. The point on 
 which it requires amending is that it should be expressed as a law 
 
XX 
 
 TRANSLATOR'S PREFACE 
 
 of equality between costs and products. The old theory not only 
 said that the value of goods tended to an equality with that of 
 the means of production, but went on to put the causal relation 
 exactly the wrong way about. As we have said, it is human want 
 gives value to goods ; and that value is thrown back upon the 
 means of production without which the goods cannot come into 
 existence, and which are really the goods in a previous state of 
 existence. In developed economy it is true that there comes a 
 reflex influence from costs to products. If a group of means of 
 production is capable of making goods which for the moment have 
 different marginal utilities, the value that is transferred to the costs 
 is the value of the last or marginal product made from these costs. 
 In time, no doubt, competition forces this value again on to the 
 other products, thus giving the impression that the value comes 
 from the costs : but the fact is that the very value which these 
 costs have, came from their product — not, however, from this or 
 that particular product, but from the marginal one. 
 
 Now the immediate point of connection between the theory of 
 value qnd the theory of interest is that the problem of interest, in 
 all its manifestations, is nothing more than a problem of price, the 
 commodity bought and sold being — Present Goods. When, then, 
 we go on to the final question, the Amount or Rate of Interest, 
 what we have to remember is that here, as in price transactions 
 generally, we have a resultant of subjective valuations, and that the 
 determining elements we have to deal with are the extent and 
 intensity of the subjective valuations of buyers and sellers. We 
 have already seen what is the extent of this supply, and we know 
 the motives which weigh with the owners and determine its intensity. 
 The demand, again, comes from those who borrow to consume, and 
 those who borrow to produce. Of these two co-ordinate demands 
 we shall, as before, confine ourselves to the more important and more 
 difficult, and to its most important section, the Wage-Earners, refer- 
 ring the reader to Bohm-Bawerk’s last two chapters for the other 
 sections. One way of looking at this demand would be to consider 
 it, not as a direct demand from the wage-earners, but as interpreted 
 and in certain definite ways modified by the undertakers. But it is 
 perhaps better to consider the undertaker as the owner of capital, 
 and take the question simply as one between Wage -Earners and 
 Capitalists. In the following argument, then, we assume that the 
 demand comes exclusively from labour, that the entire supply and 
 demand meet in one single market embracing the whole community, 
 and that all branches of production show the same scale of surplus 
 returns. 
 
 If wage were a fixed point — say determined at the subsistence 
 level, as the Iron Law assumes — the calculation of the rate of in- 
 terest would be comparatively easy. Say that every added ^100 
 
TRAN SLA TOR'S FREE A CE 
 
 XXI 
 
 of capital permitted simply a further extension of process. Every 
 extension of pro cess assures an extra product. But where capitalist 
 industry is well developed, the increments of product at each exten- 
 sion diminish relatively to those preceding, and there comes a point 
 where the increase of product does not balance the expense of 
 extension. To put it in familiar terms : an employer making 10% 
 on his own capital, and offered loans at 4%, may profitably extend 
 his business by borrowing although at every extension he makes a 
 smaller profit. But when the extensio n made possible by the last loan 
 r eturns him only 4 %^ there is no inducement to extend further. In 
 this case the rate of interest would be determined by the “ last dose 
 of capital ” economically applied, to use Thiinen’s phrase. 
 
 But the great difficulty is that wage is not a fixe d amou nt. 
 The value of labour to the employer depends upon anticipated pro- 
 duct, and that product depends on productiveness, and productive- 
 ness depends on length of process, and thus we have no fixed point 
 from which to start. Bohm-Bawerk’s solution is the following. The 
 fixed point which we cannot get in wage is got in another way. 
 As _in the the ory of money it is well known_ that any quantity of 
 currency, sma ll or gre^ will efifect the necessary exchanges, so here 
 the av ailable quantity of present goods offered for sale will buy up 
 t he whole of the a v ailab le labour. This is due to the circumstances 
 alriady spoken of — the need of the labourers to hire themselves out, 
 and of the capitalists to hire out their wealth. The few cases of 
 unemployed labour and capital may be left out of account, as, 
 obviously, it is only because of bad organisation that there are such. 
 When the proportion of wealth and of labourers changes, all that 
 is required is to contract or extend the production period. Granted 
 this assumption, then, — that at any moment labour buys up the 
 available “ wage fund,” — the rate of interest is determined on the 
 ordinary lines of the formation of price. The period will be extended 
 till such time as the marginal employment of the unit of capital is 
 reached ; that is, till the extra product gained by extension of process 
 i s outweighe d bv tFe .diiuinishing productiveness of the process. 
 
 To put this difficult argument in a way perhaps more easy to 
 grasp. Say that at any given moment there is a certain amount of 
 wealth divided out among the wage-earners as subsistence. In any 
 case there will be some agio on this wealth, and there will be an 
 average production period. If now wealth increases faster than 
 population — in Great Britain it increases more than twice as fast — 
 there must be some disturbance of the equilibrium at present estab- 
 lished. The new wealth will seek for employment, and find it — 
 not, of course, in offering higher wages, for there is still nothing in 
 increased wealth to increase product — but in extending processes. 
 But as, presumably, we have now entered the stage of progress 
 where extension of period gives decreasing surpluses, the return to 
 
 
 a 
 
XXll 
 
 TRANSLATOR’S PREFACE 
 
 this last employment of wealth will be less than before. This 
 marginal employment will bring down interest generally: the rate 
 will be determined by the last extension of the production period : 
 wage will rise relatively to interest : and the equilibrium be found 
 at a new level. If population increase, wealth and productiveness 
 remaining constant, the converse will be the case : wag e will fall 
 and interest rise because the community is brought back to a pro- 
 duction period where the absolute product is less, but the relative 
 surplus, due to extension of process, is greater. If, lastly, product- 
 iveness increase, wealth and population remaining constant, the 
 same phenomenon will take place, owing to the decreasing progres- 
 sion of surplus returns being for the moment checked, 
 y Thus we can see that the three concrete factors which determine 
 / t^ marginal. extension of process, and thereby the rate of interest, 
 are the amount of the national Subsistence Fund, the numbers of 
 the working Population provided for, and the degree of Productive- 
 ness reached in the industrial development. To quote our author’s 
 words, “ interest will be high in proportion as the national subsist- 
 ence fund is low, as the number of labourers employed by the same 
 is great, and as the surplus returns connected with any further 
 extension of the production period continue high, and vice versA.” 
 
 All this is in perfect harmony with the known facts of interest. 
 It explains how as a country grows wealthy the rate of interest falls 
 while wages rise ; how an increase of population without a corre- 
 sponding increase of wealth has a tendency to raise the rate of 
 interest and depress wages •, and, finally, how inventions which 
 increase productiveness tend to raise the rate. 
 
 It is not within the scope of my task here to follow Bohm- 
 Bawerk in gradually adding on the other elements required to make 
 the picture true to the actualities of life, and to show that they 
 make no material change in the principles laid down. Enough has 
 been said to give the outlines of a theory which challenges attention, 
 both by the originality of its ideas, and the thoroughness of its 
 treatment. 
 
 My thanks are due, first of all, to Dr. Bohm Bawerk, who has 
 materially added to the value of this rendering of his work by 
 giving it the stamp of his revision ; to Professor Edward Caird, of 
 Glasgow, and Professor M'Cormick, of Dundee, for many valuable 
 suggestions and corrections : to Miss Christian Brown, of Paisley, 
 who has again put me under heavy obligation by most carefully 
 revising my proof-sheets : and to two other of my students who 
 have spared me many weeks of thankless work by deciphering and 
 rewriting my crabbed MS. 
 
 Glasgow, June 1891 . 
 
AUTHOE’S PREFACE 
 
 It has taken me longer than I expected to foUow up the 
 publication of my Geschichte und Kritik der Kapitalzins-Theorieen 
 by the present work. The heavy part of The Positive Theory \ 
 of Capital hes in the theory of Interest . In the other portions ! 
 of the subject I was able, at least on the whole, to follow in 
 the footsteps of previous theorists, but for the phenomena of 
 interest I had to put forward an explanation which breaks 
 entirely new ground. 
 
 I make this latter statement with some confidence. It is ' 
 quite true that mv explanation of interest rests on certain 
 i mportant idens previously put forward by Jevons. But 
 Jevons did not give them that special application which might 
 have made them serviceable towards the explanation of interest 
 — if they had been taken in connection with certain other 
 lines of thought not then familiar to Jevons. Thus it is that, 
 in his interest theory, Jevons remained under the spell of the 
 old classical opinions-, notwithstanding these new lights which 
 came to him from another quarter and were applied to other 
 ends. And, moreover, as the ideas common to both of us were 
 not borrowed by me from Jevo ns. but discovered in entire 
 independence — indeed long before I became acquainted with 
 Jevons’s writings — I feel bound to take on myself, for good or 
 ill as events may prove, the entire and imdivided responsibility 
 for the interest theory now put forward. 
 
 As regards the way in which I have treated the subject, 
 I may be allowed to make two remarks. 
 
 T he method of statement adopted for the most part 
 throug hout this book is that wh ich ^^pnople— generally — not 
 without a suspicion of passing judgment on it — -caU. “ abstrac t.” 
 
XXIV 
 
 AUTHOR’S PREFACE 
 
 All the same I contend that my theory does not contain one 
 single feature which is not based on true empirical principle s. 
 There are various wavs of being empirica l. We may obtain 
 the facts of experience which serve us as foundations from 
 economic history , or we maj'’ gather them from s tatistics^ or we 
 may try to get them directly in our common daily life by 
 simple informal o bservation . No one of these three methods 
 has any monopoly : each of them has its separate and peculiar 
 sphere. In the nature of things the historical and the statis- 
 tical method treat the matter of experience in much ampler 
 fashion, and gather it from wider fields of observation ; but for 
 that very reason they fail, oir the whole, to seize any but tbn, 
 larger and more apparent fa cts : they put economic events, as 
 it were, through a large sieve, where a great many dehcate 
 and unobtrusive, but, perhaps, more essential features of 
 economic life, escape unnoticed. If, then, we would rescue 
 these and make them objects of economic investigation — 
 and for very many scientific problems we simply cannot do 
 without taking cognisance of tmem — there is nothing for it 
 but to have recourse to the ci^rrriparatively narrow but alwa^ 
 
 impressive personal observation of life. 
 
 Now I have endeavoui'ed to make full use of all three 
 methods of investigation . What help economic history and 
 statistics could’affbrd me in my task I have thankfully accepted 
 and conscientiously made the most of, even where I have not 
 explicitly mentioned the original materials with which I 
 worked. But the matter thus obtained was not by a long 
 way sufficient for my purposes. The theory of capital has to 
 reckon with a number of facts which history and statistics 
 have not recorded, partly because in their nature they could not, 
 partly because attention has not hitherto been drawn to the 
 importance of these facts. T\"hat, for instance, could history 
 and statistics say about the question which is so important in 
 the explanation of interest, as., to whether there is in perishable. 
 
 ’ ■ " T . 1 r-ing nsp. ? How much, again, could 
 
 actual grounds on which are based 
 
 the different subjective estimates of present and future goods ? 
 Or what have we learned — up till the present at least — as 
 to the relation between the amount of the national subsistence . 
 fund arirj tVip av prage production period in a commm iitY ? In 
 
AUTHOR'S PREFACE 
 
 XXV 
 
 matters like these one is obliged, for good or ill, to turn to 
 other sources of information, and other paths of knowledge 
 than those of history and statistics. 
 
 And if proof be needed that I was ri^ht in doing so, and 
 
 that indeed it was impossible for me to do otherwise, I may 
 appeal to witnesses whose authority, as regards this question, 
 is beyond dispute, nameiy, the leaders and adherents of the 
 “ historical school ” itself. For full thirty years the historical 
 and statistical tendency has been the prevailing one in German 
 economics. During the whole of this long period there has 
 not been even an attempt to solve the great problem of interest 
 
 by the tools of the historical method, although this problem 
 has always occupied a front place in economical discussion. 
 Perhaps the nearest attempt to a really historical treatment 
 was that of Eodbertus, with his famous statement of the 
 different forms imder which, in various ages, the ruling econ - 
 oTnie elaggeg have always drawn the better pa.rt of the product 
 
 of the nation’s labour to themselves, But, accurately speaking, 
 Eodbertus, in these historic flights, aimed only at winning assent 
 to his exploitation theory, while the characteristic feature of 
 that theory is that it makes use from end to end of the abstract- 
 deductive machinery of the classical school, the labour theory of 
 Eicardo. Or to mention only the recognised leaders of the - 
 historical school \ — Eoscher has put together his interest theory 
 out of elements taken partly from J. B. Say, partly from Senior 
 — -that is to say, altogether from “ pre-historic ” theory ; while 
 Knies, following Hermann, invents a theory of the “ use ” of 
 goods, which not only has nothing in the world in common 
 with history and statistics, but, as I at least believe, dispenses 
 with any inductive foundation whatever, and is the result of 
 simple speculation — and not even happy speculation. 
 
 If, then, the historical economists themselveS j when brought 
 face to face with the problem of capital, have not trusted to 
 their peculiar method, and have taken to a kind of investigation 
 generally foreign to them, J cannot he reproached if I take the 
 same course as they do. I am free — at least I try to be free 
 — from any onesidedness of method. In my opinion there is 
 no one royal road of investigation : to my mind that way is 
 good which leads to the goal of knowledge in the individual 
 case. And sometimes that will be the one, sometimes the 
 
 c 
 
XXVI 
 
 AUTHOR'S PREFACE 
 
 other method, according to the different nature of the individual 
 problems that present themselves. In the present case I 
 imagine that I have employed the method of research which was 
 most suitable to the special nature of the theoretical problems 
 ~'~~X)f~-ca pital — abstract in form, but empirical in essence : and 
 indeed, as seems to me, empirical in a truer sense than can be 
 assigned to the investigations which the historical school has 
 directed towards the same end. 
 
 The second remark I should like to make is this. The 
 fundamental ideas of my interest theory-are. I believe, unusually 
 simple and natural Had I been content to arrange these ideas 
 in a more concise form, avoiding all casuistical matters of detail, 
 I should have put forward a theory which, in small compass, 
 would have produced the impression of being exceedingly simple, 
 even verging on being self-evident. So far as power of carrying 
 conviction goes, this would certainly have been an advantage, 
 and, if I have forborne to seize that advantage, it was only after 
 full consideration. The fac; 
 have been so man 
 found fake, that I must expect to find the public very critically 
 disposed, and indeed must presume that my best and most 
 careful readers will be the most critical. In these circum- 
 stances it appeared to me morp. importaTit t n make the structure 
 of my theory secure than to make it easy and pleasant reading. 
 Thus I decided to encumber my work with numerous demon- 
 strations, details, exact figures, and so on, rather than leave 
 room at critical points for doubts and misunderstandings. 
 
 In this direction one circumstance gave me particular trouble. 
 In a theory of any range and any difficulty f.ViprP arp ppintf which, 
 by reason of some casuistical pecuharities or other, are not 
 always qnihp pasily pxp lainpd. even when the general principle 
 which will give their solution is already known ; and, so long 
 as those points are not distinctly traced back to the general 
 principle, they stand like so many living objections to its 
 correctness. As it happens, t here are a good many such poin ts 
 in th p <'wf> r.bpnri ps so cinselv connected ; — that of valufe-a nd 
 t hat of capital. Now in the theory of value I had experienced 
 how unexplained questions of this sort may stand seriously in 
 the way and hinder the acceptance of the best grounded general 
 theories, — for I am convinced that people have been so long 
 
AUTHOR'S PREFACE 
 
 xxvii 
 
 prevented from getting right views on the nature and laws 
 
 of value only because they stnmhled at certain s t riking facts, 
 which, to hasty consideration, seemed to contradict these views, 
 while in truth they were only complicated cases requiring 
 casuistical treatment. To save my theor y q, 
 
 like fate T tried tmt.i'mpa fp, nhjp.ctions of this sort , and 
 remove them by suitable digressions. Naturally I did not 
 deal with all conceivable objections, but only with those which 
 seemed to me likely to crop up in the minds of critical readers, 
 and which, at the same time, seemed difficult enough to warrant 
 a special explanation : all the same it gave me occasion to go 
 into more detail than was favourable to the fluent statement 
 of mv theory. 
 
 Thanks to all this I have arrived at a result as paradoxical 
 as it is natural ; that the very trouble wtn Vh T took to clear 
 difficulties out of the wav has given my theory a certain 
 
 appearance of difficulty. . Unsuspicious of these hidden and 
 dangerous rocks, many of my readers, I doubt not, would have 
 sailed safely over them, wliile I, knowing them so well, and 
 trying to steer a safe but laboured course, have made the 
 journey long, difficult, and troublesome. I trust, however, that 
 somethmg may be put to my credit in this regard ; for, after 
 all, no one could very well expect to arrive at the solution of 
 a problem of such recognised difficulty except through earnest 
 and laborious thinking. I may at any rate take this oppor- 
 tunity of asking one favour of my readers ; — that, if they have 
 once read my theory with all its ca.suistical detail, t hey w ould 
 go over it a second time omitting the deta il. If in this way 
 the leading ideas are put directly together again, and cleared 
 of aU superfluous elaboration, I venture to think that the 
 theory will again produce that impression of simplicity and 
 naturalness which is warranted by the simplicity of its con- 
 stituent ideas ; an impression which I may have sacrificed to 
 a critical precaution that was perhaps exaggerated, but was 
 not altogether without justification. 
 
 This book was already well through the press when Carl 
 Menger’s Contriimtion to the Theory of Capital appeared in 
 Conrad’s Jahrhiicher (vol. xvii. part ii.) I very much regret 
 that it was then too late for me to make full use of that most 
 interesting and suggestive work, and, in particular, that I could 
 
AUTHOR'S PREFACE 
 
 not (do more justice to its author in my critical notice of the 
 historical development of the conception of capital. Unfortun- 
 \ ^ at^ by the time it appeared the first part of my book, — that 
 ^ j^nich deals with the conception and nature of capital, and 
 touches most closely on this work of Menger, — was already 
 printed off. 
 
 For the same reason I could not notice the important work 
 of Wieser on Natxiral Value, which only came to my hands 
 during the printing of my last chapter. 
 
 E. Bohm-Baweek. 
 
 Innsbruck, November 1888. 
 
ANALYTICAL TABLE OF CONTENTS 
 
 Introduction. The different sense attached to the word Capital in the spheres 
 of Production and Distribution. Division of the subject into Capital the 
 instrument of production, and Capital the source of interest pp. 1 — 3 
 
 BOOK I 
 
 THE NATURE AND CONCEPTION OE CAPITAL 
 
 Chapter I. Man and Nature. The unity of all science demands that 
 economics builds on certain fundamental truths pertaining rather to the 
 natural sciences. Connection of Happiness, Wants, Satisfaction, Goods, 
 Use, Production. Man’s contribution to production — the “moving of 
 things ” — as deciding where and when natural forces shall act. Limitations 
 of our mastery over nature : our allies — knowledge, and the division of 
 nature against herself. ....... pp. 7 — 16 
 
 Chapter n. The Nature of Capital. The roundabout method of pro- 
 duction. Illustrations. Its great results as regards product are an 
 
 admitted fact of experience. The explanation ; — that by getting control of 
 one power we can bring it to bear on other powers, and through many 
 members obtain a cumulative result. This enlisting of natural forces is 
 capitalist production, and capital is nothing but the complex of inter- 
 mediate products which emerge at the various stages on the roundabout 
 journey of production ....... pp. 17 — 23 
 
 Chapter IIL Historical Development of the Conception. Originally 
 it appeared as an interest-bearing sum of money. Turgot expanded this into 
 money or goods. Adam Smith divided goods into consumption goods, and 
 income - bearing goods or capital, noticing a distinction in the latter which 
 was developed by his followers into the categories of National and Indi- 
 vidual capital. It escaped notice, however, that these were two entirely 
 independent conceptions, and hence the confused idea that capital bore 
 interest because it was productive. Definitions of Hermann, Menger, 
 
XXX 
 
 ANAL YTICAL TABLE OF CONTENTS 
 
 Klciuwacliter, Jevons, Marx, Kiiies, Walras, M'Leod, Kiihnast. Various 
 interpretations of tlie terms “goods ” and “means of production ” in these 
 definitions ......... pp. 24 — 35 
 
 Chapter IV. The True Conception of Capital. The principles of a good 
 definition. Capital in general .(Acquisitive or Private capital) is a group 
 of products which serve as means to the acquisition of goods. Under this 
 we put the narrower, hut perhaps more important, conception of Social or 
 Productive capital, the complex of intermediate products, or products 
 destined for further production ...... pp. 36 — 41 
 
 Chapter V. The Competing Conceptions of Capital, (i) Those includ- 
 ing Consumption goods as well as acquisitive instruments — the “national 
 subsistence fund,” Koscher’s ““ products saved for further production,” 
 Knies’s “goods applicable to the satisfaction of want in the future.” (2) 
 Those including Labour : the strong objections to this. (3) Those includ- 
 ing Land as well as products of labour — a classification which, indeed, has 
 some advantages. (4) Those making still stricter limitations — Klein- 
 wiichter, Marx, Jevons. (6) Metaphysical conceptions — M'Leod and 
 Kiihnast .......... pp. 42 — 60 
 
 Chapter VI. Social and Private Capital. This division is not coin- 
 cident with that made by Rodbertus and Wagner into purely economic 
 capital and legal property in capital. The groups of goods embraced in 
 each of our categories. Should “warehoused consumption goods” and 
 “money” be included in social capital? Should the maintenance of 
 labourei-s ? Emphatically this latter is not capital, but consumption 
 wealth pp. 61 — 72 
 
 BOOK II 
 
 CAPITAL AS INSTRUMENT OF PRODUCTION 
 
 Chapter I. Introductory. The two questions answered in the present 
 book : How does capital originate, and what is the natui’e of its work in 
 production ? The un.satisfactory answers up till now are principally due to 
 the neglect of describing facts before explaining them . . pp. 75 — 77 
 
 Chapter II. Capitalist Production. Recapitulation. The sole technical 
 factoi-s in production are nature and labour, but, as we economise only 
 where we have not superfluity, the limited natural agents — briefly, uses of 
 land — and labour are the sole economic factors. In capitalist production 
 the roundabout way, while securing increased products, is attended by the 
 sacrifice of Time. This is at the root of the dependence of labour on 
 capital. Every lengthening of process involves some increase of product, 
 but not in equal progression. The “production period”: — the average 
 time between the expenditure of uses of land and labour and the turning 
 out of the finished consumption good ..... pp. 78 — 91 
 
ANALYTICAL TABLE OF CONTENTS 
 
 XXXI 
 
 Chapter HL The Function of Capital in Production, (i) It is 
 
 symptomatic of the adoption of the roundabout method. (2) As storing 
 up natural power it is a tool to further production. (3) It is an indirect 
 cause of new processes, as giving off, in consumption goods, the main- 
 tenance of labourers, and leaving them free to invest their labour and 
 natural agents in lengthy processes. Thus capital is not an independent 
 productive ^wer, but an intermediate product oi' nature ana labour— a^ 
 medium through which they both work.] The claim of independence 
 would never have been made but for the assumed parallelism between 
 factors of production and branches of income . . . pp. 92 — 99 
 
 Chapter IV. The Theory of the Formation of Capital Capital, both 
 in its origin and its growth, is the result of production and saving — not 
 necessarily a direct saving of capital, but of consumption goods wMch leave 
 labour and land free to produce capital .... pp. 100 — 105 
 
 Chapter V. Formation of Capital in a Community. At any given 
 moment the capital of a community consists of a mass of intermediate 
 products, some at different stages of the same length of roundabout journey, 
 others at the same stage of processes of different lengths. Eepresentation 
 of this by concentric circles, the outer — that nearest consumption — being 
 . the largest, both in kinds of products and amount of capital invested. 
 
 Detailed proof of the proposition of last chapter, and demonstration that, 
 alike in socialism and in individualism, saving is necessary 
 
 pp. 106—118 
 
 Chapter VI. Possible Objections, (i) That most capital is not fitted for 
 immediate consumption, and that there is thus no abstinence in not con- 
 suming it — which does not affect the fact that, for the formation of capital, 
 productive powers must be withdrawn from the service of the present, 
 although it is a resisonable argument against those who confuse saving with 
 moral desert. (2) That saving must be a saving of surplus, and surplus is 
 due to industriousness — all the same, the product of industry must not be 
 consumed but saved. The true place of saving as directing nature and 
 labour towards the production of capital, not of consumption goods. (3) 
 That non-consumption is a pure negative — which has force only against 
 those who elevate saving into an independent factor of production. This 
 brings us, then, to the further question : Why do people save capital, 
 and we must before going further find a basis for our interest theory in 
 the theory of value ....... pp. 119 — 125 
 
 BOOK III 
 
 VALUE 
 
 / 
 
 Chapter L The Two Conceptions of Value. The old division into Use 
 value and Exchange value we shall replace by Subj ective value (imp ortance 
 to hu man wellbeing) a nd Objective Exchange value (purchasing power) 
 
 pp. 129—132 
 
xxxii ANALYTICAL TABLE OF CONTENTS 
 
 Chapter II. Nature and Origin of Subjective Value While all goods 
 
 by definition have a certain relation to hunian wellbeing, there is a 
 difference between usefulness, the general capacity to subserve wellbeing; 
 and value, the indispensable condition of wellbeing. For the emergence 
 of value there must be scarcity relative to demand, else we should not 
 economise ......... pp. 133 — 137 
 
 Chapter III. The Amount of Value. From the foregoing the amount of 
 a good’s value would seem defined by the amount of wellbeing actually 
 dependent on it. But this is confronted by the old paradox that bread 
 has little value and diamonds much. The solution will be found in accurate 
 examination of what really is the amount of wellbeing dependent on any 
 goods, and to get at this we have to put two questions. First ; when we 
 speak of satisfaction of want (economic wellbeing) do we mean kinds of 
 want or concrete feelings of want ? The older theory made the mistake of 
 saying the former, and so considered that which satisfied the most vital 
 needs the most valuable. Whereas the slightest casuistic consideration 
 shows that we measure the importance of a good by its relation to the 
 concrete want as it arises, and not to the totality which constitutes the 
 kind. Representing kinds of wants and concrete wants in a typical 
 scheme, we can see how little the kind tells us of the urgency of the con- 
 crete want ......... pp. 138 — 145 
 
 Chapter IV. The Marginal Utility. Second : where a good is capable 
 of satisfying wants of different importance, which is the dependent want 
 the satisfaction of which determines value ? The answer is ■ — the one 
 which would fail of its satisfaction without the good ; that is, the least 
 important among those actually satisfied. Thus vahie is detennined by 
 Marginal Utility. Illustration of the sacks of corn. In industrial life the 
 familiar fact that quantity is in inverse ratio to value is an empirical 
 statement of this law : the more goods there are of a kind the less urgent 
 is the last want satisfied, and twice "oers&. Thus we have the natural 
 explanation why bread has little value and diamonds much pp. 146—153 
 
 Chapter V. Complications. We must be careful to determine in each 
 case what is the marginal utility. For instance, (1) in assessing the value 
 of a durable good, or a collective good (like a harvest), we have to sum up 
 the importance of many concrete wants ; (2) the value of most goods is not 
 determined by their own, but by a foreign utility, that of goods substituted 
 for them, either by purchase or production — a principle of wide application 
 in present economic life ....... pp. 154 — 158 
 
 Chapter VI. What determines Marginal Utility. It is the relation 
 between wants and their provision. If wants are many and intense and 
 provision is scant, there are many unsatisfied layers of want, and the 
 marginal utility is high, and vice versd. Thus a good has many subjective 
 values, and goods generally have different values to different classes of 
 society .......... pp. 159 — 161 
 
 Chapter VII. Alternative Uses. When a commodity admits of different 
 kinds of use, it is the highest marginal utility — the marginal utility of the 
 
ANALYTICAL TABLE OF CONTENTS xxxiii 
 
 most useful employment — that decides its value : the other (excluded) 
 employments usually halve no influence on practical calculations 
 
 pp. 162 — 165 
 
 Chapter VIII. Subjective Exchange Value. Organised exchange gives 
 almost every good a second value — the indhect importance which it has 
 for human wellbeing through its capacity of being bartered for goods which 
 directly affect human wellbeing'. Where this and subjective use value 
 compete, value is decided by the higher (alternative) employment of the two. 
 Illustration of how subjective and objective exchange value may move in 
 different directions ....... pp. 166 — 169 
 
 Chapter IX. The Value of Complementary Goods. Where several 
 goods co-operate towards -one utility the value of the complete group is the 
 , value of the group’s marginal utility, except where all the members ai’e 
 replaceable. If each member is irreplaceable, and has no use outside the 
 gro.up, then one member has the value of the whole group. But where the 
 members are capable of other (though less remunerative) employments, 
 each member has one value as complement and another as isolated. Lastly, 
 where some members are replaceable, these members never have any greater 
 value than that given them in isolation outside, while the irreplaceable 
 member gets the remainder of the gi’oup value. The far-reaching bearing 
 of this on the distribution problem .... pp. 170 — 178 
 
 Chapter X. The Value of Productive Goods. Value and Costs. 
 
 It has generally been held that the value of goods is regulated by the costs 
 of their production. But, adopting Monger’s division of goods into ranks, 
 it becomes evident that productive groups only get their value (if value is 
 importance for human wellbeing) from the last link in the chain, the final 
 consumption good. Thus the value of the productive groups and of the 
 final product must be substantially the same, and costs of production are 
 reflated by the marginal utility of final products, although each group 
 has its immediate measure in its particular intermediate product. Appeal- 
 ing to experience, the well-known law of costs, affirming the identity of 
 costs and products although putting the causal connection the wrong way 
 about, confirms this. The identity, however, is disturbed by two causes— 
 (1) irregular fluctuations, (2) the normal divergence in which interest 
 emerges. Looking now tg the fact that one group of productive goods 
 may pass into products with different marginal utilities, we find that it is 
 the marginal utility of the least remunerative employment that determines 
 value. ■ But once value is thus given to costs, it in turn, where goods are 
 freely produced, transmits itself to the other products. Thus the law of 
 costs, w'hen understood as a particular law of value, is quite correct, and is 
 not in contradiction with the universal law of- marginal utility 
 
 pp. 179—189 
 
XXXIV 
 
 ANALYTICAL TABLE OF CONTENTS 
 
 BOOK IV 
 
 PRICE 
 
 Chapter L The Fundamental Law. The motive of exchange in general 
 is the striving after economical advantage : postulates of this motive. The 
 condition of exchange — that the exchangers put different values upon the 
 commodity and the equivalent price. The most capable exchanger — the 
 one who attaches most value to the good and least to the equivalent 
 
 pp. 193—197 
 
 Chapter II. Isolated Exchange. Here price is determined somewhere 
 between the subjective valuation of the buyer as maximum and that of the 
 seller as minimum ....... pp. 198 — 199 
 
 Chapter III. One-sided Competition. Where there are several buyers 
 and one seller, price is detennined between the subjective valuation of the 
 actual and that of the most capable unsuccessful purchaser ; where there are 
 several sellers, between that of the actual and that of the most capable 
 excluded seller ........ pp. 200 — 202 
 
 Chapter IV. Two-sided Competition. The course of competition between 
 several buyers and several sellers shown by an illustrative scheme, proving 
 
 (1) that transactions are closed between the most capable competitors, 
 
 (2) that price is determined by the valuations of the marginal pairs, (3) 
 that there is an exhaustive analogy between the formation of price and 
 that of subjective value, and (4) that price is, from end to end, the resultant 
 of subjective valuations. The effect which the various groups of valuations 
 have on price ........ pp. 203 — 213 
 
 Chapter V. The Law of Supply and Demand. The price zone 
 determined by the marginal pairs may also be characterised as that within 
 which Supply and Demand are in equilibrium. In two caises, the price of 
 money and the price of labour, this latter formula is even more exact 
 
 pp. 214—217 
 
 Chapter VI. The Individual Determinants of Price. The level (high 
 or low) of the valuation of the marginal pairs is a resultant of the number 
 and intensity of the desires on both sides. Analysing this into factors we 
 find (1) extent of demand, (2) intensity of demand — the latter further 
 analysed into the buyers’ subjective valuations of the commodity and of the 
 equivalent price, (3) extent of supply, (4) intensity of supply — the latter 
 further analysed into the sellers’ subjective valuations of the commodity 
 and of the equivalent price. But where commodities are made for sale 
 the sellers’ subjective valuations fall out altogether, and price is determined 
 by the valuation of the last buyer .... pp. 218 — 222 
 
ANALYTICAL TABLE OF CONTENTS’ 
 
 XXXV 
 
 Chapter VII. The Law of Costs. The law that price tends to equality - 
 with costs of production seems at first sight to contradict our law. But ; 
 the concatenation is really the following. The consumers’ subjective 
 valuations for each class of commodity determine the consumers’ demand. 
 Against this stands supply of the particular commodity. The valuations 
 of the marginal pairs determine its price. This price again determines 
 the extent and intensity of the manufacturers’ demand for raw material, 
 and this material passes to the most capable buyers at the valuation of the 
 last buyer. Thus it is the least remunerative employment (the market/] 
 equivalent of the subjective marginal utility) that determines the value of j 
 the cost goods. What gives colour to the law of costs is the subsequent 1 
 phenomenon, that the value thus given to cost goods by marginal product 
 is then transmitted from these costs to products of originally higher marginal 
 utility. Explanation of cases where the movement of price seems to be 
 • from costs to products, as in improvement of processes : increased supply 
 changing the level of subjective valuations, and lowering the marginal 
 utility. The symmetry between costs and products is disturbed by two 
 causes — (1) general friction, (2) the lapse of time. This leads us to the 
 consideration of the effect of differences of time on the valuation of goods 
 
 pp. 223 — 234 
 
 BOOK V 
 
 PEESENT AND FUTUEE 
 
 Chapter I. Present and Future in Economic Life. Our general 
 economic conduct has more reference to the future than we are always 
 conscious of. Not feeling future sensations we yet anticipate and compare 
 them, and the greater part of our wealth in the present consists of goods 
 getting ready for the future. As future feelings are commensurable so are 
 future goods, our basis of valuation being the marginal utility which they 
 win bring us in the future. It should be noted, however, that the element 
 of objective uncertainty m future goods has nothing to do with the pheno- 
 menon of interest ; it is simply a premium against risk. Our fundamental 
 principle, then, is, that present goods have a higher subjective value, and 
 thus a higher price, than future goods of like kind and number. This is 
 the resultant of the causes mentioned in the three following chapters 
 
 pp. 237 — 248 
 
 Chapter DL Differences in Want and Provision for Want. Here two 
 cases are typical — (1) that of immediate distress, (2) where economical pro- 
 spects for the future are hopeful. In these cases present goods are obviously 
 valued more highly than future. Even where the future does not promise 
 better provision than the present, the shilling in my pocket, as a durable 
 good, avails for the present, for the future, and for any chance that may 
 turn up meantime. The exceptions to this — as in some perishable goods 
 — are insignificant ....... pp. 249 — 252 
 
xxxvi 
 
 ANALYTICAL TABLE OF CONTENTS 
 
 Chapter III. Underestimate of the Future. Men, civilised as well as 
 savage, generally underestimate the future simply because it is futme. 
 Ihree reasons for this : (1) want of imagination, (2) defect in will, (3) 
 Whe uncertainty of life. The latter obtains directly only as regards long 
 periods, but by a species of arbitrage this underestimate is put into a 
 definite percentage which obtains for all periods. This second factor com- 
 bines with that of last chapter to increase the agio on present goods 
 
 pp. 253—269 
 
 Chaptjer IV. The Technical Superiority of Present Qoods- As we 
 
 ^^^^ow, methods of production which take time are more productive — not only 
 as regards units of product, hut as regards value. Tables to prove this is 
 so, even independent of the influence of the other two factors. The same 
 superiority attaches to present goods simply as consumption goods, in so 
 far as command over such goods leaves our means of production free for 
 investment in lengthy processes. This is the source of Jevons’s mistake in 
 considering subsistence as the only capital . . . pp. 260 — 272 
 
 Chapter V. Co-operation of the Three Factors. Tire action of the first 
 two is cumulative, that of the third alternative, but the three really co- 
 operate towards the same end, the preference for present goods. For the 
 reasons already given, all classes — needy, careless, rich, saving — find some- 
 thing in present goods superior to future. These subjective valuations 
 meeting in a market determine a price which contains an agio : this agio, 
 once established, has a reflex influence on subjective estimates, and a 
 developed exchange system gradually levels arbitrary Valuations into a 
 normal Tate ......... pp. 273 — 281 
 
 BOOK VI 
 
 THE SOUECE OF INTEREST 
 
 Chapter I. The Loan and Loan Interest. Here we have the simplest 
 case : the exchange of two goods, one present, the other future, with the 
 agio necessarily on the former. Misunderstandings of this in the past. 
 Knies’s answer to the criticism of the Use theory in Capital and Interest. 
 Principal plus interest is the equivalent in future goods of the principal 
 lent in present goods. A loan without interest is a sale below market 
 price .......... pp. 285 — 298 
 
 Chapter n. The Profit of Capitalist Undertaking. Principles of 
 Explanation. The business of the capitalist is to buy goods of remoter 
 rank, and transform them into consumption goods, his gain being called 
 “profit.” One point must be made clear before going further ; these pro- 
 ductive goods are economically future goods, and subject to the same dis- 
 count as the future consumption goods into which they are ultimately 
 
ANALYTICAL TABLE OF CONTENTS xxxvii 
 
 changed. This is the ex23lanation of the so-called cheap buying. The 
 capitalist gets his profit simply from the ripening of the future goods in his 
 hand into present goods ...... pp. 299—303 
 
 Chapter III. The Profit of Capitalist Undertaking. Complications. 
 
 (1) Our estimate of future goods is graduated according to the intervening 
 time : corresponding with this the value of productive goods rises steadily 
 as the process goes on, and the increased value is transferred from branch 
 to branch of production. (2) Dmable productive goods contribute differ- 
 ent parts of their contents to products maturing at various points of 
 time, and so unite the characteristics of durable and of productive goods — 
 of which later. (3) Productive goods admit of various employments turn- 
 ing Out different products at different periods ; how then can they be 
 valued in present goods ? — In the marginal utility of such goods the future 
 as well'as the present uses have already been taken into consideration, the 
 possible futm’e uses being reduced to present value. It remains for us now 
 to confirm these theoretical conclusions by appeal to the actual markets 
 where means of production are exchanged for present goods pp. 304 — 312 
 
 Chapter IV. The Profits of Capitalist Undertaking. The Labour 
 
 Market. Assuming that, over the community, an average two year.s’. 
 process is tm-ning out a product w'orth x ner week, supply here will b e- 
 represented by a gi-eat number of labourers ready to accept much less than 
 X rather than work in short unproductive processes. The demand comes 
 from the undertakers, who must find it their interest to sell their goods to 
 labour. What wage can they pay ? In simple circumstances they could 
 employ their capital in extending their own processes, and so increase their 
 return. If, instead, they use it to pay labourers, they must gain more in 
 the buying of labour than they lose by dispensing with the extension of 
 their process. In modern comjdex circumstances the ca^iitalists, who are 
 not, as a rule, workers, lend their capital, through the channels of organ- 
 ised credit, to those who wish to make their labour more productive, and 
 find an agio already in the market. But Loan and Labour markets alike 
 are parts of the great Subsistence market we have now to examine 
 
 pp. 313—318 
 
 Chapter V. The Profit of Capitalist Undertaking. The General 
 Subsistence Market. A fundamental proposition : The fund available 
 for advances of subsistence consists of the entire wealth of a community 
 exclusive of land. With the exceirtion of the small amount consumed wdth- 
 out retmn or wasted, and that consumed by independent producers, all 
 wealth comes to this gi’eat market, and is, directly or indirectly, advanced 
 to labour. It may be objected that wealth in many forms, such as tools, 
 is not subsistence. But all that is required is that wealth should be 
 changed gradually into subsistence as the workers of the successive stages 
 require it. The subsistence fund, then, includes not only finished goods, 
 but goods at all stages of progress, and goods going through all lengths of 
 process. Thus the average production period possible in a countiy depends 
 on the amount of its wealth. Proof that the amount of subsistence required 
 
ANALYTICAL TABLE OF CONTENTS 
 
 xxxviii 
 
 before entering on any process must be sufficient for a little over half the 
 production period ........ pp. 319 — 328 
 
 Chapter VI. The Profit of Capitalist Undertaking. The General 
 Subsistence Market {contini^el). To find the price at which finished 
 present goods exchange against future on the subsistence market, we must 
 examine more carefully the extent and intensity of supply and demand. 
 The demand consists of (1) wage-earners, (2) independent producers wish- 
 ing to extend their processes, (3) borrowers for consumption. Thus it is 
 easy to see that the demand must always be in excess of the supply ; that 
 an agio must appear : and that, as putting the drag on undue extensions of 
 process, this agio is as healthy as it is inevitable. Finally what is true of 
 labour is true of uses of land and of intermediate products. Error of 
 Socialist theory in not seeing that so-called “cheap buying” is true of 
 these as well as of labour ...... pp. 329 — 338 
 
 Chapter VII. Interest from Durable Goods. The value of a dmable 
 good being a sum made up of all the material services inhering in it, 
 the single service may obtain an independent value and price. Where 
 a good lasts for years the remote services suffer the same discount of value 
 as future goods in general. But as each service is given off, the remaining 
 services, by one year's approximation to the present, grow one year more 
 valuable, and each year the parent good loses the value of the most remote 
 service still inhering in the good. Thus what the owner gains is the gross 
 present value of the annual service thrown off : what he loses (wear and 
 tear) is the value of the most remote service : the difference between these 
 two is the net return of interest. Thus our theory gives a simple answer 
 where Productivity, Exploitation, and Use theories found only a stone of 
 stumbling. Obviously also it gives the natural explanation of Capitalisa- 
 tion .......... pp. 339 — 349 
 
 Chapter VIII. Interest from Durable Goods {corvtinued). In durable 
 goods that are also productive goods we find a double phenomenon : although 
 the good has perished in giving off its successive services, the services thus 
 incorporated in the process remain bound up in it till its completion : thus 
 it bears interest after it has ceased to exist, but the interest is now ascribed 
 to the circulating capital in which' the services have been incorporated, and 
 not to the “outlay.” An important application If a good is infinitely 
 durable, the capitalised value is infinitely small compared with the sum of 
 successive services ; the last service is infinitely small, and wear and tear 
 vanishes : the gross return and the net return are one. Here then we get 
 the explanation of land rent, as simply a special case of interest obtained 
 from durable goods. The bearing of this on the Eicardian theory 
 
 pp. 350 — 357 
 
 Chapter IX. Results. Owners of capital, then, are merchants in present 
 goods, and such goods being more valuable than the “future goods,” 
 Labour, Uses of land, and Capital, the agio or interest included in the 
 price is only reasonable. Circumstances may often produce exploitation 
 
ANALYTICAL TABLE OF CONTENTS 
 
 XXXIX 
 
 and usury, but in the essence of interest, there is nothing unjust ; as in all 
 human institutions, we have to balance advantages with drawbacks, and 
 the balance swings in favour of interest .... pp. 358 — 364 
 
 Chapter X. Interest under Socialism. Even here, as time does not 
 stand still, the causes of interest would still be active. Suppose all other 
 sources stopped, if dm'able goods were exchanged for less capitalised value 
 than the full sum of all their futui'e services the agio of interest would 
 emerge. Indeed under Socialism the state would ‘ ‘ exploit ” the labourers — 
 perhaps to divide out the amount more equitably, but still to divide it as 
 interest, not as wage ....... pp. 365 — 371 
 
 BOOK VII 
 
 THE BATE OF INTEEEST 
 
 Chapter I. The Bate in Isolated Exchange. Our present task is to 
 point out the concrete circumstances that influence the valuations on both 
 sides. Fu’st, of isolated exchange. In the production loan what deter- 
 mines the subjective valuation of the suitor is the amount he will gain by 
 extending his process. But as, beyond a certain point, the sui’plus retiu'ns 
 decrease as processes extend, a present loan has less value in proportion to 
 the length of process already provided for . . . pp. 375 — 380 
 
 Chapter IL The Bate in Market Transactions. First assuming that 
 the demand comes froni the wage-earners alone, how high will rise the 
 agio ? Here we meet a special diflBculty. The price of labour is the 
 resultant of subjective valuations of buyer and seller, but what value can 
 the capitalist put upon the labour he wishes to buy wheu it will bring a 
 dift'erent product and value according to the length of process in which it 
 is invested, and when, again, the process he will adopt depends upon the 
 wage he must pay 1 The “fixed point” is found in the fact that the 
 existing stock of wealth can always buy aU the wage labour offered. This 
 gives a certain definiteness to the average length of process, and so the 
 product on which the capitalist bases his valuation. But again it may be 
 a long process at a low wage or a short process at a high Wage. The final 
 answer is, that the wage offei'ed must bring subsistence and number of 
 workers to • equilibrium in such a way that neither party can disturb it by 
 under-bidding or over-bidding. Or, to put it positively ; The rate is 
 determined by the productiveness of the last economic extension of process, 
 in such a way that the amount of capital making the extension possible 
 
 must bear a less interest than the surplus return obtained by means of it 
 
 which is pretty much identical with Thiinen’s “last dose of capital ” 
 
 pp. 381 — 394 
 
 Chapter IIL The Bate- in Market Transactions {continued). 
 But what are the concrete determinants which decide the degi-ee 
 
xl 
 
 ANAL YTICAL TABLE OF CONTENTS 
 
 of productiveness of the last extension ? If, ceteris paribus, subsist- 
 ence increases, the same calculations as before show that equilibrium 
 cannot be maintained without an extension of process, an increase of wage, 
 and a fall of interest — the latter accounted for by the fact that men can 
 only keep the increased wealth employed by extensions of process which 
 involve decreased surpluses. If, on the other hand, subsistence falls, 
 equilibrium demands contraction of processes, fall in wage, and rise in 
 interest. If, again, population rise or fall we have the converse results. 
 Lastly, if productiveness increase, ceteris paribus, interest will rise along 
 with the surplus now yielded by the last extension. Thus we conclude 
 that there are three decisive factors which affect the rate of interest, and 
 this is confirmed by history and experience pp. 395 — 402 
 
 Chapter IV. The Market for Capital in its Full Development. And 
 
 now to give the features of actual life to our abstract scheme. It makes 
 no difference to om- aa'gument that product and wage vary from employ- 
 ment to employment : the essential matter for interest is the relation 
 between the two. Nor does it matter that in actual life the annual 
 increment due to extensions of process varies from employment to employ- 
 ment : capital follows an isohypse of surplus returns, not of periods of 
 production, but this does not alter the essential circumstances on which 
 our law rests. Again, there are other demands besides that of the wage- 
 earners — (A) that for consumption credit, completely co-ordinate with the 
 other, (B) that of landowners who require subsistence proportioned to the 
 length of their production processes, (C) that of capitalists themselves, 
 although their claim on subsistence is effect and not cause of the agio. 
 Lastly, we may enumerate the seven concrete factors in the interest rate 
 
 pp. 403—412 
 
 Chapter V. The Market for Capital in its Full Development {con- 
 tinued). To look now at the struggle between immediate consumption 
 and accumulation. In good economical management present and future 
 will be alike considered, and provision made that the present consumption 
 shall not reduce the level of future enjoyment. Thus parent wealth should 
 be saved, and even some portion of income. The two great deviations 
 from economic conduct are due (1) to the perspective undervaluation of 
 the futme and (2) to the neglect of exact calculation of the future’s claims. 
 Differences between our theory and that of the Wage Fund. Finally, the 
 actual market for capital is not one gi'eat undivided market, hut a great 
 number of part markets all communicating and arbitrating each other’s 
 prices. Conclusion ....... pp. 413 — 424 
 
 Appendix to page 327 
 Index of Authors mentioned . 
 
 . pp. 425-:-426 
 . pp. 427 — 428 
 
INTKODUCTION 
 
 In systems of Political Economy the word Capital and the 
 theory of Capital are regularly met with in two distinct 
 spheres ; first, under Production , and, second, under . Distribu.- ' 
 tion. I n the former case capital is represented as a factor or 
 tool of production : as an instrument which men use to extort 
 from nature the various forms of wealth unattainable by simple 
 labour. In the latter case capital appears as a source of 
 income or a rent fund ; and we are shown how, in the division 
 among the various members of society of that wealth which 
 has been produced in common, capital acts like a magnet, 
 drawing a portion of the national product to itself, and deliver- 
 ing it over to its owner : it appears, in a word, as the source 
 of Interest., 
 
 When we are told that capital assists in the production of 
 wealth, and then again that it assists in the obtaining of 
 wealth for its owner, we are apt to jump to the conclusion 
 that the two phenomena are intimately and essentially con- 
 nected, and that the one is the immediate result of the other — 
 that capital can bring wealth to its owner because capital assists 
 in the production of wealth. .As a fact. Political Economy 
 has taken up this idea only too readily and too completely. 
 Captivated by the deceptive symmetry that exists between the 
 three great factors of production — Nature, Labour, Capital — 
 and the three great branches of income — Eent, Wage, and 
 Interest — the science, from Say’s day till the present, has 
 taught that these three branches of income are nothing else 
 
 than the payment for the three factors of production , and that 
 
2 
 
 INTRODUCTION 
 
 1 
 
 Interest in particular is nothing else than the compensation 
 which capital receives for its productive services when the 
 product is divided out among society. Propounded by various 
 interest theories in various forms this idea has found its mos t 
 conciRR and, at the same time, its most naive expression, in 
 the well-known “ Productivity theories,” — those theories which 
 explain interest directly as the natural fruit of a productive 
 power peculiar to and resident in capital.' 
 
 In beginning the study of the theory of Capital, it cannot 
 be too emphatically stated that this idea,, simple and natural 
 as it may appear, contains a, prejudgment calculated to pre- 
 clridft nnhia.R.Rcd chn sideration of the problems of capi tal If 
 there were no other objection, the fact that the word capital is 
 never used exactly in the same sense in the two spheres of 
 phenomena must give us pause. True, all capital which .serves 
 as a tool of production is also capable of hearing interest, but 
 
 the converse is not the case . \/K dwelling-house, a hired horse, 
 a circulating library bear interest to their respective owners 
 without having anything to do with the production of new 
 wealth. If, in the sphere of distribution, the conception of 
 capital thus embraces objects which are not capital in the 
 sphere of production^, this alone is sufficient to show that the , 
 bearing of interest cannot bv itself be an _indi cation oljths 
 productive power of capital We have not to deal with one 
 motive power transmitting Itself to two different spheres ; not 
 even with two groups of phenomena which have grown up so 
 intimately connected that the explanation of the one is got 
 fully and entirely through the explanation of the other ; but 
 with two di stin ct classes of p henomena, yhus we have two. 
 distinct subj eats, which give' us material for two distinct 
 scientific problems ; and finally, w e have to seek for th e 
 solution of these problems by two distinct and separate roads. 
 
 It so happens, however, that these reaUy distinct problems are 
 accidentaUv linked together by one name : they are problems 
 of Capital. It may be that, besides identity of name, we shall 
 find many inner relations, between the two series of pheno- 
 mena and the two problems ; — our investigation shall decide 
 that later. But such relations are yet to be discovered ; they 
 must not be assumed ; and unless we would give up all idea 
 
 1 See my Capital and Interest, 1890, p. 111. 
 
INTRODUCTION 
 
 3 
 
 of being unprejudiced in our quest and in our conclusions, 
 ipust begin the iiiquir^^ free from any preconceived opinion of 
 a necessary identity, or even of -a n pya pt parallfthRm . between 
 the productive efficiency of cnpital and its power of bearing 
 
 interest. 
 
 Our division of the subject will correspond to this real 
 independence of the two problems. In one part of the 
 present work we shall take up the .theory of Capital as a Tool 
 of Productio n, and in another the theory nf Tirte.rest. But 
 we shall first devote a separate book to the attempt to obtain 
 some insight into what Capital itself is, in conception and 
 nature. 
 

I 
 
 BOOK I 
 
 THE NATURE AND CONCEPTION OF CAPITAL 
 
r- 
 
 
 
 
 
 •A 
 
 V- • , y , 
 
 ■ . -K-'y \.'' ■<;, 
 
 •. Vi)! i^. 
 
 I 
 
 
 
 . ■'"'"It- ■,. ■ 
 
 j 
 
 ^4 :. ' 
 
 
 ■ '♦••. . ' ■ .j ' 
 
 
 
 / 
 
 V 
 
CHAPTER I 
 
 MAN AND NATURE 
 
 There is scarcely a system or a text-book of -PoliticRl p,conomy 
 which does not, at some point or other, hring in (lisc^ issicin . s . .o f 
 matters helong-ing to the physical sciences . Usually these are 
 introduced in the chapter on Production. There we are 
 taught that ro create new goods does not mean to create new 
 material, since matter is constant and cannot be increased. 
 We learn what nature contributes to the woiiv of production 
 
 in the shape of materials and powers ; what is done by the 
 mechanical, what by the chemical, and what by the organic 
 powers of nature ; what importance climate, heat, moisture 
 have on the development of production ; on what physical and 
 technical foundations the working of machinery rests ; and 
 many things of this sort. 
 
 To the principle of this custom no sensible person will 
 object. It is the form in which, consciously or unconsciously, 
 we pay boTna.o'p. to one of the weight, lAst-, principles of our 
 
 knowledge, the unity of all science. Ever since Bacon we 
 have recognised that no single branch of inquiry explains to 
 the very end the facts with which it deals, but breaks off at 
 some point or other, and passes on its facts to some sister science 
 for further treatment, so that the total explanation is only 
 given by the totahty of all the sciences. Thus it is that if 
 one would not set before his readers simply a collection of 
 barren fragments, he must add to what is distinctively depart- 
 mental at least so nmch as will connect it wi th the related 
 sciences in, the organic whole of human knowledge, and thus 
 indicate the way in which the explanations begun by him 
 may be concluded. 
 
8 
 
 MAN AND NATURE 
 
 BOOK 1 
 
 It would, however, be rather impertinent if we theorists 
 were to think that such terminal truths — as we may appro- 
 priately caU them — -are added only for purposes of statement 
 and for the good of our readers. Eightly employed they 
 are of much greater use to ourselves as scientific inquirers. 
 They may be an effectual means of p reventing us Jrnnn lightly 
 b uilding our whole sy stem, or parts of it, on_air^ and uninten- 
 tionally maintaining in the name of Political Economy some- 
 thing which, in its assumptions or conclusions, is, physically 
 or psychologically speaking, nonsense. I must not be mis- 
 understood however. It is not in the least my meaning that 
 Political Economy should assume a nature foreign to it, and 
 become natural science or psychology ; w hat T do mean is 
 that it must never be in contradiction with these s ciences. 
 What is false in natural science or psychology is false in all 
 and every science. And to prevent us unwittingly running 
 counter to certain fundamental truths, perhaps the best way is 
 to put these truths explicitly in black and white before our eyes. 
 
 Now the subject with which we have to deal in this work 
 is of such a nature that it very snecially requires to be baset l 
 on sound natural principles, and a very great deal may be lost 
 by neglect of this. I have therefore strong reasons for 
 following the good old custom, and prefacing my theory by 
 ^^some fundamental truths that stretch over into the neighbouring 
 sphere of the natural sciences. I shall endeavour not to abuse 
 the opportunity by inflicting a mass of learned scientific detail 
 on the reader. The few truths I mean to start with would 
 indeed, in a professional classification, be put within the sphere 
 of the natural sciences, but they are of so general a character 
 that, practically, f.hpy are outside departmental l imits, ami 
 belong to the commonwealth of knowledg e. They are known 
 and recognised by everybody, and, in one form or other, they 
 have been expressed all along in our economic literature. 
 There is really only one thing that, I skould like to think, 
 will distinguish my use of them : I shall try so to put t biemJTiai; 
 the y will not be mere paragraphs introducing^ the t heory, but . 
 wi ll remain present and living i mthc-Spirit ofJL Usually these 
 excursuses into the domains of physics are placed in some corner 
 of economical books rather for ornament than use. In one 
 chapter they are made much of ; in the next they are forgotten 
 
CHAP. I 
 
 GOODS 
 
 9 
 
 and contradicted. In what follows I shall try to avoid this 
 error, and wherever anything depends upon these fundamental 
 truths — which will very often be the case in a discussion on 
 capital — to keep unobtrusively but firmly in touch with them. 
 In this way, while there is no fear of our economical theory 
 obtaining the character of a theory of natural science, it wilL 
 not be one that runs counter to physical facts. _ 
 
 Men stri vp. happiness. This is perhaps the most 
 
 general and, certainly, the most vague expression for a complex 
 of strivings, all of wliich have for object the bringing about 
 of such occurrences and conditions as we know and feel to be 
 pleasant, and the averting of those we know to be unpleasant. 
 Instead of “ striving after happiness we may use the expres- 
 sion “ striving after self-preservation and self-development,” or 
 “ stri\dng after the greatest possible furtherance of life ” ; or 
 we may, with equal propriety, use the words, “ striving after 
 the most complete possible satisfaction of wants ” . for the 
 expressions we are'" so famihaf 'wrfK’’ uT economic terminology, 
 
 “ want ” and “ satisfaction of want,” mean, in the last resort, 
 nothing else than, respectively, the unsatisfied craving of 
 man to be put under conditions he thinks desirable or more 
 desirable than those he has, and the successful obtaining of 
 such conditions. 
 
 The_ whole world, as we know it. is subject to the law of 
 cause and effee.t; no effect can take place without sufficient 
 cause. From this law man and his conditions have no exemp- 
 tion ; none of those beneficent changes of condition, which we 
 call “ satisfactions of want,” can come about otherwise than as 
 the effect of a sufficient cause ; eA^ery satisfaction presupposes 
 an adequate instrument of safisfaction . The adequate instru - 
 ments for the satisfaction of himian wants, or — what is the 
 same thing — the causes of beneficent changes in human condi- 
 tions, we call goods.^ 
 
 The man-wJfo*“ wants ” finds goods in different spheres of 
 the world in which he lives ; he finds them in the world o f. 
 persons as well as in the world of thing s. For obvious reasons, 
 which need not be discussed here, we use the word “ good ” in 
 somewhat different ways in these two spheres. On the one 
 
 See Menger, Grundsii/jze der Volkswirthscho/ftslehre, p. 1. Vienna, 1871. 
 
10 
 
 MAN AND NA TV RE 
 
 BOOK 
 
 hand, we designate bv the name of goods not t he persons. \Kho- 
 are of use to us. but only the acts, the services, thr ough which. 
 they are of nse ; on the other hand, we give the name to the 
 impersonal material shapes themselves, and call them Material 
 as opposed to Personal goods. 
 
 In what follows we have to do with m aterial goo ds only_ 
 
 Material goods are part of the external world : they are 
 natural things. As such they are, in constitution and action, 
 wholly and entirely natural products, and su bject to natural 
 laws. The fact that men’s goods are instruments towards the 
 personal ends of the “ lord of creation ” gives these goods no 
 kind of immunity from complete subordination to the natural 
 order, any more than man himself is able to emancipate the 
 natural side of his being from similar control Material goods. 
 ^ therefore, come mto existence only as natural la ws allow and 
 demand that a material shape, thus and not otherwise consti- 
 tuted, should come into existence. They pass out of existence if 
 a new combination of natural powers, working according to 
 natural laws, results of necessity in the dissolution of their 
 ' former material shape. They cannot exert the smallest effect, 
 be it useful, hurtful, or indifferent to men, unless the given 
 coincidence of materials and powers under natural laws pro- 
 duce this very effect and no other. 
 
 These seem peculiarly trifling propositions. They are 
 trifling enough to require no formal proof; indeed, no one 
 will seriously dispute them. But, simple and trifling as 
 they are, on certain tempting occasions these fundamental 
 0/ truths have been lost sight of. and theories have been 
 put in circxilation which implicitly contradict them. The 
 theorist, therefore, has good cause to emphasise them, and even 
 foUow out their logical conclusions to a certain extent into 
 those departments where they have to do duty as, peculiarly, 
 the fundamental truths of economic theory. These depart- 
 ments are the function of goods and the origin of goods ; in 
 other words, tbp tViPri yy of the Use of goods, and the theory 
 of the Production of goods. 
 
 The theory of the use of goods I have already gone into at 
 length in Capital and Interest} I there showed that material 
 
 * P. 219 (German edition, p. 266). See also my Bechte und VerMllnisse, p. 
 61. Innsbrack, 1881. 
 
CHAP. I 
 
 THE USE OF GOODS 
 
 11 
 
 goods are nothing else than such distinct forms of matter as 
 admit of the natural powers residing in them being directed 
 to human advantage. I showed how the “ use ” they afford is 
 realised through concrete activities of these iia.tural powers; , 
 and, therefore, by real forth putting of power. I showed how 
 a use {Gebrauch or Nutzung) cannot be made of them other- 
 wise than by taking the peculiar forms of the energy of the 
 good at the proper moment, supplying the conditions necessary 
 to render them available where they previously existed in an 
 unavailable form, and t hen bringing these forms of energ; ^^ 
 into proper connection with that object in which the useful 
 effect is to take place. On these considerations I based the 
 conception of the “ Material Services ” {Nutzleistungen) which 
 I believe to be the only one that corresponds with facts, and 
 rejected certain shadowy ideas which connected the old theory 
 of interest with the word “ Uses ” of goods. ^Vdiat remains for 
 us here is, on the same lines, to lay down certain fundamental 
 ideas as to the origin of material goods. 
 
 We have already said that the origin of natural goods lies 
 entirely mider the control of natural laws. No material good 
 can come into existence except when a previous coincidence of 
 materials and powers has made it necessary in physical law that 
 exactly this form of matter should emerge. Looked at from 
 the point of view of nature, the formation of goods is a purelA^ 
 
 natural process . Not so, however, from the point of view of 
 man_ Man has cause to lay emphasis on a distinction which 
 is not visible from the purely physical standpoint. One. 
 great class of useful forms of m a, tier comes into existence 
 without interference from man, as the product of favour- 
 able coincidences of matter and force — a product which, from 
 the teleological human standpoint, we should call accidental 
 Thus originate fruitful islands in the courses of streams ; thus 
 the grass on natural pastures and prairies ; thus berries and 
 trees of the wood ; thus deposits of useful minerals. But . 
 thnngb in this way accident does much for man it does not, 
 do nearly enough. In nature left to herself we have on a 
 large scale what we should have on a small one if we wished 
 to make a definite picture out. of coloured bits of stone, and, 
 instead of piecing the picture together deliberately, were to 
 put the bits of stone into a kaleidoscope and wait till accident 
 
12 
 
 MAN AND NA DURE 
 
 BOOK I 
 
 shook the planless stones into the wislied-for picture. Among 
 the infinite number of ways in which the worlcing materials 
 and powers might combine there are, in the one case as in the 
 other, a countless number of possible effects, but only a few 
 favourable ones ; and in the natural undisturbed course of 
 things these few turn up too seldom for man, with all his 
 wants, to rest content with them, ^^ccordingly he inte^pose^s 
 another factor in the natural -process, his own cons ciousl y 
 \ ^ directed energies — he begins to produce the goods he 
 requires. 
 
 To “ produce ” : what does this mean ? I t has been s o 
 often said by_econojnists that the creation of goods is not the 
 bringing into existence of materials that hitherto have not 
 existed — is not “ creation ” in the true sense of the word, — 
 but only a fashioning of imperishable, matter . ,int o more 
 a dvantageous shapes , that it is quite unnecessary to say it 
 again. More accurate, but still exposed to misinterpretatibh, 
 is the expression that in production natural powers are the 
 ^ servants of man, and are directed by him to his own advantage. 
 If this proposition be taken to mean that man in any case can 
 im pose his sovereign will in place of na tural laws^ can at wiU 
 “ bully ” natural law into making a single exception at his 
 bidding, it is entirely eiToneous. Whether the lord of creation 
 will it or no, not an atom of matter can, for a single moment 
 or by a hair’s breadth, work otherwise than the unchangeable 
 laws of nature demand. Man’s role in production is much 
 more modest. It consists simply in this — that he, himself a 
 part of the natui’al world, combines his personal powers with 
 ‘ the impersonal powers of nature, and combines them in such 
 a way that under natural law the co-operation results in a 
 definite, desired, material form. Thus— potwik bs tanding th a 
 
 j i nterference of man, the origin of go ods remains purely.- a 
 natural process. The natural process is not disturbed by man 
 ) but completed, inasmuch as, by apt intervention of his own 
 natural powers, he supphes a condition which has hitherto 
 been wanting to the origination of a material good. 
 
 If we look more closely at the way in which man assists 
 natural processes, we find that his snip but ample contribution 
 consists in the moving of things. “ Ihitting objects in motion ” 
 is the idea which gives the key to all human production 
 
CHAP. I 
 
 PRODUCTION 
 
 13 
 
 and its results ; — to all man’s mastery over nature add its 
 powers.^ And this is so simply because the powers reside 
 ill the objects. T^ow. when man bv his physical powers — the 
 power of moving thinp ; s — is able in dip.ta.tP! 'inhp.rp, the objec t 
 shall be, he obtains a control over the place at which a natural 
 power may become effective ; and this means broadly a control 
 over the wav and over the time_ in which it may become 
 effectiye. 
 
 I sav a control over the wav in wbicb a. natural powey 
 may become effective. Of course a pound weight acts as a 
 pound weight and never in any other way ; whether it be a 
 paper weight on a writing-table, or a counterpoise on a scale- 
 beam, or whether it keep down the valve of a steam-engine, it 
 never ceases to exert the force of gravitation with which its 
 mass is endowed. But just because the expression of one and 
 the same natural power always remains the same, results that n.rp, 
 extraordinarily different mav be obtained by getting it to work 
 in different combinations- — just as by adding like to unlike a 
 different sum may be got every time. And so our pound 
 weight, while in itself constantly acting with perfect uniformity, 
 will, according to the different surroundings in which we place 
 it, sometimes hold together a heap of papers on a writing-table, 
 sometimes indicate the weight of another object, sometimes 
 regulate the pressure of steam in the boiler. 
 
 A gain T say a control over the, time in which a nat u ral 
 power may become effective . This proposition, also, must not 
 be taken too literally. It must not be imagined that natural 
 powers work intermittently ; that man can sometimes bring 
 them to a standstill, sometimes set them working agaim On 
 thfer contrary^ natural powers are always at work; a natural 
 
 power not active would be a contradiction in terms. But it 
 is possible that several powers mav be so combined that tbe.ir 
 activities. may for a time mutuaUv balance each o ther, and the 
 resultant be rest- — if not complete rest, still some movement so 
 slight that, as regards human purposes, it may be neglected. 
 i^Tien this is the case, before any new resultant can emerge 
 that is of interest to man, there must be an entirely different 
 .comb ina tion of materials and powers. This suggests hoAv man 
 may get control of the point of time at which a definite resultant 
 
 ^ See Mill’s Principles, i. 1. 2. 
 
14 
 
 MAN AND NATURE 
 
 BOOK I 
 
 emerges. It is only necessary for him, by skilful use of his 
 power to ^ove objects, to provide the causes of the desired 
 effect, all hut one. So long as this one is not present the 
 conditions are unfulfilled, and there cannot be the desired 
 result. But when at the proper moment he adds the last 
 c.rmdi±,inT), the Tp ovement hitherto held in leash, as it were, 
 ia suddenly set free, and the desired effect is obtained at 
 the opportune time. Thus the sportsman moves powder and 
 lead into the barrel of the gun ; he shuts the breech ; he 
 raises the cock. Each of these things has for long possessed 
 and expressed its peculiar powers. In the powder are pre- 
 sent the molecular powers whose energy later on is to expel 
 the shot from the barrel. The barrel now, as formerly, exerts 
 ^ts forces of cohesion and resistance. The trigger which is 
 to let the cock smash down, strains and presses against the 
 spring. Still the arrangement, the disposition of the collective 
 powers, is such that the resultant of their mutual energies is 
 rest. But the sportsman covers the wild fowl with the barrel: 
 there is a slight pressure on the tongue, a Little dislocation of 
 the arrangements, and the f^^but flics ^ 
 
 ^ If we were to carry our analysis of what man does in production a step 
 further, we might approuriatelv distinguish three fundamental wavs in whiej^ 
 the prodiicinp- man “moves things. ” The fi.r.gjt is^ hat, for want of a better 
 name, we may call simple movements or changes of plag e — where men transport 
 _jntire-®bjects from one locality to another. Thus the miner brings the ore from 
 the depths of the shaft to the upper air ; the merchant takes his goods from the 
 place where they are produced to the place where they are demanded and used. 
 The secQftd—embraees- those movements of parts of one a nd t he sa me object 
 whereby it experiences a change of forna , as when nails are made from iron, 
 statues from marble, pipes from clay, dials from ivory, combs from caoutchouc, 
 tumblers from glass, furniture from wood. The third, and much the most 
 common way, i.s where difl’erent objects are brougkvdw^her-ifi-space to form 
 combinations of matter . These combinations may be merely temporary , or they 
 may be lasting . Instances of the one are where the stamp falls on the coin, 
 the chisel chips at the marble, the carving tool is applied to the wood, the ore 
 put into the furnace, the yarn into the loom, the paper under the printing press, 
 the stuff under the shears, the plough through the clods. Instances of the 
 other are where we build a house out of wood, stone, lime, iron, etc. ; where 
 we put together a watch out of wheels, springs, pendula, weignts, stop-action 
 and many other things ; in fact in manufacture generally. I must warn the 
 reader that this division into three fundamental forms neither has, nor is meant 
 to have, the character of strict scientific classification. Indeed, these forms merge 
 in many instances into one another. Temporary combinations, for instance, are 
 very often half-way to changes of form, and what I have called a simple change 
 
CHAP, 1 
 
 MAN’S ALLIES IN PRODUCTION 
 
 15 
 
 The same considerations which show us the kind of 
 mastery man has over nature show us at the s amp, timp. the 
 measure and the narrow limits of his mastery . As we have 
 seen, man has a certain power to make natural forces act where, 
 when, and how he will ; but this power he possesses only in so 
 far as he can control the matter in which these forces reside. 
 Now the masses of matter, and therefore the masses of inert 
 resistance, which have to be overcome before our purposes are 
 served, are often immense, while the physical force which is at 
 our command is very modest and comparatively trifling. Often, 
 on the other hand, the matter is too fine to be manipulated 
 by our rude hand. Our interests often call for infinitely 
 delicate rearrangements of infinitely small pieces, and how 
 un suited are our clumsy fingers to deal with molecules and 
 atoms ! How entirely incapable is the human hand of im- 
 itating even one of those wonderfully dehcate cellular tissues 
 which nature flings out in thousandfold, every day, in every 
 plant and leaf! Thus human pow ^pg at-p. fimibly defieient : 
 they are too s light as against the mass, too rude as against the 
 structure of the matter which they have to subdue. 
 
 In those circumsta nces we should be very badly off for 
 the wherewithal of production if we had not' some real allies 
 bebiml these doubly insuflScient powers. One of these aUief} 
 is the human mind. In investigating the causal rela5idn"6T" 
 things wvu come "tCT'kilow the natural conditions under which 
 the desired goods come into existence : we thus come to learn 
 where human force can be applied with advantage and where 
 not; and thus we are taught to avoid exertions which are 
 barren and choose .those which are profitable. Human power 
 so directed is like a small but well-officered army, which makes 
 up in mobility, cohesion, and energetic use of opportunity, 
 
 of place is at the same time, in a certain point of view, a material combination, 
 a bringing together of the thing moved and the object (personal or impersonal) 
 to which it is moved. This division, however, will make it easier to find our 
 reckoning, and will prove too, if necessary, the correctness of the general char- 
 acteristics which I have ascribed in the text to productive processes. I mean to 
 say that it is easy to see that every productive activity which one can thin k _Qf 
 ranges itself under some one of these three fundamental forms, and to that extent 
 it is proved that such an activity must; a fortiori, range itself also under the 
 general formula given in the text, where ve have described the nature and method 
 of the production of material goods as the mastery of natural powers by means 
 of putting objects in motion. 
 
16 
 
 MAN AND NATURE 
 
 BOOK I 
 
 what it wauts in ntimbers. ^ni^ther powerful ally in tho 
 struprple against nature is nature herself. All tliat we are able 
 to do in production would be wretchedly small were it not 
 that, in the storehouse of nature, we find the means of dividjug 
 nature a. p pjjrstdtersel-f and setting force .again st Jbice. But here 
 we touch on a subject which is, in itself, too important, par- 
 ticularly as regards our inquiry, to admit of merely a passing 
 mention 
 
CHAPTER II 
 
 THE NATURE OF CAPITAL 
 
 The end and aim of all production is the making of things 
 
 with which to satisfy our wants : that is to say, the making 
 of goods for immediate consmnption, or Consmnption Goodsd 
 The method of their production we have already looked at m a 
 general way. We combine our own natural powers and natural 
 powers of the external world in such a way that, under natural 
 law', the desired material good must come into existence. But 
 this is a very general description indeed o'f the matter, and 
 looking at it closer there comes in sight an important distinc - 
 tion which we have not as yet considered. It^has reference 
 to the distance which lies between the expenditure of human 
 
 l ^nnr in the comhiued production and the appearan ce of the 
 desired good. We either put forth our labour just before^ 
 the goal is reached, or we, intentionally, take a roundabout I 
 way. That is to say, we may put forth our labour in such su 
 way that it at once completes the circle of conditions neces- 
 sary for the emergence of the desired good, and thus the 
 existence of the good immediatdy follnwa the expenditure of 
 the labour ; or we may associate "ourTahour first with the more 
 remote causes of the good, with the object of obtaining, not 
 the desired good itself, but a proximate cause of the good ; 
 which cause, again, must be associated with other suitable 
 
 ^ Menger has suggestively called these Good.s of the First lianh, classing all 
 goods which go to their production as Goods of Higher Rank. It is unfortunate 
 that we cannot use the literal English equivalent of the “ Genussguter,” but, as 
 next to it in convenience, I propose to use the expression Consumption Goods for 
 what otherwise we should have to translate as Goods for Immediate Consumption. 
 See Monger’s Gruvdsdtze, p. 8, and Bohra- Bawerk’s Rcchte uvd Verhdltnisse, 
 p, 101. — W. S. 
 
 C 
 
18 
 
 THE NATURE OE CAPITAL 
 
 BOOK I 
 
 materials and powers, till, finally, — perhaps through a consider- 
 able number of intermediate members, — the finished good, the 
 instrument of human satisfaction, is obtained. 
 
 The nature and importance of this distinction will be best 
 seen from a few examples ; and, as these will, to a considerable 
 extent, form a demonstration of what is really one of the most 
 fundamental propositions in our theory. I must risk being tedious. 
 
 A peasant requires drinking water. The spring is some 
 distance from his house. There are various ways in which he 
 may supply his daily wants. First, he mav go to the .spring 
 each time he is thirsty , and drink out of his hollowed hand. 
 This is the most direct way ; satisfaction follows hnmediately 
 on exertion. But it is an inconvenient way, for our peasant 
 has to take his way to the well as often as he is thirsty. And 
 it is an insufficient way, for he can never collect and store any 
 great quantity such as he requires for various other purposes. 
 Second , he may take a log of wood, hollow it out into a kind 
 of pail, and pprry hi.^ da,v’R .'^ upplv from the sp ring to his 
 cottage. The advantage is obvious, but it necessitates a 
 roundabout way of considerable length. The man must spend, 
 perhaps, a day in cutting out the pail ; before doing so he 
 must have felled a tree in the forest ; to do this, again, he 
 must have made an axe, and so on. But there is still a third 
 ' way ; instead of felling one tree he fells a number of ti’ees, sphts 
 and hollows them, lays them end for end, and so constructs 
 a runnel or rhone which brings a full head of water to his 
 co ttage . Here, obviously, between the expenditure of the 
 labour and the obtaining of the water we have a very round- 
 about way, but, then, the result is ever so much greater. Our 
 peasant needs no longer take his weary way from house to well 
 with the heavy pail on his shoulder, and yet he has a constant 
 and full supply of the freshest water at his very door. 
 
 Another example. I reqtrire stone for building a house. 
 There is a rich vein of excellent sandstone in a neighbouring 
 hill. How is it to be got out ? First, I may work the lon.qp. 
 ^ stones back and forward with my bare fingers, and break off 
 what can be broken off. This is the most direct, but also 
 the least productive way. S econd. L mgay-Aake a piece of 
 ' iror r ma.ke a hammer and chise l out of. it, and use them on 
 the hard stone — a roundabout way, which, of course, leads to 
 
CHAP. II 
 
 THE ROUNDABOUT METHOD 
 
 19 
 
 a very much better result than the former. Third method — - 
 Having a hammer and chisel I use them to drill a hole in the~ 
 rock ; next I turn my attention to procuring charcoal, sulphui’, 
 and nitre, and mixing them in a, powder, then I pour the 
 powder into the hole, and the explosion that follows spht.^ the 
 Rtnnp. into convenient pieces — still more of a roundabout way, 
 but one which, as experience shows, is as much superior to the 
 second way in result as the second was to the first. 
 
 Yet another example. I am short-sighted, and wish to 
 have a pair of spectacles. For this I require ground and 
 pohshed glasses, and a steel framework. But all that nature 
 offers towards that end is silicious earth and iron ore. How 
 am I to transform these into spectacles ? Work as I may, it 
 is as impossible for me ^to make spectacles directly out of 
 sihcious earth as it would be to make the steel frames out of 
 iron ore. Here there is no immediate or direct method of 
 production . There is nothing for it but to take the round- 
 about way, and, indeed, a very roundabout way. I must take 
 sihcious earth and fuel, and build furnaces for smelting the 
 glass from the sihcious earth ; the glass thus obtained has to 
 be carefuhy purified, worked, and cooled by a series of pro- 
 cesses ; finally, the glass thus prepared — again by means of 
 ingenious instruments carefuhy constructed beforehand — is 
 ground and pohshed into the lens fit for short-sighted eyes. 
 Simharly, I must smelt the ore in the blast furnace, change 
 the raw iron into steel, and make the frame therefrom — 
 processes which cannot be carried through without a long 
 series of tools and buildings that, on their part again, require 
 great amounts of ’ previous labour. Thus, by an exceedingly ^ 
 r oundabout wav, the end is attained. 
 
 The lesson to be drawn from all these examples alike is 
 obvious. It is — that a greater result is obtained by producing 
 goods in r oun dabout ways than by producing them directly . 
 AYhere a good can be produced in either way, we have the I 
 fact that, by the indirect way, a greater product can be gotj 
 with equal labour, or the same product with less labour. But! 
 beyond this, the superiority of the indirect way manifests itselif 
 in being the only way in which certain goods can be obtained'. 
 
 if I might say so, it is so much the better that it is often the 
 •only way ! 
 
20 
 
 THE NA TURE OF CAPITAL 
 
 BOOK I 
 
 J That roundaljDiit methods lead to g reater..ji:esu lts than 
 direct methods is one of the most important and fundamental 
 / propositions in the whole theory of production It must be 
 
 
 emphatically stated that the only basis of this proposition 
 is the experi ence of pract ical life. Economic theory does 
 not and cannot show a 'priori that it must be so ; but the 
 unanimous experience of all the technique of production says 
 that it is so. And this is sufficient ; aU the more that the 
 facts of experience which tell us this are commonplace and 
 familiar to everybody. But whv is it so ? The economi.st 
 j might quite well decline to answer this q uestion. For the 
 / fact that a greater product is obtained by methods of produc- 
 tion that begin far back is essentially a purely technical fact, 
 and to explain questions of technique does not fall within the 
 economist’s sphere. For instance, that tropical lands are more 
 fruitful than the polar zone ; that the alloy of which coins is 
 made stands more wear and tear than pure metal ; that a rail- 
 road is better for transport than an ordinary turnpike road ; — 
 all these are matters of fact with which the economist reckons, 
 but which his science does not call on him to explain. But 
 this is exactly one of those cases where, in the economist’s own 
 interest — the interest he has in limiting and defining his own 
 task — it is exceedingly desirable to go bevon d_ the specific 
 economic sphere. If the sober physical truth is once made 
 clear, political economy cannot indulge in any fancies or 
 fictions about it ; and, in such questions, political economy has 
 never been behind in the desire and the attempt to substitute 
 its own imaginings .! Although, then, this law is already suffi- 
 ciently accredited by experience. I attach particu lar value to,. 
 explaining its causj ^ and, after what has been said as to the 
 nature of production, this should not be very difficult. 
 
 In the last resort all our productive efforts amount to 
 shiftings and combinations of matter. We must know how to 
 bring together the right forms of matter at the right moment, 
 in order that from those associated forces the- desired result, 
 the product wanted, may follow. But, as w p s^rW, the na.f.nral 
 forms of niatter are often so infinitely la r ge., often so infinitely 
 fine, that h\iman hands are too weak or too coarse to control 
 them. W'e are as powerless to overcome the cohesion of the 
 wall of rock when we want building scone as we are, from 
 
CHAP. II 
 
 THE ROUNDABOUT METHOD 
 
 21 
 
 carbon, nitrogen, hydrogen, oxygen, phosphor, potash, etc., to 
 put together a single grain of wheat. But there are other 
 powers which can easily do what is denied to us. and the se are 
 the powers of nature. There are natural powers which far 
 exceed the possibilities of human power in greatness, and there 
 are other natural powers in the microscopic world which can 
 make combinations that put our clumsy fingers to shame. 1£ 
 we can succeed in making those forces our allies in the work 
 
 of production- the limits of human possibility will be infinitely 
 extended. And this we have done. 
 
 The, condition of our success is, that we are able to , non ,- 1 
 trol the materials on wliich the power that helps us dep ends. I 
 more ea.sily than the materials which_ar fi_tQJh e transformed iut oj 
 the desired good. Happily tliis, condition can be very often 
 complied with. Our weak yielding hand cannot overcome the 
 cohesion of the rock, but the hard wedge of iron can ; the wedge 
 and the hammer to drive it we can happily master with little 
 trouble. We cannot gather the atoms of phosphorus and / 
 potash out of the ground, and the atoms of carbon and oxygen/ 
 out of the atmospheric air, and put them together in the shape/ 
 of the corn of wheat ; but the organic chemical powers of thei 
 seed can put this magical process in motion, while we on our partj 
 can very easily bury the seed in the place of its secret working; 
 the bosom of the earth. Often, of course, we are not able 
 directly to master the form of matter on which the friendly 
 power depends, but in the same way as we would like it to 
 help us, do we help ourselves against it ; we trv to secure the 
 alliance of a second natural power which brings the form of 
 
 matter that'jbears' the first power under our control . We wish 
 to~Bnng the well water into the house, p Wooden rhones would 
 force it to obey our will, and take the path we prescribe, but 
 our hands have not the power to make the forest trees into 
 rhones. We have not far to look, however, for an expedient. 
 r^e ask the help of a second ally in the axe and the gouge ; 
 their assistance gives us the rhones the rhones bring us 
 
 the water. And what in this illustration is done through the 
 mediation of two or three members may be done, with equal 
 or greater result, through five, ten, or twenty members. Just 
 as we control and guide the immediate matter of which the 
 good is composed by one friendly power^ and that power by a 
 
22 
 
 THE NATURE OF CAPITAL 
 
 BOOK I 
 
 second, so can we control and guide the second bv a third, t-.he 
 third ly a fourth, this, again, by a fifth, and so on. — always 
 going back to more remote causes of the final result — till in 
 the series we come at last to one cause which we can control 
 c-onveniently by our own natural powers. This is the true 
 importance which attaches to our entering on roundabout ways 
 of production, and this is the reason of the result associated 
 with them ; every roundabout wav means the enlisting in our 
 service of a power which is stronger or more cunning than the 
 human hand ; every extension of the roundabout way means 
 an addition to the powers which enter into the service of man, 
 and the shifting of some portion of the burden of production 
 from the scarce and costly labour of human be ings to the 
 prodigal powers of nature 
 
 And now we may put into words an idea which has long 
 waited for expression, and must certainly have occurred to the 
 reader ; the kind of production whic lL works in thes e wise 
 circuitous methods is nothing else than what ec onomistS-Call 
 Ca,pita.b'f^|; Production, as opposed to that production which 
 goes directly at its object, as the Germans say, “■'init (hr nackten 
 Famt.”'^ And Capital is nothing but the complex of interm^iate 
 products wfeeh appear on the several stages of the roundabout 
 journey. 
 
 It is in this way I interpret the most important funda- 
 mental conception in the theory of capital, and I should be 
 very glad to stop here. But, like so many another conception 
 in the theory of capital, this conception of capital itself ba§ 
 become a veritable apple of discord to the theorists. A per- 
 fectly amazing number of divergent interpretations here con- 
 front each other, and block the approach to the theory of 
 capital with one of the most vexatious controversies in which 
 o\m science could be involved. This uncertainty as t o the 
 conception of capital, bad enough in itself, becomes worse in 
 proportion as Capital gives modern science new questions to 
 consider and discuss. It is certainly very unfortunate when a 
 
 ^ The expression Capitalist Production is generally used in one of two senses. 
 1 1 desig n ates either a production whieh avails itself of the assistance o f CQUcrele 
 ca pital (raw materials, tools, machinery, etc.), or a production carried on for 
 the behoof and under the control of private capitalist undertakers. The one is 
 not by any means coincident with the other. I always use the ex pression in 
 theJjormer of these two meanings. 
 
CHAP. II 
 
 CAPITALIST PRODUCTION 
 
 23 
 
 science already earnestly, even acrimoniously engaged on the 
 solution of questions which affect society to its depths, — 
 questions which all the world knows, ponders, and discusses as 
 the great “ problems of capital,” — is struck, as it were, by a 
 second confusion of tongues, and becomes involved in an eurj - 
 less wrangle as to what kind of thing it is that properly is 
 
 called Capital ! Such a controversy at such a point is more 
 than embarrassing ; it is a calamity ; and has been foimd so in 
 the history of Political Economy. Almost every year there 
 appears some new attempt to Settle the disputed conception, 
 but, unfortunately, no authoritative result has as yet followed 
 
 these attempts.^ On the contrary, many of them have only 
 served to put more combatants in the field and furnish more 
 matter to the dispute. 
 
 I confess that, to me, the settlement of the real nroblems 
 
 connected with the name of capital seems more important. 
 
 and certainly is more attractive, than the cataloguing of con- 
 troversies as to the proper usp.._Q£ JJre-wor(l All the same the 
 fact remains that the confusion about the name has brought 
 a great amount of confusion. into the matter ; and, again, it 
 might be open to misconstruction — and not without reason, — 
 if the author of a somewhat comprehensive work on capital 
 were to pass over the discussion of what is certainly the most 
 noisy, if not the most weighty controversy about capital. On 
 these two accounts I feel obliged again to trend tbe h eated 
 path of controversy , in the hope that impartial and sober 
 inquiry into the matter hi dispute may succeed in ending it. 
 
 ^ Looking back over the last few years only, I can recall, as coming in quick 
 succession, the researches of Knies {Bos Geld, Berlin, 1873, pp. 1-56) ; of Cossa 
 {La Nozione del Capitale, 1874, published in the Saggi di Econom/ia Politica, 
 Milan, 1878) ; of Eicca-Salerno {Sulla Teoria del Capitale, Milan, 1877) ; of 
 Umpfenbach {Bas Kapital in seiner Kulturhedeutung, Wiirzburg, 1879) ; of 
 Kiihnast ( Ueher den rechtlichen Begriff des Kapitales in Beitrdge zur Erlduterung 
 des BeiUschen Bechtes, 1884) ; of Supino {II Capitale nell’ Organismo Economico 
 e nell' Econmnia Politica, Milan, 1886). Meanwhile we have the well-known 
 works of Rodbertus and Marx, both bearing the title Bas Capital, and again the 
 elaborate statements in the more comprehensive systems, particularly those of 
 Wagner {Grundlegung, second edition, 1879, p. 36); of Eleinwachter (Schbnberg’s 
 first edition, p. 170 ; second edition, p. 206); and of Cohn {Grundlegung 
 der Nationalokonomie, Stuttgart, 1885, § 145-147). 
 
CHAPTEE III 
 
 HISTORICAL DEVELOPMENT OF THE CONCEPTION 
 
 It will be most convenient to open the discussion by a his- 
 torical survey of the development of the conception.^ 
 
 Ori^nallv the word Capital ( Capitale from Cayut) was used 
 
 to sigpiify the Principal of a money loan {Capitalis pars cleliti) 
 in opposition' to the Interest:' This usage, already fore- 
 shadowed in the Greek formation Ket^aXatov, became firmly 
 established in mediaeval^ Latin, and appears to have remained 
 the prevailing one- for a -jvery long time, even pretty far down 
 in the new era.^ Here, therefore, Capital meant the .same 
 t hing a.a “ an interest-bearing sum of mon ey.” 
 
 I In the meantime the disputes which had arisen over the 
 I legitimacy or illegitimacy of loan interest brought about an 
 I essential deepening and widening of the conception.®— Jt bad 
 become apparent that, thp. intore.Ht- bpAring power of “ b arren ” 
 money wn.s at bottom a borrowed one — borrowed from the 
 productive power of things that the money could buy. Money 
 only gave the exchange form — to a certain extent the out- 
 ward garb — in which the interest-bearing things passed from 
 hand to hand. The true “ stock ” or parent stem which bora 
 interest was not money but the goods that were got fo r it. _ 
 In these circumstances th e obvious course was so to ch ange 
 the conception that, besides embracing the rep rese ntative 
 
 1 See on this subject Knies, Das Geld, Berlin, 1873, p. 6 (second edition, p. 
 24) ; Ricca-Salerno, Sulla Teoria del Capitale, 1877, chap. ii. ; and Schonberg’s 
 Handbuch, second edition, vol. i. p. 206. 
 
 “ The English word “Cattle,” as Knies (p. 7) has rightly remarked, has 
 nothing in common derivatively with our conception. 
 
 ^ Capital and Interest, book i. chaps, ii. and iii. 
 
CHAP, in 
 
 TURGOT 
 
 25 
 
 thing, money, it would emlirace the represented thing goods. 
 And, indeed, popular language seems to have made this change 
 before science did. At least, as early as the year 1678, in a 
 glossary of that year, besides the meaning of a sum of money 
 there appears this further interpretation of the word capital, 
 
 “ Capitale dicitur bomim orwne quod yossi detur.” ^ But science 
 was not long behind in sanctioning the adoption of the con- 
 
 ce ption . We find it substantially in Hume in his essay onl 
 Interest, when he shows that the rate of interest altogether 
 depends, not on the amount of money, but on the amount of 
 riches or stocks available ; the only thing wanting is that 
 he should have formally callecT these riches or stocks “ real _ 
 capitals.’* This formal chan.o~e was finally made by Turgot : 
 
 “ Whoever,” he says in his Reflexions sur la Formation et la 
 Distribution dcs Richesses, “ gets possession of more goods in aJ 
 year than he requires to use, can lay past the surplus, and 
 accumulate it. These accumulated goods are what people call 
 Capital. . . . It is absolutely the same whether this sum of 
 goods, or this Capital, consists of a mass of metal, or of othe r 
 t hings , since money represents every kind of goods, just as, on 
 the other side, all other kinds of goods represent money.” 
 Thus Turgot gave the second reading m historical succession 
 to the conception of capital 
 
 It was very soon superseded by a third . Bor when Turgot 
 designated all saved goods mdiscrimihately as Capital, he 
 seemed to have gone too far in broadening the conception. 
 To replace the word “ money ” in the definition by the word 
 “ goods ” only reflected, indeed, the more thorough grasp which 
 was now taken of the subject. But to give the name of 
 Capital, without any further discriminatiorL to stocks of 
 
 goods, was to give up . without sufficient reason, the second 
 feature in the old conception,^ — the reference that napital i 
 had to a cap&,bihty of yielding interest, to an acquisition or 
 goods. To that extent Turgot’s conception of capital was 
 only in part a development born of the time : in part it 
 was an entirely new reading of the term ; a reading 
 which, at the same time, exposed him to the charge that, 
 without due cause, he had neglected the very suggestive 
 
 ^ Glossarium of Dufresne du Cange, quoted by Umpfenbach, Das Kapital in 
 seiner Kulturhedeutv/ng, Wlirzburg, 1879, p. 32. 
 
26 
 
 DEVELOPMENT OF THE CONCEPTION 
 
 BOOK I 
 
 ditfereiices there are between goods and goods. It was no 
 * less a man than Adam Smith who changed and rectified 
 /lurgot’s definition. The “ saved ” stocks, he sa id, mu st be. 
 / distinguished as containing two parts. ^ One portion is 
 { destined for i mmediate consumption, and gives off no kind of 
 income ; the other portion is destined to hriiig in a.n in come to 
 its owner, and this part alone rightly bears the name of 
 Capital. 
 
 With this distinction, however, Adam Smith connected 
 another consideration, which was destined to have very serious 
 consequences on the development of the conception. He 
 I remarked that his use of the term was applicable. - as__well 
 ‘ to the case of individuals as to th at of a whole community^; 
 I only, with this shifting of the standpoint, the group of things 
 embraced by the conception was also somewhat changed, 
 Tndi\dduals, that is to say, can make a gain, not only by the 
 production of goods, but also by lending to other individuals 
 for a consideration goods which are destined in themselves to 
 
 immediate consumption, such as houses, masquerade dresses, 
 furniture, etc. But the community, as a whole, cannot enrich 
 itself otherwise than bv the product ion of new goods. Bor 
 
 I tlie community, then, the conception of “ means of acquisi- 
 tion ” coincides with the otherwise narrower conception of 
 means of production .” In harmony with this the conception 
 oi' capital, from the point of view of the cornmnnity, must Ije 
 
 limited to a cmnplex of the means of production. It is worth 
 our while to put more exactly before us the bearing of this 
 insignificant remark — which, by the way, in Adam Smith is 
 put more unpretentiously, and much less sharply, than in the 
 abstract which I have given of his meaning. 
 
 First of all, this- was the beginning of the uivision of 
 
 t auital into two independent conce ptions — the conceptions 
 afterwards distinguished as hTp.ti'nna.l fia pital and Individual 
 Capital Or, to indicate the relation still more exactly, the 
 ]jaren't'~cdnception of capital as a stock of goods yielding- 
 income lived on under the designation of “ private capital,” 
 l)ut, nnder the name of “national capital.” it sent outran 
 (jffshoot which quickly grew t( independent importance. ; soon, 
 i^eed, to greater importance than the parent conception 
 
 ^ Wealth of Nations, book ii. chap. i. 
 
CHAP. Ill NATIONAI AND PRIVATE CAPITAL 
 
 27 
 
 itself. It was immediately recognised that a very notable 
 i mportance as regards nroduction attached to that class of 
 goods which people now began to call capital par e^celhnce : 
 and this became the occasion of a great many profitable 
 applications of the new conception to the theory of production. 
 Thus we find the national conception in a short time taking 
 its place as one of the chief fundamental conceptions of that 
 theory, and enga^d in those very important problems that 
 are now associated with its name. In the triad. Land. Labour, 
 and Capital, we find the n ew nnnppptinn gi ving its name to one 
 of the three great sources of wealth , or, as it was put later, to 
 one of the three factors of production. 
 
 But all the time, in virtue of the old parent conception — 
 that known later as Private Capital — the term capital remained. I 
 connected with the phenomenon- o f intere st, which belonged to I 
 the theory of distribution or income. Thus, from that time 
 onward appeared the peculiar phenomenon which was to be 
 the source of so many errors and complications, that two 
 series of fundamentally different phenomena and fundament- 
 ally different problems were treated imder the same name. 
 Capital, as National Capital, became the central figure of the 
 
 weightiest'problems of Production : Pnvate riapit-al^ of fhc 
 
 fuitdamregtaTly -dfstinct pro blem of Interest. 
 
 In view of this it becomes of consequence to state clearly 
 that Adam Smith’s two varieties of the coimeption of capital 
 are, properly, two "~^tirel^' independent conceptions, resting 
 substantially on quite different foundations, and only connected 
 externally by a very loose bond. As chance, however, would 
 have it, it was just this secondary and external relation that 
 caused the name to be given to the younger conception, and 
 brought about the. identity of name between the two. The 
 centre of gravity of the conception of private capital, as has 
 
 been poin ted out, lies in the acquisition of interest , in the 
 chafacteristic of being a source of inGom~e~:' the'''cent're~6r gfavdtv 
 of the~ conception of national capital, on the~7ifTierliajid. lies 
 
 in nroduction. in the characteristic of "being a tool of produc- 
 tion ; sttld the loose bond" that c/mnects th'em. 'is'^'the acci- 
 dental circumstance that the goods of which men make use 
 i q production are the same goods as are the source of profit and 
 interest to a people considered as a whole, and are, therefore. 
 
28 
 
 DEVELOPMENT OF THE CONCEPTION book i 
 
 capital in the original sense. Now this latter reference to 
 income gave the national conception of capital its-Jiame, 
 b ut it was very far from giving it its living substansc 
 This was fmmd so exclusively in the relation to prodnctimi 
 that, in a short time, the formal definition of capital was 
 based upon that relation alone. It was defined as a^omple.v 
 4)f “ produced means of production.” and such like, and in the 
 / end it scarcely caused any misgiving when, on closer considera- 
 tion, the produced means of production seemed never to be 
 quite identical with those stocks which constitute the income- 
 be aring capital of a people . For there can be no question that 
 'communities obtain income from consumption goods loaned to 
 other countries against interest. When this ingongruity was 
 expressly noted, and yet, notwithstanding, national capital 
 was quietly defined as a complex of means of production, it 
 (' amounted to a practical and emphatic recognition of the fact 
 that people were interested in capital solely on account of its 
 relations to production, and not at all on account of its 
 accidental characteristic of being the source of interest to the 
 community. To put it shortly : in National Capital the char - 
 acteristic of being tlie national scairce of interest came to t^ 
 front only for a moment, but this moment was long eno ugh-tn 
 attach the name of “ capital ” to it. Scarcely was this done 
 when the eentre of gravity was shifted, and placed in its 
 relation to production, and since then National Capital has 
 been looked on as an independent conception, substantially 
 quite foreign to its namesake. Private Capital. 
 
 Clearly as the historian of economic theory may now 
 distinguish between these conceptions as developed, the dis- 
 tinction was not seen at the time, nor for long afterwards^ 
 With Adam Smith himself the whole matter lies, I might say, 
 in embryo. Hi s ideas were so far from being fixed that he 
 could occasionally ascribe to them meanings which were quite 
 distinct from and did not at aU fit in with the fundamental 
 conception. An instance of this i s-Jiis extension._Df_ .tlia 
 national conception to aU sorts of personal proper ties , tabenta. 
 
 etc., — which seem a little out of place as elements of a 
 “ stock,” and which, like spirits rashly conjured, banished peace 
 for many a long day from the theory of capital This, how- 
 ever, is an episode of only secondary importanca The prin- 
 
CHAP. Ill NATIONAL AND PRIVATE CAPITAL 
 
 29 
 
 cipal point is that the followers of Adam Smith not only failed 
 to get rid of the confusion in which he had left the conception 
 of capital, but, on the contrary, positively put their seal to 
 one of its worst mistakes. They did not notice that, in what 
 Adam Smith and they themselves called “ capital.” there were 
 
 two fundamentally distinct conceptions ; they considered the 
 capital of which they spoke in the theory of production as 
 iden tical with the capit al which bears interest. As we know, 
 Adam Smith had already noticed' that there was a certain 
 difference in the meanings usually given to the word capital, and 
 that, for instance, rented houses, hired furniture, or masquerade 
 dresses were capital in one sense and not in another, and his 
 followers had not failed to loyally transmit the remark. But 
 ob\dously they attached no importance to it, — what was the 
 use of making a fuss about a distinction which referred only 
 to a few hired fancy dinsses and such like ? — and held fast by 
 their conceptmn of capital, tbp. far, tor of production being 
 canital. the source of interest. And now one confusion 
 resulted in another. Before, it was the conceptions that were 
 mixed ; now, it was the phenomena and the problems. Capital 
 produces, and it bears interest. Wha.f more natural than t o 
 gay shortly ; — it bears int'^st' It produces . And thus, 
 
 introduced’ and made possible "Sy the confusion in the concep- 
 tion of capital, originated that naive and one-sided theor}' of 
 the Productivity of capital which, from Say’s days to our own, 
 has held, and still, in some measure, holds economic science 
 iinder its baneful influences. The Socialist or semi- socialist 
 writers of our time were the first to face in earnest the con- 
 fusion of conceptions by distinguishing capital into “ pure 
 economic capital,” and capital as a “ historico-legal category.” ^ 
 This distinction, as we shall see, did not indeed hit the nail 
 on the head ; but it was at least a distinction which, of 
 necessity, finally distinguished between the obiect of the pro- 
 duction problem and the object of the interest problem , and 
 thus paved the way for an advance in the treatment of the 
 stni viciously confused problems. But this is to anticipate 
 the course of development : to resume the methodical narrative 
 we must go back to Adam Smith. 
 
 It maY be said that Adam Smith’s fundamental conception 
 ’ Kodbertus, ; Wagner, Grundlegung, second edition, p. 39. 
 
30 
 
 DEVELOPMENT OF THE CONCEPTION 
 
 BOOK r 
 
 wa s never afterwards quite neglected ; the relation n £-ca.pital 
 to acquisition and to p roductioiL which iu opposition to Turgot 
 he had again imported into the conception, has, in some form or 
 other, been retained by all later writers . Qn the other liand, 
 it very soon became manifest that, within the common funda- 
 mental conception, there was a surprismg amount of latitude 
 for different readings of it, and, as it chanced, there were certain 
 circumstances which very much favoured the taking advantage 
 of this latitude. First of all, economists fell heir not only 
 to the fundamental conception, but to the seed of ambiguity 
 which Adam Smith had planted in it. This seed now burst 
 into full life. Almost everybody, entangled in the conf usian 
 we liave pist described, thought that “ Capital ” mu st be defined 
 by one, uniting conception . But the one party, and indeed 
 theAhajority, thought more about the instruments of prdduc- 
 tion, while the other thought more about the source of income ; 
 and thus they attached to capital the characte ristics of two. 
 ditferent conceptions. This was one fruitful cause of divergent 
 definitions, but there was another still more fruitful Whether 
 the theoretical conception of capital was made to include pro- 
 ductive instruments only, or whether, more liberally, it was made 
 to embrace acquisitive instruments as well, iu any case there 
 are many different kinds b oth of proAup.tivp a.Tid of acq uisiti ve_ 
 instruments . NoW, in proportion as economists discovered 
 more similarities or more contrasts between the various groups 
 / of goods which serve for production and for acquisition, 
 
 ' they considered it appropriate to group together, under the 
 conception which they called capital, sometimes aU. acquisitive 
 or all productive instruments without exception, sometimes only 
 a certain circle of the same. And this circle again, according 
 to the tendencies of the writer, might be larger or smaller ; 
 sometimes of moderate dimensions, and sometimes, again, very 
 closely limited. It may be said, indeed, that of a.II, combina - 
 tions and permutations which were logically and ma t hematicall y 
 p.nnp.p.iva.blp., pcn nomirfl.] sh'pupp in thisi_r. ase was not spared 
 one . 
 
 Without attempting either to give a complete tale of these, 
 or to keep to the chronological order, I shall shortly coUocate 
 the more important of them. 
 
 bTumerous writers define cap i tal as a group of “products. 
 
CHAP, in HERMANN, MENGER, KLEINWACHTER 
 
 tha,t serve towards production.” or as ^rmips of “ p roduced 
 means~~^‘~pro3u ctioi i.” This conception, which is expressly 
 based on the relation of capital to production, excludes, on the 
 one hand, land (as not produced) and, on the other hand, all 
 goods that serve for immediate satisfaction of wants. This 
 conception I have, followed in defining capital as a group of 
 
 Intermediate Products . In so far as it is not so much an 
 alteration as a more distinct formulation of Adam Smith’s 
 (national) conception, I do not reckon it an independent 
 variation. 
 
 The variation which Tifrinnuri, however, has given must 
 be considered an independent one, and is the fourth reiidiug in 
 ar ithmetical or der gh-nn. to the. conception. He goes back to 
 capital as the source of income, and makes this the object of 
 his definition : Capital, he says, is “ every durable foundation of 
 a utility iNutzund\ which has exchange value. ” ^ In opposi- 
 fion to the”^IasF definition this one includes under the concep- 
 tion of Capital all land, and besides embraces such consump- 
 tion goods as are durable, like furniture, houses, etc., even if 
 they are personally used by the owners. 
 
 A fifth variation is given by Mcnger. He defines capital as 
 
 ^.<such groups of economic goods of higher rank (productive goods) 
 
 I as are now available to us for future periods.^ This defini-^ 
 
 tion is, in one way narrower, in another, wider than Hermann’ 
 It excludes durable consumption -goods (“goods of the first 
 rank ”), but it is wide enough to take in the productive services 
 of lahourj which Hermann Had not reckoned as capital. 
 
 A si xth var iation comes from Kl einwac hter. He finds it 
 a chara.cteristic mark of capital that it lightens the toil of 
 
 acquisTtion or productive hihour. Now this characteristic 
 appears to him not to belong to aU means of production, hut 
 only to one category of these, the tools of production, while 
 the matter or materials of production are absolutely passive 
 during the whole production process ; they are worked up or 
 used up but give no assistance in working. “ Logically,” 
 
 ^ Staatswirthsehaftliche Uhtersibchungen, Munich, 1832, p. 59, and similarly 
 in the second edition of 1874, p. 111. On p. 56 he expressly calls capital 
 “ Wealth which brings in income.”- 
 ^ GruTidsdtze, Vienna, 1871, p. 130. 
 
 ® See Mataja, Der JMernehmergevrinn, 1884, p. 180. 
 
32 
 
 DEVJ^LOPMENT OF THE CONCEPTION 
 
 BOOK I 
 
 7 
 
 therefore, “ the concep tion of capital should be hniited to tools 
 of production.” ^ 
 
 seventh interpretation has Jevons for its . .a uthor^ It 
 runs parallel to a certain extent with the foregoing. That is 
 to say, Jevons also considers it proved that by capital is to be 
 understood “ wealth employed to facilitate production .” ^ But 
 he finds this characteristic in quite another group of concrete 
 goods from that of Kleinwachter. “ The siugle and all- 
 important function of capital.” he says, “is to enable thp. 
 
 labourer to await the result of any long lasting work — to put 
 an interval between the beginning and the end of an enter- 
 prise.” Capital, then, “consists merely in the aggregate of 
 those commodities which are required for sustaining labourers 
 of any kind or class engaged in work. A stnc.k of fond is tbp 
 main element of capitab but supplies of clothes, furniture, 
 and all the other articles in common daily use are also 
 necessary parts of capital.” Th e tru e and only capital thus, 
 according to Jevons, is the sustenance of the labourers.® 
 
 Marx arrived at an eighth reading of the conception. As 
 every one knows he sees in mterest“a pfdflrgot'By the capitalist 
 at the expense of the wage-earner. This element of exploitation 
 seems to him so important that he brings it pi to the concep- 
 tion of capital as a constitutive feature of it : h e con ceive of 
 capital as only those productive instruments which, in th e 
 hand of the capitahsts, serve as “ instruments for t he explqita- 
 tion and enslaving of the labourer.” The same things in the 
 
 possession of the labourer, on the other hand, are not capital.'* 
 .A uiut]^ variation we owe to the distinguished critic of the 
 theory of capital, Karl Knie s. It originates in a well-meant 
 attempt to settle the terribly tangled controversy to the satis- 
 faction of everybody. To this end Knies , endeavours to 
 construct .a conception of capital which will be so wide that 
 the most imp'ortant of the contending interpretations may find 
 room in it beside each other. The uniting element in the, 
 conception be imap-ines he finds in the — devoti&n-of gQod s to 
 
 1 Gruridlagm und ZieU des sog. wisscnschaftlichen Sozialismus, 1885, p. 184. 
 ^ Theory of Political Economy, second edition, London, 1879, p. 242. 
 
 ® Ibid. p. 242, and very emphatically p. 26*4 : “ The capital is not the railway, 
 hut the food of those who made the railway.” 
 
 ■* Das Kapital, vol. i., second edition_, p. 796 (first edition, p. 747). See also 
 Knies, Das Geld, first editiori, p. 53. 
 
CHAP, in 
 
 KNIES, WALRAS, MCLEOD 
 
 33 
 
 thp. sRr\icp. of thf fiitur a Accordingly he defines the capital] 
 of a community as “ its svsils^^Q gn^df; (whether for 
 
 consmnption, acquisition, or production) which may he apphed to 
 satisfying wants in the future. ” ^ This definition does, as a fact, 
 afford room both for Turgot’s “ saved stocks of goods ” and for 
 the “ produced means of production ” of Adam Smith’s school, 
 as also for all goods embraced in Hermann’s definition as 
 affording the foundation of a durable — and therefore a con- 
 spicuously future — utihty. 
 
 Quite by itself stands the tenth interpretation, that of 
 L. Walra s. He divides all economuTgoods intg^j" capital ” and 
 “ income ” (revenu). All kinds of goods, irrespective of their 
 destination, which can be used more than once — that is, all 
 durable goods — he cnlls capital : while all perishable gnorls a.re^ 
 incorn g. Going into details he mentions the following as 
 capital: — Land {capitaux fonciers), persons {capitavxc personnels), 
 and movable durable goods {capitaux proprement dits or capitanx 
 mohiliers), while he considers food, the raw materials of in- 
 dustrial production, fuel and the hke, as income.^ 
 
 If the interpretations just mentioned are divided in 
 opinion as to the goods which should be designated capital, 
 they are, at any rate, all agreed that it is goods that are to bear 
 
 that name. But, finally, a n eleven th read i n g of the conception 
 calls this in question, and, instead of makmg capital a real 
 concrete quantity, distils out, as it were, some kind of abstrac- 
 tion as the essenc e nf eapital Thus _M‘Leod^ who sometimes 
 recurs to a favourite metaphor of earlier writers and defines 
 capital as a “ stock of accumulated labour,” sometimes goes 
 still deeper in abstraction and defines it as “nurchasing power ” 
 or “ circulating power. ” These phrases are not meant as illus- 
 trations, but explanations given in full earnest ; he gives us to 
 imderstand this in the most emphatic way by saying, in one 
 place, that the apphcation of the word capital to goods is a 
 simple metaphor, and. on another occasion, in so many words. 
 
 10 , 
 
 ^ Das Qeld, first edition, p. 47. In the second edition (1885) the same concep- 
 tion is on the whole retained, but often formulated in a less exact manner. 
 Accordingly, where I do not explicitly mention the contrary, I quote from the 
 more distinct formulation of the first edition. 
 
 ^ RUmcrUs (TDcmoinic Politique Pure, Lausanne, 1874, p. 218. Launhardt 
 {Mathematische Begrii^idung der Volkswirthschaftslehre, Leipsic, 1885, § 2) has 
 closely followed Walras. 
 
 D 
 
34 
 
 DEVELOPMENT OF THE CONCEPTION 
 
 BOOK 1 
 
 onpital not rp.prp.sp.ot-, goods in any way whatever , . ^ 
 
 Quite recently too we have a strikingly similar conception in 
 the suggestive work of a juristic writer, Ki ijiuasr, Hp also t.pfl a 
 us emphatically that capital is of an immaterial nature, and 
 
 does not consist of material objects at all — of goods themselves, 
 that is to say — but only of their value. “ Capital is . . . the 
 value of the productive power contained in material goods . . . 
 or a complex of productive material values.” ^ 
 
 Numerous as are these various readings of the conception, 
 our list does- not by any means exhaust the divisions and sub^ 
 
 djy i^sions that might be given. In addition to the above inter- 
 pretations which differ in form — which are, that is, different 
 definitions — there may be complete imanimity as to the formula 
 of the definition, and yet a good deal of disagreement as to the 
 essence of it. This might happen where a word employed in 
 all the definitions as characteristic and distinctive was not 
 used in all of them in the same sense. Not to speak of less 
 important instances, there are two charaeteristie terms which , 
 as capable of different readings, involve materially differen t 
 interpretations "of the conception of capital One of these is 
 the word “ good.” Of the many economists who were agreed 
 in defining capital as a stock or group of goods, some, taking 
 the word in its narrower sense, thoi^ht only of a supply 
 o f material good s ; some, extending it to immaterial objects. 
 thought of things like the state, peace, law, national honour, 
 virtue ; ® some again, under the same term, included useful 
 personal properties and powers ; ^ while others took man 
 himself into the conception.® A similar ambiguity J ias 
 a ttended the use of the characteristic term “ means of produ c- 
 tionj ’ or simply “ production.” While some economists, and 
 
 1 ‘ ‘ It floss not represent commodities in any way wh atever, but only the power 
 its owner has of purchasing what he wants ” {Elements of Political Economy, 
 1858, pp. 66 and 69). 
 
 2 “Ueber den rechtlichen Begriifdes Kapitals,” in the Beitrdgczur ErldiUcrung 
 des Deutschen Rechtes, 1884, p. 356 ; and particularly pp. 385-387. 
 
 * See also Knies, Das Geld, p. 17 (second edition, p. 38). 
 
 ■* Thus occasionally Adam Smith, J. B. Say, and others. 
 
 5 Thus Canard: “The fundamental wealth of one who pursues au art or a 
 Handicraft is his own person”; and later, M'Culloch {Principles of Political 
 Economy, 1825, p. 319) ; “A labourer is himself a part of the national capital.” 
 Elsewhere he explains the wage of labour as an interest on capital of the “machine 
 called man.” 
 
CHAP. Ill 
 
 ROSCHER 
 
 35 
 
 those the majority, understood by production simply a pro- 
 ducing of juaterials- for the satisfaction of human want, others 
 included the producing of what they called “mward goods.” 
 the creation of satisfactory conditions for and in the human 
 person. T he consequence of this was that the significant term 
 “ means of production ” lost every possible limitation, and that 
 even goods for immediate enjoyment were received into the 
 conception of capital on the ground of being instrumental in 
 producing the “ inward goods ” of content, health, culture, etc. 
 The greatest sinner in this respect is Eoscher. He first defines 
 capital to be “ every product which is dedicated to further 
 production,” but then divides this general conception into 
 “ Productive capital ” and “ Use capital,” according as these 
 products affect the production of material goods or “ the pro- 
 duction of personal goods or useful relations.” ^ Thus, notwith- 
 standing the difference in definition, his conception of capital 
 practically comes very near to that of Turgot. 
 
 ^ Grundlagen der National bkojuymie, § 42. 
 
CHAPTEE IV 
 
 THE TEUE CONCEPTION OF CAPITAL 
 
 Political economists have not, as a rule, been noted for the 
 imanimity of their definitions. But here the differennes in 
 the interpretation of the conception are so excessive as to 
 suggest that there may he something quite peculiar about 
 the object of dispute . I think" Knies has quite correctly 
 estimated the peculiar position of the case when he says that 
 “ there is something else in it than an ordinary scientific 
 dispute as to whether a particular definition is happy or 
 unfortunate, or, indeed, true or false.” ^ It is nnt thp. rlpfirii- 
 tion that is the matter of disp ute, 'hni' itip Hpfinprl ; 
 
 or, as I should prefer to say, the ‘terminology. The material 
 difference in the definitions is not so much that the one 
 thing to be defined appears to each one in a different light, 
 as that each one is defining an entirely di fferent thing : and 
 thus definitions that are really incompatible come within the 
 same ring-fence, because each one claims the expression Capital 
 for the object he is defining. 
 
 It is clear that, while this circumstance may explain the 
 striking divergence of opinions, it makes it, imfortunately, more 
 difficult to decide between them. For in questions of nomen- 
 clature there is. strictly speaking, neither right nor wrongr 
 There is, therefore, nothing to compel conviction ; there is only 
 an appeal to a greater or less appropriateness ; and people 
 may to a considerable extent, remain of different opinions as to 
 the appropriateness. All the same it is clear that our .cnji; 
 t roversy must he settled. It is impossible that economic 
 science can for all time allow its representatives liberty to call 
 
 1 Das Geld, p. 5. 
 
CHAP. IV REQUISITES OE A TRUE CONCEPTION 
 
 37 
 
 ten or eleven fundamentally different things by the same 
 name. Political Economy requires clear thinking, and for that 
 the prerequisites are clear ideas and clear speech. We must 
 come to an agreement , and it will he come to exactly as 
 men have agreed and continue to agree over the innumerable 
 disputes to which the nomenclature of the descriptive natural 
 sciences, zoologj^, botany, mineralogy, geography, continually 
 gives rise. The majority unite, and slowly but surely leave 
 the dissentients and pass to the order of the day. 
 
 But on which of the numerous readings of our conception 
 
 of capital can we hope to unite unprejudiced persons ? To my 
 mind, if we have once reahsed the nature of the controversy 
 as pre-eminently one of terminology , we shall not find it so 
 difficult to decide as the amount of confusion up till now 
 might lead one to suppose. Happily there cannot he much 
 doubt as to certain lending principles that have to be observed 
 in questions of terminology • if these are impartially acted 
 upon, the great majority of the competing definitions wiU he 
 definitely thrown out, and there will not remain more tha^i 
 two or three between which there need be any real hesitation. 
 And, even in this short leet, the arguments of appropriateness 
 which must decide are so unequally distributed that, though 
 we may not be able actually to force a universal acceptance nf 
 nnp.. definite p.nnn.pptkm — as it is. after all, only appropriate- 
 ness that must guide us, — yet we may confidently look for the 
 voluntary adhesion of a vast majority. 
 
 The leading principles we have to observe seem to me to 
 be as follows. First, and chieflY, it is quite clear that our 
 ^ding o f the, enneeptinn must be logically unassailable : that 
 is to say, it must not contra, diet itself , and it must apply to 
 the object which it proposes to define. Then, we must not he 
 s pendthrift in our terminology : that is to say, we must not 
 attach the name capital to, and make it synonymous with, a 
 conception that already has a name, while other suggestive 
 conceptions, to which naturally the word would equally well 
 apply, have to do without any name. Thirdly, the conception 
 we adopt must be scieptificallv important and scientifical ly^ 
 uaefuL Lastly, and not least, unless an alteration be urgently 
 demanded on some grounds of logic or appropriateness, the 
 name-of capital must be left to that conception for whicli-it. 
 
38 
 
 THE TRUE CONCEPTION OF CAPITAL 
 
 BOOK I 
 
 has been longest and most generally used. Or, to put it in a 
 more roundabout way : as things are at present, everybody 
 treats of the most weighty theoretical and social problems 
 imder the general name of “ problems of capital ” ; that being 
 so, the word capital, wherever possible, should be ^o used as to 
 spare us the aggravated difficulties that will attend the great 
 controverted questions of the day if we rebaptize their terms. 
 
 In view of these rules I would suggest the following as 
 the most adequate solution of the controversy. 
 
 Capital in general we shall call a group of Products which 
 
 serve as means to the Acquisition of Goods . Under this 
 general conception we shall put that of Social Capital as 
 narrower conception. Social Capital we shall caU a group of 
 products, which serve as means to the socio- economical 
 Acquisition of Goods ; or, as this acquisition is only possible 
 through production, we shall call it a group of products 
 destined to serve towards further -production ; or, briefly, a 
 group of Intermediate Products . Synonymous with the wider 
 of the two conceptions, the term Acquisitive Cap ital may be 
 very suitably used, or, less suitably but more in accordance 
 with usage, the term Private Capita l. Social Capital again, 
 the narrower of the two conceptions, may be well and concisely 
 called Productive Capital . The following are my reasons for 
 this classiflcation. 
 
 Capital in its wider sense, and capital in its nai rower 
 
 sense^ both marV _nnt cate gories which, economically, are ofl 
 t he highest importance . “ Products which serve to acquisitive 
 ends” possess a pre-eminent importance for the theory of 
 income as being the source of interest ; while the “ inter- 
 mediate products ” possess at least as great an importance for 
 the theory of production. The distinction between production 
 f rom hand to mouth and production which e mploys roundaboi j t , 
 and fruitful methods, is so fundame ntal that it is eminently 
 desirable that a special conception should be coined for the 
 •latter. This is done— if not, as we shall see, in the only 
 possible way, yet in a way that is not inappropriate — in 
 grouping together, under the conception of capital, the “ inter- 
 mediate products” which come into existence in the course of 
 this roundabout production. 
 
 Again, the solution suggested is the most conservative _one^ 
 
CHAP. IV ACQUISITIVE AND PRODUCTIVE CAPITAL 
 
 39 
 
 Without laying any particular weight on the fact that the 
 historical origin of the word Capital ^ indicates a relation to 
 an acquisition or a gain, and that our reading remains true to 
 this, it preserves the double relation — -the relation to acquisi- 
 tion of interest on the one side, and to production on the 
 other — which was imported into the conception of capital by 
 Adam Smith, and since his time has been adopted in scientific 
 usage. It is no inconsiderable advantage, then, that we do 
 not require to create a majority in its favour by a revolution 
 in terminology ; the majority is already with us, and the 
 conception may easily be carried unanimously if we add some 
 new unbiassed members. Here, too, it is worthy of particular 
 attention that those writers who have occupied themselves 
 professedly and most profoundly with the investigation of the 
 conception of capital and its problems, have ended, almost 
 without exception, by adopting exactly the same conception, or 
 at least one which comes very close to it. ^ 
 
 Connected with this is the further advantage, that we avoid 
 a puzzhng change of name for the two classes of problems w hich 
 
 1 See above, p. 24. 
 
 - Cossa {La, Nozione del CapUale), Saggi di Ec. Pol., p. 157, has the defini- 
 tion : “ Capitale e un prodotto impiegato nella produzione.” Ricca- Salerno 
 {Sulla Teoria del Capitale, 1877, p. 51) says: “II capitale e ricchezza prodotta 
 applicata alia produzione. ” Rodbertus. whose op inio n I am inclined to put p a rti - 
 cularly high , because, although not altogether happy in his solution of the 
 problems of capital, he had an insight into its essence such as scarcely any one 
 before him had, explains {Das Kapital, p. 234, also Zur Beleuchtung der soz. 
 Frage, p. 98) that “ Capital (materials and tools) is product w hich serves for 
 still farther production.” A. Wagner, also, who has done good service in the 
 theory of capital {Grundlegung, second edition, p. 38), calls capital a “Stock of 
 economical goods, which serve as instruments to the making or acquiring of new 
 economical goods.” In the most recent Italian monograph on capital, Supino 
 {II Capitale TvelV Organismo Economico e nelV Economia Politica, 1886, pp. 
 9 and 17) defines capital again as “II prodotto del lavoro passato che serve a 
 produzione successiva,” or as “ricchezza impiegata produttivamente alio scopo 
 di ricavarne un piofitto.” Of other prominent modern writers may be 
 mentioned Pierson {Leerhoek der Staathuishoudkunde, Haarlem, 1884, p. 157) ; 
 Schbnberg {Handbuch, second edition, p. 209), “ Capital is a material meaus of 
 production obtained by human labour, which, employed as suc h As destined t o 
 give a return to its owner ” ; E. Sax {Grundlegung der theoretischen Staatsvdrth- 
 schaft, pp. 115, 315, 323, etc.) Of recent French writers on the subject Oida 
 {Prindpes d’Economie Politique, Paris, 1884 '! recognises the two varieties in the 
 conception of capital w ith a clearness rare even in French literature, and distin- 
 guishes them as “capitaux simplement lucratifs” and “capitaux productifs.” 
 
40 
 
 THE TRUE CONCEPTION OF CAPITAL 
 
 BOOK I 
 
 . of now under the name of problems of capital. 
 The popular name is retained both for the “ factor of produc- 
 tion ” and for the “ source of interest.” And finally, it seems 
 to me no small advantage that, notwithstanding the material 
 difference there is between capital the factor of production, 
 and capital the source of interest, it is not necessary in our 
 reading of J t—ta make . tw o conceptions of capital that, .are 
 entirely foreign to one a nother, and have nothing more in 
 common than cat has with category. Our two conceptions 
 have just enough in common to allow of their being formally 
 coupled under one common definition, and then distinguished 
 as narrower and wider conceptions. True, their connection is 
 not an intimate one, and in the light of what has been said 
 it cannot be so ; i t rests sirnply nn the accidental circnTnstn.Tic.p. 
 thaty for society as a whole, which cannot acquire except 
 through producing, t he goods which constitute the produced 
 me.ans of acquisition (capital in the wider sense) c oinc ide with 
 t he go ods^ which constitute the q)roduced means oi production 
 (capital in the narrower sense, or Social Capital). It will be 
 noted that I use the phrase Social Capital, and not the common 
 expression National Capital I do so for this reason, that, for 
 a Limited community, th e mea ns of ac quisition embrac e-nob 
 only p roductive goods but consumption _gQods-leat ^ to foreign 
 countries . Those who hold by the conception of National 
 Capital, then, must either take in the above-named consump- 
 tion goods along with productive goods, thereby arriving at a 
 
 les second s sont_ceux_q^ui produiseiU une richesse nouvelle dans le paysy (p. 
 148). His only failure is that he would r ecognise productive capitals alone as 
 “ tr ue ” capit als. 
 
 Jii_English_literature our conception of capital (without, of course, any clear 
 distinction being kept between its two varieties! is almojt exclusively the prevaiL- 
 ing one ; this is so well known that I may spare quotations. Generally speaking, 
 it is very significant of the state of “public opinion” in the matter that not 
 long ago Kleinwachter (Schonberg’s Handhiteh, second edition, p. 210) could 
 explain ‘ ‘ Common usage in political economy to-day considers it an essential 
 characteristic of capital that it is a material means of production.” The only 
 difference o f opinion is as to wh ether landjshpjuld. be reckQn.e(La.s_capita_l or not. 
 Finally, I think~T"may venture to express the opinion that even the fore- 
 most representative of a rival definition, Knies, is in opposition to us more in 
 form than in matter. It is he at any rate who has, in a masterly manner, 
 developed the idea — the really important one in our statement of the concep- 
 tion — that, in defining capital, we must define that which is the object of those 
 problems that “have appeared on the scene under the name of capital” {Das 
 Geld, p. 19). 
 
CHAP. IV 
 
 OR PRIVATE AND SOCIAL CAPITAL 
 
 41 
 
 very uninteresting conception indeed ; or if they mean to 
 confine it to productive goods only, they must build their 
 national conception on a cpxite independent basis, and break 
 off all logical connection with the other conception, — wliich 
 would at any rate be a doubtful policy. Our “ Social Capital ” 
 avoids both these difficulties. 
 
CHAPTEE V 
 
 THE COMPETING CONCEPTIONS OF CAPITAL ' 
 
 And now we may review the other conceptions of capital 
 already mentioned, and see if any of them can better satisfy 
 scientific requirements. 
 
 The conception which seems to me to come nearest to 
 
 ours is that suggestive one which may be most 
 called the “ National Subsistence Fund, ” and which very 
 much coincides with Turgot’s “ Saved Stocks of Goods.” This 
 conception embraces all material goods with the exception 
 of land. Later on we shall have to make ourselves very 
 accurately acquainted with it, and to avoid repetition I refrain 
 from going farther into it here. I shall only say this much. 
 The conception of the national subsistence fund is. like ou r 
 own, a co nce ption of great scientific suggestiveness , and is so 
 as regards those very problems which connect themselves with 
 the word capital In particular, as being so much ia touch 
 with the phenomenon of capitalist production (production 
 carried on in lengthy processes and roundabout methods), it 
 even more happy than our conception of the Intermediate 
 Products . The latter, indeed, embraces all those goods which 
 come into existence during the production process, the goods 
 which carry it on and help to complete it ; but it does 
 not embrace the initial fund of consumption goods needed 
 to commence the process^ It therefore leaves out the fi rst 
 link in the chain, which is a very important one, while 
 the conception of the Subsistence Fund, as I understand it, 
 embraces the entire group of goods by means of which the 
 capitahst process is begun and carried through. 
 
 Notwithstanding the importance of this conception in the 
 
CHAP. V 
 
 NATIONAL SUBSISTENCE FUND 
 
 43 
 
 theory of capital. J put it seconfl to the other for the followin g 
 reasons. First, on account of the difficulty of sharply diyiding 
 between those funds of subsistence which serve for acquisition 
 
 and production, and those which stand outside of any relation 
 
 to acquisition, and consequently have nothing at all to do 
 with the scientific problem of capital.^ Second, that in any case 
 the conception of “ intermediate products ” is so conspicuously 
 
 important, that it is scarcely less worthy of being indicated 
 and emphasised by the name of capital, than is the conception 
 of the “national subsistence fund.” Third, that, as compared 
 with the latter, the “ intermediate products ” appear to me to 
 have in their favour the distinct and also the decisive ad^un- 
 tage of being already familiar expressions. Capital, the factoi' 
 of production, cairnot again be left without a name, and for 
 that reason the conception of “ national subsistence fund ” 
 must come second. 
 
 Next in importance comes Eoscher’s conception . It is due 
 as much to the high scientific position of this writer as to the 
 widely spread acceptance of his doctrine that we should go more 
 fully into the definition he gives of capital. Unfortunately, I am 
 bound to say that it seems to me anything but happy. In the 
 form of it Eoscher appears to come very near to the same concep- 
 tion as lies at the basis of our definition, m claiming the designa- 
 tion capital for “ every product saved for further production.” ^ 
 But in the very next lines, when enumerating the elements of 
 a community’s capital, he veers round to Tm'got’s conception, 
 and includes dweUing-houses, “ utensils of personal service,” 
 
 ^ I do not care to waste more words than necessary here on things which will 
 become clear of themselves as we go on, but I may make one remark. For reasons 
 that Rodbertus {Das Kapital, p. 301) has seen through tolerably correctly, and 
 which will be fully explained later, it is bv no means my mean i ng to emphasis e 
 only the subsistence advanced to productive labourers, and reckon it capital. 
 
 Either the conception of capital is limited to goods which serve im/mediatelv in 
 production, and therefore to productive goods proper, — in which case means of 
 subsistence in general, and also the means of subsistence of labourers, have no 
 share. Or, besides “intermediate products,” such finished consumption goods 
 are taken into the conception as serve indirectly by their existence to produc - 
 tion. — in which case, as will be shown in the proper place, certain advances of 
 subsistence given to landowners and capitalists must be included. But then we 
 are at once met with the difficulty suggested in the text of fixing definitely, when 
 
 the a dv ances of subsistence, given to people who do not themselves produce, are 
 of inJireet.a ssistance to production, and when they occupy no relatipn^to it, 
 
 * Grvndlagen der Nationalokmiomie, § 42. 
 
44 
 
 COMPETING CONCEPTIONS OF CAPITAL book i 
 
 and, in short, goods for immediate consiunDtion . This vacilla- 
 tion is due to the fact that Roscher gives an unusually wide 
 interpretation to the conception of “ product ” and “ means of 
 production.” He looks upon every satisfaction of a real want 
 as the production of a “ persongtl good,” ^ and this causes him 
 to recognise everything that servers to the satisfaction of 
 
 human want (that is, simply, all goods) as means of production. 
 Any unbiassed person can see how unfortunate this is. With- 
 out due cause it obliterates the very important opposition that 
 exists between the production of goods which sa tis^. wank 
 their consumption. It christens, for example, the idler as a 
 zealous producer, always thinking how he may produce the 
 personal goods of satiety, of ease, of contentment, and so on. 
 It leads, moreover, to a lamentable waste of terminology. 
 When the conception “ means of production ” is made synony- 
 mous with the conception “ good,” there is no name left for 
 t he true instrument of production. But the latter, as a highly 
 important economic category, must be kept prominent and 
 distinct from goods for immediate consiunption, and so we fall 
 from one confusion and ambiguity of terminology into another 
 This shows itself most significantly in Eoscher’s own conception. 
 He feels the very sensible need of distinguishing , inside his 
 conception of capital, those goods which serve to the produc - 
 tion of “materia l goods” from those other goods which serve 
 simply to the production of “ pers onal good^” and he does this 
 by designating the former as “ productive capit als” and the 
 latter as “ use-capitals. ” This expression is doubly unfortunate. 
 First, in putting “ use-capitals ” in opposition to “ productive 
 capitals,” the capacity of being m ei^nH nf prndnp.ti on is im - 
 plicitly refused to “ u se-capitala .” ; while they found admittance 
 to the conception of capital only on the ground of this very 
 capacity, viz. as “ products saved for further production.” 
 And second, the same word “ productive” is made to serve in 
 the one breath as the predicate which binds together all 
 capitals, and as the predicate which divides capital into two. 
 Could any terminology be more unfortunate ? ^ 
 
 But Eoscher’s definition of capital is not only inappro- 
 priate ; iL is. in mv opinion. logica EvL unsoun d, inas mucli-aa-it— 
 
 ^ Grundlagen der Naiionalokonomie., § 211. 
 
 - See also the acute criticism of Knies, Das Geld, p. 46. 
 
CHAP. V 
 
 ROSCHER'S CONCEPTION 
 
 45 
 
 does not cover those thin^js which Boscher means it to define. 
 
 After he has christened all goods productive instruments, it 
 might be thought that he would consider the totality of goods as 
 capital, with the exception of land. The definition of “ products 
 saved for further production ” — if the production of personal 
 goods be included — seems to apply to them all. That, how- 
 ever, is not Eoscher’s meaning. From his enumeration of the 
 elements of a community’s capital, as weU as from an expression 
 used in § 43, where he puts the use-capital in opposition to 
 objects of use which are not capital, i t follows that, of con- 
 sumption goods he wiU. reckon as capital only those which are 
 durable, such as houses, furniture, etc ., and not those which 
 are perishable (with the exception of the means of subsistence 
 of productive labourers). He justifies this by saying : — “ On 
 the other hand, the sharp line of division between the Use- 
 Capital and those objects of consumption which are not capital 
 rests, in conformity with our definition of capital, on the fact 
 t hat the latter are not only more speedily consumed, but are 
 always meant to be consumed : whereas, in the case of the 
 former,, the consumption is only the inevitable and the reverse 
 side of the use.” These words cannot very well mean any- 
 thing but that the speedy intentional consumption of goods 
 is the direct opposite of “ saving,” so that one characteristic 
 demanded by Eoscher’s definition is not present in perishable 
 consumption goods. Suppose this granted, is the same defect 
 not inherent in the perishable raw materials and auxiliary 
 materials of production as in the means of subsistence of the 
 productive labourers, which Eoscher has expressly enumer- 
 ated among the elements of the community’s capital ? Is 
 not “ the coal at the forge,” the “ gimpowder in the chase 
 and in blasting operations,” the bread in the worker’s mouth, 
 
 quickly and intentionally consumed ? It is either, or ! 
 
 ■Either speedy and intentional consumption is the opposite 
 
 of “ saving.” and takes away from such goods the property of 
 being capital, in which case Eoscher must also exclude the 
 perishable raw and auxiliary materials, of production and the 
 maintenance of the producers ; or speedy consumption is not 
 a groimd of exclusion from the conception of capital, in whioh 
 case the perishable means of “ production of personal goods ” 
 cannot be refused admittance to the conception. Eoscher’s 
 
46 
 
 COMPETING CONCEPTIONS OF CAPITAL book i 
 
 definition therefore fits either a wider or a narrower circle of 
 things, but never exactly that circle which he meant to define 
 as capital^ 
 
 The, conception of capital most closely allied to this — -iti 
 
 so far as it also enumerates consumption goods along with 
 
 acquisitive instruments — is that laid down hv Knies . It is 
 based on an idea which, from the point of theory, is as inter- 
 esting as it is important. All the same, I think that, on closer 
 examination, it will not be preferred to ours. 
 
 Knies defines as capital “ tha t complex of goods avail able 
 to a community which may he applied to the sa.tisfa,ctiop of 
 
 want i% the future .” This definition, as we can easily see, 
 agrees almost word for word with that of another conspicuously 
 important and fundamental conception. If we leave out the 
 words “ in the future,” it takes in all the goods in a. cnmmu.uity 
 available for the satisfaction of want, and that is an amount 
 which most writers are in the habit of calling the “ wealth ” 
 {Vermogen) of the community. If, like Knies,^ we emphasise 
 the fact that wealth embraces only the net amount of goods 
 after deduction of debts, we may perhaps call that amount the 
 co mm unity’s “ gross property ” ^ (Guterbesitz). In any case 
 we have in this to deal with an independent amount bearing 
 an independent name, with which “capital” neither coincide^ 
 
 nor should coincide . 
 
 Now from this amount Knies would distinguish his con- 
 ception of capital by adding the words “ in . the future. ” Do 
 these words really convey a distinction ? In my opinion they 
 do not ; at least, if we strictly give them the meaning they 
 naturally have. It is an attribute of all wealth without 
 exception that it is used for the satisfaction of wants in the 
 future. All accumulation of wealth is based on provision for 
 
 ^ In latest editions Rosoher, evidently under the influence of what Knies 
 has said on the subject, formally widens his definition of capital to some extent 
 by an addition. It now runs: “Every product which is destined to further 
 economical production (even to systematic later use) we call capital.” This 
 addition, however, does not materially widen the conception, as Koscher, inde- 
 pendent of this, has already included every use — therefore every “systematic 
 later use ” — in the production of (material or personal) goods. 
 
 " Das Geld, pp. 83 and 92. 
 
 For the community as a whole, moreover, which, naturally, has neither 
 claims nor debts, its material property, according to Knies’s definition. completeLg 
 poineidea with its wealth. 
 
CHAP. V 
 
 KNJES’S CONCEPTION 
 
 47 
 
 future requirements. Every atom of wealth in my possession 
 at this moment has been acquired at a previous point of time 
 with the view . of being spent at a future point of time. 
 That point of time may not be far away ; it may, perhaps, be 
 the next day, or the next hour ; but certainly it is stih in the 
 future. Tf, therefore, we take .the word “ fut urps ” in ita Rtricf, 
 sense. Knies’s formula has obviously defined not only Capital 
 
 but Wealth. ; and his conception of capital coincides with the 
 ordinary conception of wealth. 
 
 If Knies had actually contemplated this, it would not be 
 difficult to pronounce upon his conception of capital We 
 should have to accuse him of waste of terminology. It would 
 evidently be a high ly inap propriate duphcation of terms to 
 use the word capital as a synonymous expres sion for the 
 familiar conception which already bears the name of wealth. 
 while other weighty conceptions — as, for instance, certain 
 groups of acquisitive instruments — have no name.^ Ept 
 Knies had no thought of any such identification . Indeed, he 
 repeatedly and emphatically says that his conception embraces 
 only a part of the total possession of goods, and he opposes to 
 it, as the second member of his division, t hose goods that serve 
 for the satisfaction of “current present want.” This classification 
 obviously assiimes that the word “ present ” is not to be taken 
 altogether hteraUy. For if by the “ present ” were to be 
 understood strictly that point of time which divides the past 
 from the future, the goods which entered into employment in 
 that moment of time would, of course, represent so insignificant 
 an amount that it would not be worth while to speak of them, 
 to say nothing of basing a scientific classification and a new 
 conception on their short lease of hfe. If the second member 
 of Knies’s classification is to be anything at aU, the “ present ” 
 must be extended from a point of time to a period of time, 
 
 and this, naturally, can only be done at the expense of thq 
 
 futute. By the “ present ” we must understand a period of 
 time which goes beyond the narrow limits of the fleeting 
 moment, and takes in some part, large or small, of the im- 
 mediate or near future. 
 
 Now, while it would be pedantic to say that such a 
 
 ^ Kuies himself has pronounced tliis opinion in saying (Das Gtld, p. 22) that 
 no one would claim that “ capital is identical with economic goods.” 
 
48 
 
 COMPETING CONCEPTIONS OF CAPITAL book i 
 
 deviation from strict literal exactness is inadmissible, it seems 
 t o me unfortunate if a scientific concep tion can only holdJLts 
 own by allowing its m ost important, indeed its only character- 
 istic fea,tiireT to be nsed in aioo se sense ; all the more so that 
 Knies, in order to guard his conception of capital from merging 
 mto that of wealth, should have made the distinction between 
 present and future into a sharp opposition. Tt is not too 
 nrinp.h tn aay hhat his conception of capital live s by the op posi- 
 ti on between present and future, and this opposition must lose 
 its strength whenever, and so far as, goods devoted to the 
 service of a near future, but all the same a future, find their 
 place not on the side of capital devoted to the future, but on 
 the other ! 
 
 But to look further : if we add a portion of the future to. 
 th e present, how far is this additi QiL,tQ-gO ? Is it to be the 
 next hour, or the next day, or is it to be a longer period — say 
 the current month or the economic year ? This seems to me 
 rather an important point to determine, but KDip..s himself has 
 not saicLanytbing aho,ut_iti If, in his place, we consider the 
 different possibilities, it is easy to see that the addition of a 
 short period, an hour or a day, does not secure the end con- 
 templated. The amoimt of goods that a people consumes in a 
 day is of its income, and is a much smaller fraction of its 
 wealth. Now, very few people would think it appropriate to 
 separate off a thousandth part from the total amount of goods 
 which form the total wealth of a commimity in order to put 
 the remaining together under one independent conception 
 
 — particularly when that thousandth part is not divided off 
 from the principal sum by a clear and well-marked opposition, 
 but only by a conventional and somewhat metaphorical reading 
 of the word “ present.” To put it shortly : .a_C£mcepti©m_iif 
 iiap ital which embraces roughly -pnm of the conccBtiQO.— af 
 wealth comes too close to the concept i on of wealth to_haX£ 
 any^scipntifip. sig nificanc e. 
 
 But if we add a longer period of time, gay a. rnonth we 
 encounter new difficulties. Owing to this altered reading we 
 shall now deduct from the conception of capital all goods that 
 are destined to be consumed in the ordinary purposes of life 
 during the current month. Good. But it is possible that I 
 may jmake a profit out of t hese very gnnds^previous t o them. 
 
CHAP. V 
 
 KNIES 
 
 49 
 
 consumption an d without prejudice to it. For instance, a 
 sum of money which I intend to dispose of finally on the 
 fifteenth of the current month, I may lodge with a bank 
 as an interest-bearing deposit from the first to the fifteenth, 
 against a deposit receipt, or I may put it into open account. 
 What then ? Does this interest-bearing money belong to 
 capital or does it not ? Wfiatever the answer, we do not 
 avoid serious difficulties. If we answer it in the affirmative, 
 we lay ourselves open to the charge of being illogical ; for, by 
 hypothesis, the whole of the current month is a widened 
 present. But if we answer it in the negative, we first put 
 ourselves in a position of flagrant contradiction with firmly - 
 established usage ; then we commit ourselves to the strange 
 doctrine that a thing which undoubtedly bears interest is not 
 capital; and, finally we give up what formed the strongest 
 recommendation of Knies’s conception — its purpose of recon- 
 
 ciliatio n. This conception of capital has been put forward by 
 Knies with the express intention of uniting under it, as a 
 higher and broader unity, a ll former and competing conceptions. 
 In it Turgot’s “ stocks of goods,” and Adam Smith’s “ complex 
 of acquisitive instruments,” and Hermann’s “goods of durable 
 use ” were to find ample room beside each other. But this 
 mission of reconciliation, and with it the raison d’etre of 
 Knies’s theory, disappears the moment that any one acquisitive 
 instrument is denied recognition as capital — especially interest- 
 bearing money, the first parent of the conception.^ 
 
 In whatever way, then, it is looked at, we get no clear 
 satisfaction from Knies’s conception. But, to be just to Knies. 
 
 I must recognise emphatically that, there is a deep and signifi- 
 
 cant idea at the root of it, and that if his conception fails of 
 its end it is only because of external defects , or, if I might say 
 so, defects that belong to the technique of conception. As a 
 fact their destination to the service of the future is a pec.Hliarly 
 im portant charactp.ristic of the goods we call capital, indeed, a 
 characteristic which gives us the key to the most important 
 problems connected with the subject. QuIy it is not exactly 
 the distinguishing characteristic, but one that capital shavRs 
 
 ^ It needs no showing that t he group of short-dat ed money claims, althoiitrh 
 the moat obvious, is by no means the only example that miafht be gi v en in pvni^f_ 
 of the objection urged in the text, 
 
50 
 
 COMPETING CONCEPTIONS OF CAPITAL book i 
 
 w ith several other classes of goods which we have good reasons 
 for not reckoning as capital ; and for that reason — but only 
 for that reason — it is not fitted to act as the constitutive and 
 distinctive feature on which to base our definition.^ 
 
 The conceptions of capital hitherto mentioned are dis- 
 tinguished, as a whole, from our conception in that they incinrip. 
 ronsump tion goods as well as acquisitive instrnmp.nts We 
 come now to certain conceptions that agree with ours in 
 reserving the name of capital for a complex of acquisitive 
 instruments, but differ from it, and from each other, as to 
 what this complex includes. 
 
 The widest of these would simply include under capital all 
 
 acquisitive instruments — not only material but personal. 
 
 Under different names it counts labour as capital Many 
 conceive of the work of the labourer as capital : others of his 
 labour yower ; ^ others, again, of the entire person o f the, lahmirer^ 
 In itself of course there is nothing in the world to prevent the 
 totality of things which serve in acquisition from being 
 grouped together under one uniting conception, and called by 
 one common name. This has already been done substantially 
 in the conception and under the title of “ acquisitive instru- 
 ments,*’ or “productive goods,” or “goods of higher rank.” 
 But it is an entirely different question whether one is pistified 
 
 in claiming the name of “ capital ” for such a conception. I 
 
 should say with all possible emphasis that one is not. First 
 of all, if the title is given to the totality of all acquisitive 
 instruments, it can only be at the cost of refusing it to any 
 narrower group of acquisitive instruments which likewise 
 claims it. Now the former conception is already sufficiently 
 known by the above-mentioned names, while the narrower and 
 
 ^ Among others Eicca-Salerno {Sulla Teoria del Capitals, Milan, 1877, p. 58) 
 and lately Emil Sax {Grv/tidlegung der theoretischen Staatsiuirthschaft, p. 310) 
 have criticised Enies on this point. Sax’s criticism of the weaknesses of Knies’s. 
 conception is both trenchant and substantially correct, but he does not recognise 
 
 the kernel of truth that is in it. and ends by a judgment which, on the whole, is 
 rather rudely expressed. 
 
 ^ For instance, Adam Smith, ii. 1 ; Umpfenbach, Das Kapntal in seiner Kul- 
 turhedeutung, 1879, p. 19 ; Say, Coure Complet, part i. chap. x. 
 
 ® Thus Say, Cowrs Complet, part i. chap. xiii. ; M'CullQch, Principles, first 
 edition, p. 319; fifth edition, p. 294; Walras, £Umeyvts d’ Eeonomie Politique, 
 p. 217. 
 
CHAP. V 
 
 INCLUSION OF LABOUR 
 
 51 
 
 rival conception is very important and has no other name but 
 capital. Even were the question, then, in other respects an 
 entirely open one, wp._ should, on the ground of economy of 
 terms, decide against the use of the word capital for the totality 
 of acquisitive instruments. But it is not an open question ; it 
 is already prejudiced by universal usage. In political economy 
 and in practical life generally we have long been accustomed 
 to treat of certain great social problems as problems of capital, 
 and in doing so we have had in our minds, not a conception 
 which embraced labour, but a conception that opposed capital 
 to kbmir. Capital and Labour, Capitalism and Socialism, 
 Interest on capital and Wages of labour, are certainly not 
 harmless synonyms ; they express the strongest conceivable 
 social and economical contrasts. 
 
 ISTow what would be the consequence if people began all at 
 
 once to call labour capital ? In the most favourable circum- 
 stances it would be a.u iuunvatiou in tpTTuiunlngy with little to 
 recommend it. If all the world were to adapt itself to the 
 innovation, and were to do so in full consciousness that it was 
 an innovation in terminology and nothing more, it might 
 remain perfectly clear that, in putting under one common 
 name the real differences that sppa.ra.tp. labnur. from what 
 has hitherto been called capital, tlie.se, differences are not in 
 t]^P loQct_ before, everybody would notice these 
 
 differences, and work without bias at the social problems to 
 which they give rise. Economic theory would not then suffer 
 any material injury bejmnd the inconvenience of having no 
 name for the chief object of such inquiries ; for, of course, 
 from the moment that labour is reckoned capital we must 
 cease to give the name of capital to its social opposite. 
 
 This, I say, might be the result in the most favourable 
 circumstances; unfortunately such a result is most unlikely. 
 It is much more probable that the blending of the names . 
 would bring confusion into the matter. We need not deceive 
 ourselves on this point ; names and catchwords always exert an 
 immense influence over us. Most of us are very fond of slurring 
 over inconvenient contradictions and smoothing down thorny 
 problems. How could one resist the tempting opportunity, 
 which the new meaning of the word capital would offer ? 
 Between Capital and Labour, as these words were used 
 
52 
 
 COMPETING CONCEPTIONS OF CAPITAL book i 
 
 formerly, there was discord, contrast, conflict. Now one single 
 happy word unites all contrasts ; what we thought opposites 
 are, re ally homogeneous ; labour is capital ; wage and interest 
 are at bottom one ! 
 
 The reader will perhaps think it a mere jest to put such 
 words in the mouth of serious thinkers. Economic literature, 
 unfortunately, witnesses to the earnest of it, as we see in the 
 case of those writers who conceived the unlucky idea of 
 re baptizing labour as capital Th ere is first^^'CnHoch. He 
 represents the labourer as a piece of fixed capital, as a kind 
 of machine. When he has thus torn down the partition 
 wall between capital and labour he immediately goes on to 
 the logical conclusion, and abolishes the distinction between 
 Interest and Wage. To him they are homogeneous ; but — 
 and it is as significant as it is ridiculous — h e does not very 
 well know whether he should explain interest by waga , nr 
 wage by interest . He gets .out of the difficulty by explaining 
 each by the other . He first sets forth, at great length, how 
 interest is essentially nothing else than the wage for “ previ- 
 ously accumulated labour,” and then he tries to make the 
 nature of wage clearer by explaining it as a profit of capital — 
 “ the common and ordinary rate of profit on his capital, 
 exclusive of a sum to replace its wear and tear, earned by the 
 machine called man.”^ It does not seem to have occurred to 
 him that a see-saw like this does not really explain either of 
 the phenomena. 
 
 M'Culloch’s ill-digested doctrines have nearly fallen into 
 well-deserved oblivion. But if I am not mistaken, we are 
 threatened with a resurrection of them in changed form. 
 Quite lately we have had a number of view s,mlQaely_rfiIat gd to 
 the foregoing, put forward with that suddenness a nd _ah undance 
 which is at aU times a sign that the idea is, so to speak, in 
 the air, and promises to be fashionable. We are told almost 
 simultaneously, and in almost the same words, by Weiss, by 
 Dargun, and by Ofner, that every labourer repr esents a.jr,apital 
 p. qna] tn tbp. p.nat nf bis upbringing — say, a thousand thalers 
 for the unskilled, or three thousand thalers for the skilled 
 labourer. Or, on another method of valuation, we are taught 
 that the labourer is equal to the capitalised n e t return of i lia, 
 ^ See my Capital and Interest, p. 99. 
 
CHAP. V 
 
 INCLUSION OF LABOUR 
 
 53 
 
 year’s labour. His wage, therefore, is peculiarly a kind of hire 
 of capital, and must, like every -othe-r hire, e ontain at least the 
 tj iree follnwin f ? elp.merits : (1) The replacement of the cost of 
 necessary u pkeep of the human machine, calculated at the 
 minimum of existence ; (2) a quota for amortisation, in pre- 
 miums of assurance against old age; and (3) a met-Jutereat 
 calculated on the capital value of the human machine at the 
 ordinary interest rate.^ 
 
 All honour to the motives which have given rise to this 
 theory. I t is devised in the interests of the poor, and for 
 the reconciliation of all classes. Between the iron law of 
 wages which takes away all hope from the worker of earning 
 anything but bare necessaries, and the socialist theory which 
 promises the labourers everything, and the propertied classes 
 nothing, it ste.ers a middle course; i t leaves the owner of 
 material capital his hard p.nnt,p.st.pfl interest, hut would have him 
 
 share it with the owner of personal capi tal. Thus the joint 
 capitalism of the worker becomes on this theory the magic 
 formula that is to be followed by the golden fruits of recon- 
 ciliation and humanity. The pity is that it is only a formula ; a 
 parade of words with no soul of truth in it Very few people 
 would deny that, in certain points, there is a real analogy between 
 a worker, the cost of whose education and training in produc- 
 tion has been advanced to him, and a piece of capital But 
 how deep does this analogy go ? On occasions when we wish to 
 make use of it in making comparisons that are really instructive, 
 or when nothing depends on scientific exactitude, the analogy 
 goes deep enough to permit of using a figure of speech and 
 calling the labourer a “capital,” just as capital also is often spoken 
 of figuratively as “ previous labour ” or “ stored-up labour.” But 
 ^be aual ngv does no t hold rig ^ through, and in particular it 
 fails as regards wa^ and intm^st.. That capital yields a profit or 
 gain, rests on a quite peculiar ground- — a ground that does not 
 obtain in the case of labour, or does so very exceptionally. I 
 hope to establish this with perfect clearness when we come to 
 
 ^ Ft. Albert Maria Weiss, Ord.-Priester, Die Gesetze der Berechnung von 
 KapUalzins und Arieitslohn, Freiburg, 1883. Quoted by Schaffle in Tiihinger 
 Zeitschrift, vol. xli. p. 225. Dargun, Arbeitskapital und NormaJerwerb, 
 Tubinger Zeitschrift, vol. xl. p. 514, and specially pp. 530-535. Ofner, Ueber 
 das Rechtsprineip des Arbeitslohnes nacJi herrschendcm System, Juristiseke Blatter, 
 1884, Nos. 3 and 4. Engel, Der Werth des Menschen, 1883. 
 
54 
 
 COMPETING CONCEPTIONS OF CAPITAL book i 
 
 the theory of interest, but this much 1 may say meantime, — 
 that a man must have curiously shi'ftcrl bis point of view if 
 
 he thinks to make the essential nature of wap^e more intelbgible 
 
 b y supporting it on the phenomenon of interest. Of the two 
 phenomena, that of wage is by far the more simple and self- 
 explanatory. One man gives the valuable good called labour, 
 and another man gives him a price for it. Anything simpler 
 cannot well be imagined. But the fact that capital yields 
 an interea is much less easy to iinderstand. Witness the 
 many theories we had to discuss in Capital and Interest, 
 none of which were ever able to state satisfactorily the 
 essence of that phenomenon. To think of explaining the 
 simple faxjts of wage by reading into them the much more 
 involved and obscure facts of interest, is really to explain the 
 church by the steeple. Moreover, the value of these forced 
 interpretations receives a vivid illustration in the fact that, 
 as we have seen, numerous writers are at the sa me time strivin g 
 to get at a better understanding of the nature o f interest by 
 expounding it as a peculiar kind of wage. Where then the 
 one sees the riddle, the other sees the solution. What an 
 amount of vagueness as to the nature of the problems waiting 
 solution is involuntarily betrayed in all this.^ 
 
 To sum up. The inclusion of labour in the conception of 
 capital would be, in the most favourable circumstances, inap- 
 propriate ; in the more unfavourable, which unfortunately have 
 been the real circumstances, it has been pernicious, calculated 
 to perpetuate the confusion of terminology, to open door after 
 door to false analogies, and to obscure and prevent clearness of 
 thought in those very questions which are at once the most 
 difficult and the most important in the social science of to-day. 
 We shaU. therefore decide very emphatically and. T bope,^ 
 unanimously, to exclude personal means of acquisition from 
 t he conception of CanitaL ^ 
 
 ^ It is very significan t that none of the authoi-s w ho explain wage by interest 
 m akes any attempt to explain interest itself . They simply accept it as a given 
 fact — with the exception of M'Culloch, who, with amazing nalveti, repeats the 
 trick again in the opposite way, and explains interest by wage. It is very 
 gratifying to me to note that Schaffle holds hi m s elf aloof ‘Vom the t heories jnst, 
 c riticised, although his social and political tendencies must certainly lie in their 
 direction {Tubinger Zeitschrift, vol. xli. p. 225). 
 
 * See also Schmoller. whose conclusions agree with mine {Lehre vom Ein- 
 
CHAP. V 
 
 INCLUSION OF LAND 
 
 55 
 
 The next stage of the controversy brings us to the question 
 whether we are to give the name of capital only to the 
 products of labour that serve for acquisition, the “previous 
 stored up labour,” or are to include land. Both views claim for 
 the name of capital a really important and fruitful conception. 
 As contrasted with labour, land has so much in commo g with 
 the “ produced ” acquisitive instruments of material nature 
 that a union of them under one conception has good justifica- 
 tion. So, too, the mcome which flows from the two kinds of 
 acquisitive instruments has, in many essential respects, the 
 same nature, and this likewise favours the uniting of them in 
 one conception. On the other hand, in many essential respects 
 land and capital take different wavs. The former is immovable; 
 the latter, for the most part, movable. The former is a gift of 
 nature ; the latter, a result of labour. The former cannot be 
 increased, the latter can be. The landowner has a social 
 and economical position essentially different from that of 
 the capitalist ; property in land is justified on essentially 
 different grounds from property in movables. Land is the 
 special object of a kind of production which is economically 
 distinguished by many important pecuharities. Income from 
 land, while subject to many laws in common with income 
 from capital, obeys many (iistinot laws of its own — land rent. 
 for instance, rising with economical development, while interest. 
 
 falls . On all these considerations, the number of which might 
 easily be increased,^ it is most convenient to keep land quite 
 distinct from the other kinds of productive wealth. 
 
 komnen in ihrem Zusammmhang mit den Grundprindpien der Steuerlehre, 
 Tiihinger Zeitschrift, 1863, p. 24) ; Knies, Das Geld, pp. 15-22 ; Kicca-Salemo, as 
 before, p. 28; and Cossa, La Nozione del Capitale, in th“. Sa^gi di Ec. Pol., 1878, 
 p. 163. What Cossa says against the passion for immoderately widening the co n- 
 ception of capital is well worth noting. He is remarking that one very often feels 
 the want of an expression which would indicate without ambiguity just those 
 products which serve immediately for production, and he continues: — “Se il 
 concerto del capitale si allarga di troppo, comprendendovi altri prodotti, o altri 
 fattori della pr6duzione, esso o sfuma del tutto, o non ha piii la sua ragione di 
 essere. Si contruisce, per dir la cosa in altro modo, uno strumento od imperfetto 
 o superfluo, il quale o non serve punto, o non serve bene. E tali categorie 
 debbotisi senz’ altro espellere, e nongik moltiplicare nolle investigazionieconomiche, 
 se non vogliamo che la scienza si isterilisca in polemiche oziose e puramente nom- 
 inali,” p. 168. 
 
 ^ See Knies, Das (^eld, p. 33 ; Schonberg, Handbueh, second edition, vol. i. 
 p. 210 ; Roscher, Grundlagen, § 42, note 1. 
 
56 
 
 COMPETING CONCEPTIONS OF CAPITAL book i 
 
 Thus the two competing conceptions are fairl y weJl 
 b alanced in importance and suggestiveness, and if these pro- 
 perties were the only things to look to in deciding our con- 
 troversy the decision might really be left very much to indi- 
 vidual choice. If, however, we go on to compare the two 
 in the light of the other rules we have laid down as regulat- 
 ing appropriate terminology, we find several points in which 
 the “ complex of produced acquisitive instruments ” has a 
 definite advantage over its competitor. The first is that of 
 economy of terms. Tf wp. n pply fbe word capital to nil ffip. 
 material means of acquisition^ then the narrower of the com- 
 
 peting conception s, and the branch of income that corresponds 
 to it, remain, notwithstanding their importance, without any 
 name at alL When we have disposed of the words capital and 
 rent of capital otherwise, we have no correspondingly simple 
 name, either for the group of produced acquisitive instruments^ 
 or for the income that comes from them. On the other hand, 
 we avoid any such confusion of terminology by giving the 
 name capital to the produced acquisitive instruments. The 
 totality of all material acquisitive instruments may then, well 
 and simply, be called “ acquisitive wealth,” and aU income 
 flowing from it may, on Eodbertus’s precedent, be called Eent 
 with its convenient subdivisions o f land rent and cji pital ren t 
 '^hp. liTTnitatinn of capital to “produced m e ans of acquisi- 
 tion ” has another advantage i n being in accord wit h p o pu laj* 
 usage. Both scientific and popular language tell us unmis- 
 takably that they do not put land under capital, but oppose the 
 two. The genius of our language plainly d istinguishes between 
 lan downer and capitalist. No one will say that a nation 
 that has an abundance of fruitful soil is possessed of great 
 capital on that account. The name of interest is never applied 
 by people generally to the income from land, and in scientific 
 literature it is so applied only by an insignificant minority. 
 And in the discussion of the great social problems, property in 
 land and property in capital are generally attacked and 
 defended by quite distinct people and by quite distinct 
 methods. If we sum up aU that has been said, the conclusion 
 seems to be that while, for reasons repeatedly given, there can 
 be no idea of an absolutely convincing argument, there is -atilL 
 a considerable balance in^favour_of defining. _.capital_aa_Thfi< 
 
CHAP. V 
 
 NARROWER CONCEPTIONS 
 
 57 
 
 “j)roduced means of acquisition.” and ngainst the mclusion of 
 
 land._ 
 
 Finally, such conceptions as would limit capital still more 
 severely, may, I think, be easily and decidedly refuted. 
 TCIpiinwachter would distinguish between the materials and the 
 tools of production . and reckon only the latter as capital, on 
 the ground that in production it is only the tools that actively 
 co-operate and assist us, the materials of production being 
 purely passive.^ But this assumption is not correct. The 
 function of materials of production is not simply to serve as 
 a “dead and plastic mass”; by means of the natural powers 
 residing in them these materials take a share in the work of 
 
 production which is, indeed, less prominent, but is, essentially, 
 no less active. Kleinwachter’s view is, by his own confession, 
 incorrect from the point of physical science,^ and as we have 
 here to do with a question of productive technique, where 
 political economy must take its stand on natural science, it is 
 incorrect from the point of economics. 
 
 Marx, a^ain, would confine the conception of capital 
 those productive instruments which are to he f ound in the 
 hands of persons other than the labourers themse lves, and are 
 used to exploit the labourers. With him, therefore, capital is 
 the same thing as “means of exploitation.” This distinction 
 would be quite an important and suggestive one if the ( 
 Exploitation theory itself were correct. But since, as has 
 been shown in my former work,® it is not, the justification of \ 
 the distinction based on that theory falls with it. \ 
 
 J evons’s notion of capital is that of “ th e aggreg ate of thos e’^ 
 commodities which are required for sustaining labourers of an y 
 kind or class engaged in work ” ; “the wages of labour either 
 iu its transitory form of money, or its real form of food and 
 other necessaries of life.”^ If this were correct, every land 
 would be rich in capital in proportion as it n wagps wprp. high 
 a nd its means of subsistence cheap .. An African tribe that 
 has neither industry, nor machinery, nor factories, nor railways, 
 but lives under a tropical sun, where the necessaries of life are 
 
 ^ Die Gru-ndlagen und Ziele des sog. wissenscha/tliche^i Sozialism/us, Innsbruck, 
 1885, p. 185. 
 
 ® “In the strict physical sense, of course, this is not correct” (p. 192). 
 
 ® Capital and Interest, book vi. p. 313. 
 
 ‘ Theory of Political Economy, second edition, pp. 242, 263. 
 
58 
 
 COMPETING CONCEPTIONS OF CAPITAL book i 
 
 poured forlh without stint, would be the richest hi capital ! 
 Obviously, of course, the idea that Jevons had in his mind 
 was a perfectly correct one, but the expression he gave it was 
 unfortunate. He confused a condition of the for mation of 
 capital with capital itself. The way of capitalist production is 
 lon^ and loundabout. and man cannot enter upon it unless he 
 is provided with the means of subsistence for the time that 
 must intervene before he reaps the return. But it is not the 
 means of subsistence, and, in particular, it is not the means of 
 subsistence alone, that constitutes capital. Capital only comes 
 into existence when man actually en ters u pon the profitable 
 roundabout journey that the means of subsiste nce have made 
 possibl e ; when he builds machines, tools, railways, factories, 
 raises raw materials, and so on. However abundant the 
 means of subsistence were, if the workers were to consume 
 them in living from hand to mouth, the community would 
 evidently never accumulate capital at all. 
 
 Finally, there remain those conceptions which see in 
 capital not a complex of goods, hut an abstract qua,ntity 
 hovering over goods, as it were, ; as, for instance, Kuhnast’s 
 “ sum of value,” or M'Leod’s “ circulating power.” T have, 
 generally speaking, a very poor opinion of such idealisation s 
 of economic conceptions . They are usually cheap expedients 
 for getting round difficulties. If in any difficult subject there 
 occurs some troublesome, angular kind of conception that 
 corresponds with real life and will not fit in to the particular 
 line of explanation, there are always certain theorists ready to 
 disembody it, whereby, of course, it loses its unmannerly 
 angles and edges, but, at the same time, its strength and 
 truth. I t becomes a phrase and leads to ^ihrases. - We hav g. 
 a n instance of this here. If we were to take the sponsors 
 of those definitions at their word, and ask them whether they 
 would seriously say that an immaterial sum of value or 
 circulating power can grind corn, or spin yarn, or plough up 
 land, or carry a load ; o r whether it is not the case tha.t t hese 
 good things ar e done by : the common material goods called 
 mills, looms, ploughs, locomotives, they would be very much 
 perplexed. For, asking at their own consciousness, they could 
 scarcely deny that, under the name capital, they have always 
 and peculiarly thought of that something which helps man to 
 
CHAP. V 
 
 ABSTRACT CONCEPTIONS 
 
 59 
 
 work in his production; and the rude materiality of this some- 
 thing agrees but ill with the high-sounding abstract dcfinitinu 
 of “ sum of value ” or “ circulating po-wer.” It is very signifi- 
 cant, as regards this group of definitions of capital, that their 
 origin may be traced to a slipshod expression of a writer who 
 was always too careless about the way in which he stated his 
 conceptions — J. B. Say, Say first — and quite correctly — • 
 gives the name of capital to certain results of labour that 
 serve as tools to further production, such as Seed, Dye-stuffs, 
 Wool, Tools, Machines, Buildings, Cattle, etc., and calls their 
 total value Capital Valua Later on he makes the remark 
 that a capital value may take very differen t for ms, such as 
 money, houses, utensils, commodities, etc., and this gives him 
 occasion to caU “ this value a camtal. so soon as it is contained 
 in objects, whatever they be, which are destined to productive 
 activity.” ^ Evidently a careless and contradictory e:;cpress ion. 
 which, however, his economical disciples made the basis of a 
 serious theory ! - 
 
 Thus, of all the many readings of the concept ion, of capital. 
 there is only one left on the field — only one, of which it can be 
 said that it has stood all the tests. It is that which, by capital,\ 
 understands an aggregate of products destined, not for imme- 
 diate consumption or use, but to serve as means of acquisition. 
 It is a conception which meets aU our logical and terminoy 
 logical requirements. Logically it is unassailable , and it is 
 suggestive ; so suggestive that it distances the most of its 
 competitors, and is distanced by none of them. And, 
 terminologically . its investiture with the title of capital 
 best economises our terms, and agrees with that usage which 
 
 ^ Ccrwrs Complet, part i. chap. viii. It may be added that Sa y, in this and 
 oth er passages formerly quoted, yives no less than four contrad i'^t'^ry rpaHiT)fr<! nf 
 the conception of capital. In one place, chapter viii., he explains it as products 
 of labour which serve towards production ; and in the same chapter he speaks of 
 it as the of these products. In chapter x. (see above, p. 50) he makes it 
 the t alents and skill of the labourers ; and in chapter xiii., again, the J 2 erae 2 i 4 , of 
 the labourers ! 
 
 ® That theories of such doubtful value should commend themselves to the 
 recognition of eminent jurists like Kiihnast may, perhaps, be explained by point- 
 ing out that jurists, a s having to deal in their systems, to a very great extent, 
 with abstract persons and objects, have, generall y, a strong tendency to divpns- 
 c onceptio ns,: a practice which may bo quite suitable for their special field 
 of investigation, but is certainly misapplied in political economy. 
 
60 
 
 COMPETING CONCEPTIONS OF CAPITAL book i 
 
 has taken most general and firm root in economics and in 
 popular speech. Finally, it is the conception which most 
 exactly coincides with the object of those great social problems 
 
 of our time which people are in the habit of discussing as 
 problems of capital. In its one division, as “ Social Capital,” 
 it indicates the third instrument of economical production in 
 the triad of Nature. Labour, and Capital : and in its other 
 division, as " Private Capital,” it indicates the third source of 
 the economical acquisition of goods by individuals in the triad 
 Rent of land. Wage of labo ur. Interest on capital, If, then, 
 unbiassed people are ever to agree on a conception of capital, 
 we may expect that this will be the one chosen. 
 
CHAPTEK VI 
 
 SOCIAL AND PRIVATE CAPITAL 
 
 A FEW remarks stiU remain to be made on the relation in 
 which the two divisions of our conception. Social (or Productive) 
 
 Capital, and Private (or Acquisitive) Capital,^ stand to one 
 
 another. When enumerating and reviewing the various 
 theories, I have already expressed my views generally on this 
 point, and may here shortly sum them up. Private Capita^, 
 as we now call it, is the parent conception. It is not so 
 much a branch, or a subdivision of the general conception of 
 capital, as the conception itself. The conception of National 
 Capital, or, more correctly. Social Capital, has detached itself 
 from the other, in the historical development of theory, as a 
 narrower conception. Substantially it is a quite independent 
 conception. In every essential respect (in definition, in 
 scientific employment, and in scope) it stands on entirely 
 independent principles. It is bound up with the conception 
 of Private Capital only by the external and subordinate cir- 
 cumstance, that the aggregate of its “ intermediate products ” 
 happens to coiacide in extent with the aggregate of those 
 products which are the sou rce of income to society as a whole, 
 — those products which constitute capital in the older sense. 
 
 ^ As I have already remarked on p. 38 I consider the terms in brackets, 
 Productive and Acquisitive Capital, as essentially the more appropriat e. But 
 since Rodbertus and Wagner the terms National and Private capital have 
 been used almost universally, and as I consider it conducive to the final 
 settlement of this jumble of terminology not to disturb names that are fast 
 rooted in common usage, unless there is some quite overwhelming reason 
 for doing so, I content myself with making the one change — which seems to 
 me in any case indispensable — of the term “National” into t he term “Social” 
 capital . 
 
62 
 
 SOCIAL AND PRIVATE CAPITAL 
 
 BOOK I 
 
 But through a historical accident i t is this subordinate f eature 
 that has had most to do with the narm'np- of the new concep- 
 tion ; and thus it also bears, and will perhaps continue to 
 bear, the name capital. And this circumstance, so long as the 
 whole relation was not clearly understood, led to the lament- 
 able jangle, so often spoken of, that not only the concep- 
 tions themselves, thus similarly named, but the fundamentally 
 distinct problems connected with them, were confused and 
 interchanged. 
 
 This unfortunate confusion of the problems was first . 
 
 attacked, so far as I know, by Bodbertus. and his efforts were 
 seconded with peculiar clearness by Adolf Wagner. In the 
 course of this a new interpretation was given to the distinction 
 between National and Private capital, which is highly interest- 
 ing in itself, and which, at the same time, has been accepted so 
 quickly and over so wide an area that I feel bound to take up 
 a definite position towards it. Wagner, like Eodbertus before 
 him,^ makes a distinction between capital as a “ purely economi c 
 category,” and capital “ in the historico-legal sense.” or propgriy 
 in capital. “ Capital as a purely economic category, considered 
 apart from the legal relations which obtain as regards property 
 in capital, is a store of those economic goods, — natural goods, 
 — which serve as technical instruments to produce new goods 
 to a community ; it is a store of .productive in sfrum entij ; it 
 is National capital (or a portion of such). Capital in the 
 historico-legal sense., or property in capital, i s that portion of 
 a person’s wealth which may serve him as a me^ns of obtain- 
 in g an income fPent. Interest), and which, therefore, is owned 
 by him to this end ; it is a Eent Fund, or Private Capital.” ^ 
 In this the distinction between National capital and Private 
 capital is narrowed down to the distinction between a natural 
 .store of goods on the one hand, and the legal rights which 
 private individuals have over that natural store on the 
 other. 
 
 I am far from denying the very great importance an(^ 
 usefulness of this new distinction . Its appearance was an event 
 
 ^ See particularly Zur Erkldrung nnd Ahhilfe der heutigen KredUnoth des 
 CrTundbesitsxs, second edition, vol. i. p. 90, vol. ii. p. 286, where das reals KapUal, 
 as consisting of the natural objects of capital, is sharply opposed to KapitalbesUz, 
 or property in capital. Similarly Das Kapital, pp. 304, 313, and passim. 
 
 ® Wagner. Grundlegung, second edition, p. 39. 
 
CHAP. V! 
 
 PRIVATE V. PROPERTY IN CAPITAL 
 
 63 
 
 of the first rank in economic criticism, and it has done good and 
 laudable service in clearly stating the fundamentally distinct 
 problems associated with the one name of capital. Without 
 it, certainly, the far-reaching consequences of the other dis- 
 tinction, that between Social and Private Capital, would never 
 have been noticed. One thing, however. I cannot allow . It., 
 does not exhaust the meaning of this latter disti nction, and , 
 rnnspqiiPTitly, it is not exactly fitt ed tn ta.kp its place. The 
 categories of Social Capital and Private Capital on the one 
 hand, and of Natural Capital and Property in Capital on the 
 other, do not coincide, either in compass or in content, so as 
 to allow us simply to explain or replace the former by the 
 latter. They are rather independent categories, each of them 
 resting on a different basis of distinction. Social Capital 
 and Private Capital are not distinguished from each other 
 simply as a natural store of goods and property in these goods ; 
 they represent two distinct natural stores of goods. Social 
 Capital embraces only the means of production : Private Capital 
 embraces also certain consumption goods . These distinct 
 natural quantities or stores of goods, further, exert distinct 
 economic functions. And if to these we add the further 
 distinction that Social Capital is a category independent of 
 any regulations of positive law . — is, that is to say, a purely 
 economic category, — while all capital as Source of Income 
 presupposes an owner, and therefore a T ; ~ig]it of ownership 
 foimded on history and law, the n this is only one dist,iTic tjniT] 
 out of many, and that not the peculiar and essen lial-dis tinction, 
 For if we were to drop the two former distinctions, and draw 
 our dividing hne ■ according to the absence or presence of 
 historico-legal claims of ownership, we should find that the 
 division had made some very considerable changes in the 
 constitution of the members. In the first branch, indeed, we 
 should have as before Social Capital, the natural means of 
 production. But in the second branch we should have only 
 the same means of production now looked at as private 
 
 property and as source of rent, a nd we should nor, have 
 those -Consumption goods._ such as dwelling-houses, libraries, 
 etc., which serve as sources of rent. To cover these latter, 
 and so fill out the compass of private capital to its true 
 extent, we must set against the natural means of production 
 
64 
 
 SOCIAL AND PRIVATE CAPITAL 
 
 BOOK I 
 
 not only private claims based on history and law, bu t alsQ 
 
 anot her 
 
 extensile. 
 
 Perhaps the peculiar inappropriateness of confusing these 
 two distinctions may be most strikingly shown by taking an 
 exactly analogous example. If one were asked to characterise 
 the distinction between the two conceptions “ producing ” and 
 “ exchanging .” and were to answer that production is a purely 
 economic category, whilst exchange, as presupposing the exist- 
 ence of private property, is a historico- legal phenomenon, 
 the answer would, scarcely be taken as sufficient. We should 
 certainly have the impression that it gave us a distinction but 
 not the distinction between producing and exchanging. For 
 t he essence of exchanging obviously does not consist in its 
 being a “ historico-legal category. ” It is also a very important 
 economic category; indeed, it is just such another as produc- 
 ing ; and one who would explain both conceptions must, at 
 once and before anything else, establish t h e distiurtinn bp.twpp.Tj 
 the mmoviic nature of t he two. And, similarly, in this 
 opposition between “ purely economic ” and “ historico-legal ” 
 categories, a distinction is put forward — and a very important 
 distinction, — but not the characteristic distinction between 
 Social and Private Capital. 
 
 Let me say once more that I consider the d istinction made 
 by Rodbertus and Wagner between natural capital and pro- 
 perty in capital a very important one indeed, and one which, 
 in any case, must also be drawn. What I want to point out 
 is, that it should not be confused with the distinction betw een 
 ^c.ia.l a.nd privat.c capital, which rests on an entirely diffc rcrit 
 basis ; and the definition of social and private capital should 
 not be based on characteristics borrowed from another and 
 totally different distinction. 
 
 The exan rple. of Rodbertus himself is the be st pro of that 
 this is not simply a quarrel abo ut formulas..- His one-sided 
 conception led him directly into a false theory of interest. In 
 his view the essence of private capital consisted in the historico- 
 legal circumstances of force that were connected with it : and 
 he was thus logically committed to explain the interest on 
 private capital simply and solely from the existence of those 
 circumstances. Interest to hiimvas robbery : a profit whi eh- 
 
 .capital squeezed out of t he labourers in virtue of. 
 
CHAP. VI 
 
 CONTENTS OF THE FORMER 
 
 65 
 
 t.hp. bi-ntfi strength which their exclusive property in the means 
 
 of production p^ave theiTL.^ 
 
 If, on the other hand, Eodbertus had attended to the 
 pecuharly economic side of the matter, he would have found 
 that that other natural complex of goods, called private capital. 
 has exerted and contimies to exert a peculiar economic function 
 
 quite equally with social capital ; and, further, he would have 
 found that it is simply as the natural fruit of this economical 
 element that interest originates. Thus he would have found 
 that interest is not purely a gro wth of h istorv-and - law.r-huh 
 an original economic growt h, the emergence of which is, to a 
 certain extent, independent of the form which history and law 
 have given it. This will be shown with sufficient clearness, 
 I trust, in the investigations into the origin of interest which 
 foUovv. 
 
 Before concluding this chapter there is still one question 
 to be put ; Whipt in t.Vie PQpprete are the grou ps of gOods that 
 constitute Soc ial capital, and what Private capital ? The 
 answer to this should, by rights, follow from the very definition 
 of the two conceptions. But pecuhar circumstances have led 
 to disputes not only as to the correct definition, but even as 
 to the compass which was to be allowed to each conception in 
 conformity with the accepted definition. It is well, therefore, 
 to be quite clear on this point. 
 
 Sncjfil Cap it a l es an aggregate of products destined to serve 
 for further prnduetinu ^ envers 
 
 1. Productive improvements , arrangements and disposi- 
 tions of lanch so far as these preserve an independent character, 
 such as dams, drains, fences, etc. So far, however, as they 
 are completely incorporated with the land, they are tn bp. kept 
 separate from capital for the same reasons which made us 
 keep land itself separate from capital.^ 
 
 2. Productive buildings of aU sorts — workshops, factories, 
 sheds, steadings, shops, streets, railways, and so on. DweUing- 
 
 ^ See my criticism of this theory in Capital and Interest, p. 337. y 
 
 ‘ I may he accused of want of logic here on the ground that such improve- 
 ments are always products which serve towards further production, and therefore 
 come under our definition of capital. The criticism is correct as to the letter, 
 but wrong as to the spirit. A stay propped up against a tree is certainly not 
 the tree itself but an outside body. But who would still call it an outside body 
 if after some years it had grown inseparable from the tree ? 
 
66 
 
 SOCIAL AND PRIVATE CAPITAL 
 
 BOOK I 
 
 houses, however, and other kinds of buildings , such as serve 
 immediately for any purpose of enjoyment or erlucatinr) or 
 culture, e,.g. theatres, schools, churches, law courts, do not 
 come u n der Capital 
 
 3. Tools, machines, and other kinds of productive utensils. 
 
 4. Useful animals and beasts of burden employed in pro- 
 luction. 
 
 5. The raw and auxiliary materials of production. 
 
 6. Finished consumption gooda in the hands of producers 
 id merchants as (warehouse) stock. 
 
 7. Money, \ 
 
 At the first glance the two latter categories may be called 
 
 in^uestion. Consumption goods as found in warehmi.ses are, to 
 all appearance, no longer “ intermediate products,” but “ finished 
 goods,” and Money is not a tool of production but a tool of 
 exchange. Still, I think it correct to put both conceptions 
 under capital. 3'hev both serve to complete a joundahout 
 i^T-of . production. When, in order to take advantage of more 
 favourable conditions, goods are produced, or caused to be 
 produced, at a different place from where they are demanded, 
 it is nothing else than a peculiar kind of roundabout process. 
 The consequence then is — and it is here that the “round- 
 aboutness,” which is to be understood hterally in this case, 
 comes in. — that, after the product is technically, finished, JL 
 must be conveyed to the place where it is demand ed- All 
 this is done very often inside the narrow limits of an isolated 
 economy ; the peasant must bring his harvested grain from 
 the field, his felled wood from the forest. But it is done, on 
 an immensely greater scale, in the wider field of social produc- 
 tion and divided labour. Just as the peasant may raise his 
 crop a quarter of an hour’s distance from his house, or cut his 
 wood an hour’s distance off, because in this way he can best 
 utilise the conditions of production, so for good reasons it is 
 quite common in organised and divided industry to obtain the 
 objects of our demand from other people’s workshops, indeed 
 often from other places, other lands, other continents; and then, 
 naturally, in the end we have to provide their means of 
 conveyance. In the one case as inALe- other the conveyance 
 forms the last act of production, and before this last act is 
 finished we cannot properly say that the products are ready 
 
CHAP. VI 
 
 MAINTENANCE OF LABOURERS 
 
 67 
 
 for human consumption. So, just as everybody would include 
 among instruments of production and capital the horse and 
 cart which assist the peasant in carrying in his grain and 
 wood, must we reckon as capital the objects and apparatus of 
 that more extensive “ leading in ” of the national harvest — the. 
 conveyed products, the streets, rads, ships, and the oommercial 
 
 t ool money. It may he noted, besides, that those commercial 
 roimdabout ways , arising out of the division and organisation 
 of labour, rank, as regards the advantage they confer, along 
 with the other technical roundabout way s^ They are as 
 profitable as, or even more profitable than, any of the capitalist 
 methods of production to which the most famous technical 
 inventions have led. 
 
 These seven categories exhaust, in mv opinion, the group 
 
 of things which constitute Social Capita l/ It goes without 
 saying that economists who take another view of the concep- 
 tion of capital add other categories, such as land, durable 
 consumption goods, the person of the labourer, and so on, 
 and this needs no further elucidation here. It is surprising, 
 however, to find writers, who take exactly the same view of 
 the conception as we do, proposing to add certain other 
 categories. 
 
 Most surprising of all in this connection is the unanhnity 
 with which economists , from the earlier Enghsh writers down 
 to Adolf Wagner,^ nut the maintenance of yrndvravp. lahmirem, 
 under social capita l. Certainly the real wages of the lahojirers 
 — the articles of food, clothing, fuel, lighting, etc., which the 
 labourers use — are,^ from the standpoint of the undertaker 
 who advances them, his ^wivatp, cap b^l. But it is just as 
 clear in my opinion that, from the standpoint of the whole 
 community, these objects cannot be counted capital if capit al 
 is defined as a complex of means of production. The conception 
 of “ means of production ” should and does form an antithesis 
 to the conception “means of consumption.” There cannot be 
 the slightest doubt as to the meaning of this antithesis, and 
 just as little can there be as to the fact that the workers ’ 
 subsistence is the immediate instrument to the satisfaction nf. 
 their wants , and that labourers are men and members of 
 society. But if this is so, it seems to me absolutely proved 
 
 , ^ Grundlegung, second edition, pp. 39, 43. 
 
68 
 
 SOCIAL AND PRIVATE CAPITAL 
 
 BOOK 1 
 
 that the maintenance of the labourer must hp, claasftd along 
 with wealth destined for consinription and for the immediate 
 satisfaction of the wants of society, and not with the means of 
 production or capital. It could only he. otherwise if tln^ . 
 labourers were to be looked upon, not as members of the civil 
 society in whose interest industry and commerce are carried 
 on, but as 7 n a f,erial machines of labour . Then, but only then, 
 the maintenance of the labourers would, as a matter of course, 
 fall under the same category as the feeding of beasts of burden 
 and the stoking of furnaces ; it would be a means of produc- 
 tion, or capital. The idea, however, scarcely needs refutation. 
 
 It may be pointed out, however, that productive labourers 
 are not simply consuming subjects, but are also active 
 economical instruments ; and that, consequently, the subsistence 
 which does directly serve for the maintenance and furtherance 
 of their life indirectly serves towards the further production 
 of goods. But in this case a simple indirect relation to 
 production is not sufficient. For it is easy to see that the 
 distinction between means of production and means of con- 
 sumption has a meaning only if it refers to t he immediate 
 destination of goods . If we were to take notice of their 
 indirect or mediate destination we should require to put all 
 goods without exception under the category of means of 
 consumption, since even the means of production serve in- 
 directly to the satisfaction of human wants. Then this raises 
 another difficulty. The division of goods into goods for 
 consumption and goods for production is intended to be a real 
 
 d ivision ; it should be based on an opposition. Now it is 
 impossible to deny that the food which the labourer consumes 
 serves for the immediate satisfaction of the wants of a member 
 of the community ; that is, it corresponds entirely to the 
 definition of a consumption good. H ow then could we class a 
 thing which has all t h e pro p erties of categ or y u nder the 
 category opposed to it ? Thus, as is so often the ease, the 
 laboured explanation leads us into a net of confusion, and the 
 simplest is the truest. The goods with which the working 
 meniljers of the community feed, heat, and clothe themselves, 
 are goods for immediate consumption, not means of production. 
 
 That, in face of arguments so obvious, the opposed doctrine 
 should be held so universally and so tenaciously is a pheno- 
 
CHAP. VI 
 
 MAINTENANCE OF LABOURERS 
 
 68 
 
 menon scarcely intelligible at first sight, but easily explained 
 when we inquire more closely into the circumstances of the 
 case. Two powerful factors, I think, co-operated towards it. 
 One was historical tradition, which, in this case, was very 
 strong and deep-rooted. It should not be forgotten that the 
 inclusion of the labourers’ maintenance into the conception 
 of capital came at a time when the conception itself was not 
 yet clearly defined, and when, in particular. Private capital, to 
 which the labourers’ maintenance in any case belongs, was not 
 yet sharply divided off from Social capital, to which it does not 
 belong. This was assisted by the peculiar view, dominant for 
 a long time, that the function of capital was the " putting of 
 
 labour in motion ” — a function which the labourers’ main- 
 tenance conspicuously realised. It was, assisted, moreover, by 
 the famous Wage Fund theory. That theory made the rate of 
 wages depend chiefly on the proportion between the number of 
 labourers and the amount of the Wage Fund ; that is, the 
 amount of capital destined for the support and payment of the 
 labourers — an idea which helped to connect the means of sub- 
 sistence still more closely with the conception of capital. And, 
 finally, another impulse in the same direction may have been 
 given by the frequently and justly criticised tendency of th^. 
 English school to look unon the labourer as a machinfi of 
 production , and to consider his wage simply as an element of 
 the costs of production — a deduction from the national income 
 and not a part of it.^ 
 
 Eesting on such a wide basis of support, the proposition 
 that the maintenance of productive labourers forms an element 
 in Social capital worked its way by degrees so firmly into the 
 scientific consciousness, that it was considered by many as an 
 axiom quite above discussion ; and in the end it was able to 
 maintain its position on the strength of its own authority, 
 even after the ground had really been taken from under it by 
 4Jie distinction between Pr ivat.ft anrl Sopin] 
 capita l, and by the definition of the latter as an aggregate of 
 means of production. 
 
 The second factor has had even more effect than the 
 weight of historical tradition ; and not only has it co-operated 
 in the past in the creation of these traditions, but it still 
 
 ^ See ScLmoller, Tuhinger Zeitschrift, vol. xix. (1863), pp. 10, 25. 
 
70 
 
 SOCIAL AND PRIVATE CAPITAL 
 
 BOOK I 
 
 asserts its living influence. That factor was , if I am not 
 very much mistaken, the conscinus or uncnuscious inclination 
 to wards another reading of the conception of capital than that 
 recognised in what we may call the official definition. Econo- 
 mists have stood, and still stand, in hesitation between those 
 two conceptions which have the most numerous and suggestive 
 relations to the problems of capital — tbe conception of “ pro- 
 duced means of production” and the conception of uatinua.l 
 subsistence fund. ” ^ In the official definition, it is true, ,the 
 preference was finally given to the “ produced means of 
 production ” ; but economists, quite rightly feeling that the 
 “ national subsistence fund ” had also something to do with 
 the theory of capital, could not quite give up this con- 
 ception. And thus they put together a hybrid conce ption, 
 adding to the Men,ns of Production — proper . which had the 
 stamp of the official definition, a portion of the Subsistenc e 
 Fund conception, in the maintenance of productive labourers. 
 Of course a classification like this, which is nothing else than 
 the result of uncertainty and compromise, cannot be satis- 
 factory. Economic theory must make decisive choice between 
 the two competing conceptions, and, however the choice turns 
 out, the conception will, be limited and determined other- 
 wise than it is by the writers now being criticised. Either 
 wp. shall decide for that conception w hi ch makes capital 
 a n aggregate of Intermediate P roduct j — and this choice, for 
 reasons of appropriate terminology already stated, I consider 
 the happier one — and in this case the labourers’ mainten- 
 ance falls outside the conception ; o r we shall give the name 
 c apital to the Subsistence Fund which makes the rounda bout 
 way of prndup.tinn possible, and then, as will be shown later,® 
 not only must the means of subsistence of the productive 
 labourers be reckoned as capital, ^ut also the subsistence o f 
 the capitalists and landowners, as standing in exactly the same 
 indirect relation to the adoption of “capitalist” methods of 
 production. If all this cannot justify, it may at least explain 
 the phenomenon otherwise almost incomprehensible, that, in_ 
 flat contradiction to the official d e fin ition^ of capital., peopl e 
 continue to add to it the mainten ance of _tlie,_Iab.auifira ; and 
 
 1 See above, p. 42. 
 
 ® See also above, p. 43, note 1. 
 
CHAP. VI 
 
 CONTENTS OF THE LA TTER 
 
 71 
 
 perhaps the exposure of this origin may help to put an end 
 to the curious habit.^ 
 
 Another category which seems I n mo wrongly pla.cod a.moug 
 the constituents of Social capital is the so-called “ incorporeal 
 
 capitals,” such as debts and other kinds of claims, goodwill of 
 businesses, the state, etc. These things are not capital, because 
 they are not real goods. They are, as I have shown at length 
 in another place,^ nothing but representative words or collect- 
 ive names for a sum of real goods, which may be capital, 
 or may not. If they are, then they are already contained in 
 our seven categories ; if they are not, we should not, of course, 
 open a. special category for them. 
 
 Finally. Private capital consists of the following : — 
 
 1. All goods which form Social capital 
 
 2. Those consumption goods which their owners do not 
 use, for themselves, but employ by exchange (sale, hire, loan) 
 in the acquisition of other goods, e.g. let-houses, lending- 
 libraries, means of subsistence advanced by undertakers to 
 their labourers, and many others. 
 
 ^ The case is exactly the same wit h the notori ous Wage F und theory. In it 
 also I see a misbegotten fruit of an idea which is quite right in itself. It is, as 
 we shall see later, a very unsuccessful attempt to express certain relations that 
 really do exist between the national subsistence I’und on the one hand, and the 
 height of wage and interest on the other. Against the inclusion of the labourers’ 
 means of subsistence in national capital Eodbertus has expressed himself in a 
 quite classical style. Das KapUal, p. 294, and before that in his Zur Erkenntniss 
 unser. stautsw. Zustdnde, theorem i. Very clear and convincing, too, is Gide, 
 Prindpes PEcmomie Politique, Pans, 1884, p. 150. See also Sax, Grundlegung, 
 p. 324, note. 
 
 ^ Rechte und Verhaltnisse vom Standpunkte der volks. (PHerlehre, 1881,yas«7n. 
 Since then, see H. Dietzel {Der Ausgangspv,nkt der Socialwirthsehaftslehre und 
 ihr Grundbegriff, in the TiiMiiger Zeitsehrift, 1883, p. 78), and Sax {Grundlegung, 
 pp. 39, 199), who surely goes too far in excluding personal service from the con- 
 ception of goods. Neumann, on the other hand (Schonberg’s Handhuch, 
 second edition, p. 151), remains firm in recognising rights and relations as re al 
 goods on grounds which do not comm end the m selves to me as at all convincin g. 
 On one single point I feel myself bound to reply. In my definition of the con- 
 ception of goods, Neumann “does not find” the lines sufficiently distinctly 
 drawn, and quotes, in a tone of irony, a number of expressions which, taken by 
 themselves, certainly do not draw any distinct line {ibid, note 41). But Neu- 
 mann can only have read portions of the work he objects to, or read it very 
 hurriedly. Otherwise it would not have escaped him that the expressions he 
 quotes stand at the end of a chapter {Rechte, p. 29), and that the beginning and 
 middle of that chapter (p. 13 onwards) are devoted to what he “ does not find,” 
 and that, obviously, the later expressions are to be taken and understood along 
 with what goes immediately before. 
 
72 
 
 SOCIAL AND PRIVA TE CAPITAL 
 
 BOOK I 
 
 Many writers add p.p.rhain “ rp-Iationa/’ trade con- 
 
 nection,^ legal claims.® These, of course,. on the same grounds 
 of theory as above. I must reject as constituting an independent 
 category of capital. 
 
 And now, after this very lengthy introduction, which can 
 only be excused by the singular confusion in which we found 
 the theory, we may turn from the conceptions to the prob- 
 lems which are associated with them. In the book which 
 follows we shall work out the theory of the conception we had 
 to glance at in the two first chapters of the present book ; the 
 theory of capital as Tn.strument of Production, or the theory 
 of Social Capital.? 
 
 ^ Wagner, Grundlegung, second edition, p. 42. 
 
 ^ Reseller, Grundlagen, eighteenth edition, § 42. 
 
 ® Hermann, StaMs. Untcrsuchungen, second edition, p. 122. 
 
 * The careful reader will, without doubt, have remarked that the statement 
 as to the nature of capital given in the second chapter, relates solely to Social 
 economic capital. For obvious reasons I did not wish to mix up the dogmatic 
 statement with the terminological and critical discussion which, I am afraid, has 
 been terribly prolix. And, for reasons as obvious, I did not wish to commence 
 this discussion without having, at least partially, put before my readers the object 
 to which the discussion refers. I therefore made use, for the time being, of the 
 word Capital without any of the clauses and additions which would at once have 
 necessitated the tedious terminological discussions I wished at the time to avoid. 
 The more exact explanations which follow will prevent any misunderstanding to 
 which this may, perhaps, have given rise. 
 
BOOK II 
 
 CAPITAL AS INSTEUMENT OF PEODUCTION 
 
CHAPTEE I 
 
 INTRODUCTORY 
 
 In expounding the theory of capital as Instrument or Tool or 
 Means of Production we have to describe and explain the 
 emergence and effects of capital in the economic production 
 of goods. What we have to say on this matter groups itself > 
 round two questions : How does capital originate ? and what ^ 
 is the nature of its productive work ? The first question has 
 to do with the theory of the formation or accumulation of 
 capital ; the second, with the productive function of capital 
 The reader who has waded with us through the dozen 
 theories and dozen definitions of capital will scarcely be sur- 
 prised at meeting a similar divergence of opinion on the ques- 
 tion we have now to consider . Of course there is no dispute 
 about the fact that capital is, in the highest degree, useful tc^ 
 production. But I am much afraid that this is the only 
 proposition on which our economists are quite agreed. So 
 soon as the further question is asked : In what does this Y 
 usefuhiess consist , or what character does the co-operation of 
 capital in itself bear ? — agreement is at an end. One finds 
 the utility of capital in putting labour in motion ; another,^ 
 in saving or supplanting labour ; ^ a third, in performing! 
 labour ; ® a fourth praises it as gi^dng man the mastery over 
 the powers of nature ; ^ and a fifth, as enabling the labourer, 
 to “ put an interval 1 letween the beginning and the end of an-i 
 
 ^ Adam Smith, book ii. chap v. 
 
 ^ Lauderdale, Enquiry, p. 161, passim. 
 
 ® Lauderdale, ihid. So also J. B. Say, “11 faut, pour ainsi dire, que les capitaux 
 travaillent de concert avec I’industrie” {TraiU, i. 3). 
 
 ^ Strasburger, Hildebrand’s Jahrhiicher, vol. xvii. (1871), p. 325 ; and Carey. 
 
76 
 
 INTRODUCTORY 
 
 BOOK II 
 
 enterprise.” ^ Some, like Lauderdale, see in it an independ- 
 ent, original factor of production along with land and labour ; 
 others, like Gide, call it an independent but still merely 
 derivative factor. Kleinwachter looks on it simply as a 
 “ condition ” ; Carey, again, as an “ instrument ” or “ tool ” of 
 production. Indeed, our theorists cannot even agree as to the 
 wav in which that useful auxiliary of p roduction comes into 
 existence. If we ask the question concretely : How is a plane, 
 or a plough, or a steam-engine made ? — they would probably 
 be able, with perfect certainty, to give minute information 
 as to how those concrete portions of capital come into existence. 
 But whenever they have to generalise what they have observed, 
 they divide into hostile camps. Capital originates in savings 
 says one ; no. says another, it must be produced ; while a 
 third proclaims that it originates in the two together. 
 
 It is a much greater cause for wonder that economists 
 came to no agreement m these and similar questions than that 
 they remained apart in their theories of interest. The task 
 here was quite different, and essentially easier. Tu the iutpresf, 
 theory the difficulty is to give the proper explanation of facts 
 which are really much entangled, while here there is almost 
 nothing to do but to describe the facts correctly ; and facts, 
 moreover, with which everybody is quite familiar. As we 
 have said, every one knows how a plane or a steam-engine 
 comes into existence. Similarly every one has a sufficiently 
 exact idea what and how a plane, a machine, a plough, a raw 
 material, does in production. It was only necessary to leave 
 out everything pecuhar in those cases, and to describe in 
 appro priate words everything universal and typical in them. 
 and the theory of the formation and function of capital would 
 mhnost have been written. 
 
 'C The reason why economists failed in this simple task was 
 that they did not allow the facts to speak fo r th emselves.^ 
 Instead of simply describing them as they were, explanations 
 were read into them and added to them ; one feature was 
 pushed into the foreground, another kept in the background, 
 a third was quite overlooked, while perhaps a fourth was 
 entirely absent, but was read into them. When every man 
 had thus imported his own particular views bodily into the 
 1 Jevous, Theory of Political Economy, second edition, 1879, p. 243. 
 
CHAP. I 
 
 INTRODUCTORY 
 
 77 
 
 facts, it was, of course, no wonder that everybody got some- 
 thing different out of them. 
 
 To my mind the most important duty of the theorist in 
 such a case is to avoid the faults we have just condemned. 
 To make certain of this we shall make a clear distinction, even 
 
 in outward form, between the statement of the facts and the. 
 
 interpretation of them . The next chapter, therefore, will 
 delineate and describe the process of capitalist production . 
 When a solid basis of fact has thus been obtained, the inter- 
 pretation and construction will follow in the chapters on the 
 productive fimction of capital, and- on the theory of the forma- 
 tion of capital.^ 
 
 ^ Tn fipoTinniic literature the cleare.st views as to the nature of ca]ntalist pro- 
 
 duction are, in my opinion, to be found in Kodbertus. Jevoiis. and Q aT-l Monjjgr 
 The works of Rodbertus, where they are not directly disfigured by the influences 
 of his one-sided Socialist standpoint, are of quite classical accuracy and clearness. 
 Unfortunately there are certain features which very sensibly mar what he has 
 said. This is true in particular of his omission to notice the share which the 
 valuable natural powers take in production, and the influence of time — two 
 things which, obviously, could not easily be fitted into the “exploitation” 
 theory he maintained so vigorously, and so were suppressed. We shall see this 
 more fully later on. Carl Monger, again, by his arrangement of goods according 
 to “rank” {Orundsatze, p. 7), and his statement of the laws which connect 
 together goods of various ranks, has given at once a brilliant proof of his clear 
 insight into the developed phenomena of production, and an invaluable tool to 
 the hands of succeeding investigators. 
 
CHAPTER II 
 
 CAPITALIST PRODUCTION 
 
 We have already sketched, in its most general outlines, the 
 process of capitalist production^ There are certain features 
 of it which now require more exact treatment. I shall briefly 
 recapitulate, interpolating what remains to be said as we go 
 I along. 
 
 ^ All human production aims at the obtaininp of goods for 
 consumption. These consumption goods are dependent for 
 their existence on physical conditions, and are subject to 
 natural laws. To obtain them, as we have seen, we must seek 
 to bring about such combinations of active forces as will 
 result in the desired object. Thus we get a product which 
 has come into existence under natural law and continues to 
 exist under natural law. Now look a httle more closely at 
 t he nature of the power which man can employ towards these 
 I productive combinations . It is made up of two componen ts 
 very dissimilar in amount — ^rst. an enormous -mass of powers 
 which the natural world exerts sp ontaneously year out year 
 in ; and second, the much more limited natural pow ers which 
 reside in the hu man organism. 
 
 The natural world, in midst of which man lives, is 
 endowed with a vast number of forces which are never for a 
 moment idle. Gra^’itation holds this ball of earth together ; 
 keeps all things fast to its surface ; makes the rain fall to 
 earth, and rolls streams and rivers to the sea ; governs the 
 ebb and flood of the tides ; works unceasingly at every point 
 of the earth’s crust as stress, weight, pressure. The -sun 
 sends our earth light and heat, and thereby develops an 
 
 ^ Book i, chap. ii. 
 
CHAP, II 
 
 THE SOLE TECHNICAL FACTORS 
 
 79 
 
 infinity of mechanical and chemical procfesses, of which vegeta»- 
 tion particularly attracts our a,ttcntinTi. both by its mysterious 
 magic and by its enormous importance for the human race. 
 Uncounted and countless again are the molecular, electric, and 
 chemical effects and counter -effects which every atom of 
 matter exerts without intermission on its neighbours. The, 
 total of those energies which nature pours forth in ceaseless 
 
 strenm . without help from man, we may look upon as one 
 branch of the productive endowment of humanity ; and this 
 extremely valuable branch we shall c all man’ s natural. endow - 
 ment . It is an infinite treasure-house from which the pro- 
 dueiug man may draw as much as he wiU and can. As yet ^/ 
 it is only the very smallest part of thi.s treasure that has 
 
 been touched . As yet by far the greater portion, of the 
 energies of nature pass away in combinations which, from the 
 human teleological standpoint, seem useless or even haraiful. 
 The resistless rise and fall of the tide, the rush of rivers and 
 waterfalls, the atmospheric movements, the giant forces of 
 electricity, magnetism, and gravitation slumbering iu our 
 earth, are powers turned to human account only to a very 
 small extent. Others again, such as the vegetative powers of 
 land, have been utihsed to a greater, but .still very far from 
 complete extent . The steady advancement in agricultural 
 science not only leads us to expect a constantly increasing 
 amoimt of utility from the land, but makes us suspect that the 
 possibihty of such advance is stiU far from being exhausted. 
 
 Now, as we have seen, the way in which we get command 
 of these natural treasures is through the other branch of oru 
 productive endowment, our own personal powers. We put 
 forth our labour in ail kinds of wise combinations with natural 
 processes. Thus all that we get in production is the reault of 
 two, and only two, elementary productive powers — Nature and 
 
 Labour. This is one of the most certain ideas in the theory 
 of production. Man finds ready to hand an abundance of 
 natural processes, and allies his own powers with them. MTiat 
 nature by herself does, and what man does along with her — 
 these form the double source from which all our goods come, 
 and the only source from which they can come. There is no 
 place for any third primary source. ^ 
 
 These two elements, then, jechnically do everything in the 
 
80 
 
 CAPITALIST PRODUCTION 
 
 BOOK II 
 
 work of production. But, economically, a further and very 
 suggestive limitation must be drawn. Of the vast natural 
 endowment which serves as foundation for man’s productive 
 combinations, one portion particularly claims the interest of 
 economics, and that is, those useful things offered by nature 
 only in limited amoun t. In nature, indeed, there is no lack 
 either of materials or powers ; carbon and nitrogen, oxygen 
 and hydrogen — generally speaking, most of the “elements” — are 
 per se not more scarce than are electrical, magnetic, chemical, 
 and gravitation forces. But certain spontaneous combina- 
 tions of these elements that are peculiarly well adapted to 
 human want may be, relatively, scarce ; such, for example, as 
 useful plants and minerals, water for driving power, fertile 
 land, etc. These limited gifts and energies of the natural world. 
 obtain for us a peculiar economic importance . It would be 
 foob'.sh not to economise them. Technical elements of produc- 
 tion which we may have in any quantity, like atmospheric air 
 or water or sunlight, we may employ or waste as we please 
 without suffering loss in our productive returns. But the 
 limited technical elements must be treated with consideration, 
 must be saved, must be fully utilised. In a word, within the 
 technical natural endowment, as a wider circle, they form the 
 
 specifically economic natural endowment of man. Since aU, or 
 at least almost all, limited gifts and energies of nature are con- 
 nected with land, we may, without much danger, take Land. 
 with its activities or uses, as the representative of this eco nomic 
 natural endowment. ^ 
 
 To the uses of land the exertions of labeur form the 
 counterpart. Labour has ahnost entirely an economical char- 
 acter. This is due partly to the fact that physical strength is 
 given us in such scanty measure, as compared with the very 
 extensive claims put forward by human needs, that even the 
 most assiduous exertions of labour power cannot fully satisfy 
 our desire for goods, not to sj^eak of supplying them in super- 
 fluity ; partly to the fact that the exercise of our powers is 
 usually attended by the painful feeling of distress and fatig pn^ 
 
 1 Wliere population is scanty, of course, it is possible that land, or at least 
 certain of the uses of land, such as the growing of timber, may be free goods, as 
 obtainable in any quantity. But in modern communities, to which naturally I 
 refer by preference in this statement, the uses of land — with the exception of 
 waste land or desert — are entirely economie goods. 
 
CHAP. II 
 
 THE ECONOMIC FACTORS 
 
 81 
 
 — at least when carried beyond a certain point/ — and the 
 feeling warns us to economise our labour. 
 
 Nature and Labour are, then, the technical elements of 
 production ; JTses of T.and and Labour are the economic 
 elements . Tliese latter are the talents which the producing 
 man puts out at usury with nature, with her great fruitful soil 
 and infinite store of force. They are the enj y powers that 
 re.ipuire ecnnnmic, treatment, inasmuch as the co-operation of 
 the free natural powers, which, technically, is also indispensable, 
 is given without question and without cost. It is only the 
 man who has command over the, requisite, uses of land and 
 services of labour who receives the desired economic nroduct : 
 the man who has not these must do without the product ; the 
 man who owns a double allowance or a half allowance of them 
 will — if the technique of production remain the same — receive 
 double or half the product. In production, therefore, they are 
 the only powers with which the economic community has any 
 concern, and with which it has to reckon. In short, land and 
 labour — or, more accurately, uses of land and services of 
 labour — are the primary economic productive powers.^ 
 
 Now in what way does man use thes e original productive 
 powers, ? In answering this question we turn back for a little 
 into familiar paths. 
 
 To construct goods for human consumption out of these 
 
 productive elements man may take one of two ways. He may 
 combine the economical productive powers with one another, — or 
 with activities of free natural powers, — in such a way that the 
 desired good immediately emerges as result nf thp romhinatinn ; 
 
 
 ^ On the common experience that “ a3 labour is prolonged the effort becomes. 
 as a gen eral rule, more and more T)aiDfnl, ” see Jevons, Theory of Political 
 Economy, second edition, p. 185 ; and Gossen, EntwicMung der Gesetze des mensch- 
 lichen Verkehrs, 1854. 
 
 ^ This is the state of the. case, as I believe, expressed with perfect clearness 
 in the facts, and this i.s what Rodbertus profoundly misunderstood when bn 
 maintained, and repeated with emphasis, that labour is the sole original power. 
 
 with which human economy has anything to do. and drew from that the conclu- 
 
 sion that all goods, economically, are to be conceived of as products of labour 
 alone {Zur Erkemvlniss unserer stoats, Zvstdnde, theorem i. ; Zur Erkldrung, 
 second edition, p. 160 ; Zur Beleuchtung, p. 69). If to-day we allow a fruitful 
 field to lie fallow, or a mine or water power to remain unexploited if, in short , 
 we do not act economically -with valuable uses of land, we act as directly against 
 
 cur economic wellbeing as when we throw away labour uneconomicallv,. 
 
 G 
 
82 
 
 CAPITALIST PRODUCTION 
 
 BOOK. II 
 
 as when he gathers shellfish on the shore. Or he may take a. 
 roiindahout way, and, with the element at his command, mar 
 
 make, first, another good, and then, with its assistance, the 
 good he wishes ; as, for instance, when he makes a boat and 
 net and takes to fishing systematically. We already know 
 that the former method is identical with what the Germans 
 call Tcapitallos production, the latter with capitalist production ; 
 and that the intermediate products, which come into existence 
 in the course of the indirect methods, represent economic 
 social capital. 
 
 The adoption of capitalist methods of production is followed 
 
 by two consequences, erpially cha,racteristic and significant. 
 
 One is an advantage, the other a disadvantage . The advan- 
 tage we have already looked at ; it consists in the greater 
 Jechnical productiveness o f those methods. With an equal 
 expenditure of p'rimary productive powers ^ (that is to say, 
 labour and valuable natural powers) more or better goods can 
 be produced by a wisely chosen capitalist process than could 
 be by direct unassisted production. This proposition, which 
 is quite convincingly accredited by daily experience, we illus- 
 trated and tried to explain in the second chapter of Book I. 
 by a number of examples. We found the explanation to 
 be that, when roundabout methods are skilfully chosen, new 
 allies are obtained from the immense stores of natural powers, 
 and their activity is enlisted in the_ JWQrk jrf-^roduetion. It is 
 this well-known fact that is usually indicated by the term 
 “ productivity of capital.” This name, however, imports into 
 the facts a particular interpretation, the correctness of which 
 has yet to be examined in the next chapter. 
 j The disad vp.nta.gp. coimpp.tp.rl with the, ca.pita.b'st Tnethod of 
 •production is its sacrifice of time, The roundabout ways of 
 capital are fruitful but long ; they procure us more or better 
 consumption goods, but only at a later period of time. This 
 proposition, no less than the former, is one of the ground 
 pillars of the theory of capital. We shall see later on that 
 the very function of ca pita l., as a means of appropriatiorL-oc,. 
 so urce of interest, to a great extent rests upon it . . I must, 
 
 1 “ Primary productive powers” is the move corrset expression, which we 
 
 mn.st BOW p.mpiny instead of ths partial expr fl.‘^sinn “ ia'hniir-” used by me in the 
 second chapter of Book I. in order to avoid tedious explanations. 
 
CHAP. 11 
 
 THE SACRIFICE OF TIME 
 
 83 
 
 therefore, s^uard it against any- iiiisnndprstanrlitig by the .hwa 
 following remarks. 
 
 In the first place, it maY very well happen.in an exceptional 
 case, that an indirect method of production is not only better 
 
 bnt speedier . A man wishing to gather apples from a high 
 tree will evidently attain his purpose sooner by first cutting a 
 stick from another tree, and nsmg it to knock dov/n the apples, 
 than by climbing the tree and trying to break off the apples 
 one by one with his hand. But this is not the rule. In the 
 overwhelming majority of cases we must tread the roundabout 
 ways of capitalist production under technical conditions of such 
 a nature that we have to wait, and often for a very long time, 
 before we get the ripe final product. Instead of giving examples 
 which must occur of themselves to every reader, I would rather 
 draw attention to the fact that, in the loss of time which is, as a 
 rule, bound up with the capitalist process, lies the sole gimmtLaf 
 
 that much-talked-of and much-deplored dependence of labourer on 
 capitahst . If capitalist production led as quickly from the hand 
 to the mouth as unskilled direct production does, there would 
 be nothing to hinder the workers carrying on sucli roundabout 
 methods from beginning to end on their own account. They 
 would still be dependent on the landowners, who could prevent 
 them from access to the land which at the outset they require, 
 bnt they would not be dependeot on the capitahsts. It is only 
 because the labourers cannot wait tih the roundabout process — 
 which begins with the obtaining of raw materials and making 
 of tools — delivers up its products ready for consumption, that, 
 t hey become economically dp.pp.nd pnt on thp. rapitalists who 
 already hold in their possession what we have called “ inter- 
 mediate products.” ^ 
 
 ^ It is very characteristic that Eodbertus, when describing the economical 
 effects of adopting roundabout ways of production, chooses his illustration pst 
 ou t-of that minority of cases where the rounda bout wav i s the quicke r {Das 
 Kapital, p. 236). The consequence is that, on this and other occasions, he leaves 
 in the shade all the economical elements which form the basis of the phenomenon 
 of interest — and of these the most notable is the loss of time connected with 
 the canying through of productive methods — and, taking a very one-sided view, 
 lays the origin of rent at the door of the existing circumstances of private right 
 (e.g. p. 310). But private rights in capital would not , by t hemselves, do any 
 harm to the labourers, and it would be very easy for them to avoid the toll-bars 
 which the capitalists have erected, if the fatal lapse of time between beginning 
 and end of the lengthy capitalist process did not make it impossible for labourers 
 to adopt similar processes on their own account. 
 
84 
 
 CAPITALIST PRODUCTION 
 
 BOOK II 
 
 Again — though this scarcely needs pointing out — when we 
 speak of capitalist production taking time, it is not relevant to 
 raise the objection that, with a piece o_f „ 
 viade, say a tool, a definite 
 than it could be without the assistance of capital ; that, for 
 instance, a tailor takes three days to sew a coat by hand, and 
 one day to do it with a sewing-machine. For it is clear that 
 the machine sewing forms only one part, and indeed the 
 smaller part, of the capitalist process ; the principal part falls 
 to the making of the sewing-machine, and the total process 
 lasts considerably longer than three days. 
 
 Thus far we have considered capitalist production as an 
 undivided whole, and have contrasted it with production 
 carried on entirely without capital But here we are reminded 
 of a fact that has to be reckoned with, viz. that in capitalist 
 production th^ rp. arp stag es and degrees ; to speak accurately, 
 there are innumerable degrees of “ Capitalism.” In the 
 making of a consumption good the possible roundabout methods 
 are of very varying length. We may make intermediate 
 products from which the final good will be obtained in a 
 month, or a year, or ten years, or a hundred years. The 
 question now is. what influence such differences of degree havft 
 
 on product . 
 
 On the whole it may be said that not only are the first 
 steps more productive, but that every lengthening of the 
 roundabout process is accompanied by a further increase in 
 the technical result ; as the process, however, is lengthened 
 the amount of product, as a rule, increases in a smaller 
 proportion. 
 
 This proposition also is based on experi ence.- and on ly_Qii 
 experience . What it says must be simply taken as a fact of 
 the technique of production. The reader, moreover, will easily 
 be able to check its accuracy if he follows in thought the steps 
 which lead to the production of any consumption good. For 
 instance, firewood can be got quite directly so long as we limit 
 ourselves to the gathering of dry branches or breaking off of 
 weak twigs. We take a short roundabout path in making 
 and using a stone axe. A longer process involves digging ore 
 out of the ground, getting the fuel and necessary tools, and 
 smelting iron out of the ore, working up the iron into steel. 
 
CHAP. II 
 
 INCREASE OF PRODUCT 
 
 85 
 
 and finally turning out a finished steel axe. Beginning 
 farther back, we may construct cunning machinery for mining 
 and raising the ore, elaborate blast furnaces for smelting it, 
 special machines for making and sharpening the axe. Going 
 farther back still, we may put up engineering shops and 
 machinery for constructing each kind of appliance, and so on. 
 It will scarcely be doubted that every additional step increases 
 
 the productiveness of the total process ; that is, results in 
 the obtainmg of the unit, say the cubic foot of wood, at a 
 smaller total expenditure of labour (mediate and immediate). 
 But just as little will it be doubted that the first two pro- 
 ductive methods, the use of the stone axe and then of the 
 steel axe, must have caused a much greater revolution in the 
 productiveness of woodcutting than the later improvements, 
 although, absolutely, these may be by no means inconsiderable. 
 
 If necessary, this may easily be proved to demonstra - 
 tion by a little calculation . Assume, for example, that 
 a labourer working with his hands can cut in one day 2 
 cubic feet of wood, and working with a stone axe, which 
 has taken three days to make, can cut 1 0 cubic feet : the 
 three days’ capitalist process is rewarded by a surplus return 
 of 8 cubic feet per labour day. Now possibly the doubling of 
 the process — say that the more careful fashioning of the stone 
 axe takes six days — may also double the surplus return, and 
 give 16 cubic feet. But it is scarcely likely that trebling the 
 roundabout process can treble the surplus return. And it is 
 quite certain that extending the roundabout process a thou- 
 
 sandfold — say by sinking of pits, from which the ore for the 
 axe may be got after years have elapsed — will not be able tg 
 increase the surplus return a thousandfold- Otherwise we 
 should have the all but inconceivable possibility that a worker 
 in one day could cut 8000 feet of wood! From some one 
 point — probably a point not far off^ — the sirrplus, though still 
 increasing, will increase in a less ratio than the production 
 period. 
 
 Of course in such cases no definite figure can be named, 
 either for the point from which the productiveness of further 
 extensions of the process begins to decrease, or, speaking 
 generally, for the amount of surplus result connected with any 
 definite length of process. These data vary according to the 
 
86 
 
 CAPITALIST PRODUCTION 
 
 BOOK II 
 
 technical circumstances of each branch of production, and at 
 each stage of productive skill. Every new invention alters. 
 thenL. The discovery of gunpowder, for example, opened up 
 at a flash the possibility, which did not exist the moment before, 
 of increasing the productiveness of the chase by perhaps one 
 half, and the productiveness of stone-quarrying by perhaps a 
 hundredfold.^ We may, however, with sufficient confidence 
 repeat the proposition already formulated, that every exten - 
 sion of the -production proces s (so far as it is wisely chosen, 
 of course) leads, generaUy speaking, to some surplus result. 
 It may be confidently maintained that there is not one 
 branch of production the returns of which may not be 
 considerably increased in this way, as against the method of 
 production prevailing at the time ; and that without any new 
 invention, but simply by the intercalation of intermediate 
 members long familiar to capitalist production, — whether it be 
 by the adoption of a steam motor, or an apt transmitter, or 
 some ingenious gearing, blast, lever, regulator, or the like. 
 How far behind, indeed, in capitalist equipment are the tnost 
 
 of our agricultural and industrial businesses compared with 
 
 the most advanced typical businesses ! And certainly these 
 latter are no less far behind an ideally perfect equipment.^ 
 
 The fact that the prolongation of production processes 
 leads to surplus results, and the fact that these surplus results 
 
 ' Inventions, so-called, generally mean the rlisnoverv of a new and moiR 
 
 productive method of production. Frequently — probably in most cases — the 
 new way is longer than the old, and in this case to utilise the invention requires 
 the making of a great number of intermediate products, or, as it is usually 
 expressed, a large investment of capital : e.g. in machinery, building of railways, 
 and the like. But often a happy invention may lead to a better, and at the 
 same time shorter, way of production, s uch as the manufacture of certain dye- 
 stuffs from chemical instead of plant bodies. ' However elaborate the former 
 may be, it is stUl certainly far more direct and speedy than a manufacture which 
 has to wait on tedious processes of growth. 
 
 ^ It may be asked here, by way of objection, why man does not fu ll y utilii^ 
 the chances o ffe red him of increasing the technical res ult bv the tcclmical know- 
 ledge heJhas at the tnoment . The common explanation runs — from want 0/ 
 capital With the limited amount of capital at his disposal man can only utilise 
 those chances of employment, among the infinite number of remunerative ones, 
 wliich are most remunerative, and a great number of less, but still remunerative, 
 employments must be passed over. This explanation is not quite exact , but 
 it is at least right in the main contention. We may therefore be content 
 with it until, in another connection, we can examine the matter with perfect 
 accuracy. 
 
CHAP. II 
 
 THUNEN'S LA IV 
 
 87 
 
 usually decrease from a certain point or)wa.rd.a, have long 
 Lftp.n iiotipprl anH .q.pl-nnwIp.Hgp.rl in our science ; mostly, I must 
 say, in another form, and one borrowed from the jargon of the 
 Productivity Theory. It is many years smce Thiinen put 
 them in the most impartial manner, and showed that, in 
 the case of progressive increase of capital, the capital that 
 comes last does lead to an increase in the product of labour. 
 
 but in a constantly decreasing proportion. ^ On this founda- 
 tion of fact he himself framed the well-known doctrine that 
 the rate of interest adjusts itself to the productiveness of the 
 
 last dose of capital applied in the least productive employment. 
 
 and, in the wake of this doctrine, the facts were recognised and 
 received in the widest circles.^ In harmony, however, - with 
 the fashion of the time, these facts were forced into the special 
 forms of presentation and terminology of the Pioductivity 
 Theor}^, whereby the most vexatious mistakes and confusions 
 shpped in along with them.® Lefore going further it seemed to 
 me advisable here to try to restate the facts in their naked 
 simplicity. 
 
 It scarcely, perhaps, requires to be proved that the capital- 
 ist production of consmnption goods, although carried out in 
 roundabout ways and by many stages, does not , on that 
 account, cease to exhibit an intimately connected and imitpr) 
 work of production . The laliopr which produces the mter- 
 mediate products — -the mediate laboig- . as we shall call it with 
 Eodbertus ^ — ^ajid the labour which, out of and with the inter- 
 mediate products, produces the desired good — the immerbate 
 labour — both form- a part of the production of the consumution 
 good. The production of timber is more than the labour of 
 
 1 Der isolirte Stoat, third edition, part ii. div. i. p. 97. See particularly 
 the table on p. 101. 
 
 * For instance by Soscher , Grundlagen, § 183 ; by Mangoldt, VolJcswirth- 
 schaftslehre, 1868, p. 432 ; by Mithoff in Schonberg’s Handhich, second edition, 
 p. 663, and by many others. Jevons independently adopted quite similar views. 
 Theory of Political Economy, second edition, p. 277. 
 
 ® In particular the “ physical” or “technical productivity^.” which is founded 
 on these facts (that is, the circumstance that by the assistance of capital more 
 products can be produced than without it), was confused with a “value pro- 
 ductivity ” (that is, a pretended power of capital to produce more value than it 
 itself posses.ses). See my CapiUd and Interm, pp. 112, 131. 
 
 * Bos Kapital, p. 236. 
 
88 
 
 CAPITALIST PRODUCTION 
 
 BOOK II 
 
 felling wood in the forest ; it embraces the labour of the smith 
 who makes the axe, of the carpenter who cuts the haft, of the 
 miner who raises the ore, of the iron workers and steel workers 
 who prepare it, and so on. True, our modern divisinn of 
 employment to outward appearance b reaks up the u nity of the 
 process into a number of independent parts, but it is the 
 theorist’s business to understand economic processes in their 
 living connection, and he dare not, of course, let himself be 
 deceived by appearances, but must reproduce in his own mind 
 the real unity of the work of production thus obscured. The 
 masterly manner in which Eodbertus has done this is one of 
 his best services to economics. 
 
 But this very consideration, essentially economic as it 
 is, raises a doubt we must fairly meet. According to what 
 has been said, the production period of a consumption good 
 is, strictly speaking, to he reckoned from thp. moment nn 
 
 whip.h tt ip firgf-, banri wq p laid to the making of its first inter - 
 mediate right down to the completion of the good 
 
 itselh In our times, when unassisted production has almost 
 entirely disappeared, and one generation builds on the inter- 
 mediate products laid down by earlier generations, the produc- 
 tion period of almost any consumption good could, in any strict 
 calculation, trace its beginning back to early centuries. 
 
 The boy who cuts a stick with his knife is, strictly speak- 
 ing, only continuing the work of the miner who, centuries ago, 
 thrust the first spade into the ground to sink the shaft from 
 which the ore was brought to make the blade. Of course the 
 finished product of to-day owes a quite infinitesimal fraction — 
 not worth calculation even if that were possible — to the firstlings 
 of labour in these far-off centuries, and it would therefore give 
 a, very false view of the degree of capitalism expended in the 
 eiitting pt tbp if wp were to estimate it hv the absolute 
 
 period of time intervening between the atom of labour first put 
 forth and the completion of the work. 
 
 It is more important and more correct to look at the 
 period of time which elapses on the ^eraqe between the 
 expenditure of the original productive powers, labour and 
 uses of land, as successively emp oyed in any work, and the 
 turning out of the finished consumption goods. Brnriiip.tion i.s ^ 
 more or less capitalisti c according to the average remoteness o£ ^ 
 
CHAP. 11 
 
 THE AVERAGE PERIOD 
 
 89 
 
 the period at which the original productive powers exerted 
 
 diu'ing the process are paid . Say, for example, that the pro- 
 duction of a commodity costs in all a .hundred days of labour 
 — for the sake of simplification we shall leave out the co-oper- 
 ating uses of land — and that, of these hundred, one day was 
 expended ten years before the completion of the work, another 
 nine years, others respectively eight, seven, six, five, four, three, 
 two, and one year, while the remaining ninety days were 
 expended immediately before the completion. Then the first 
 day of labour is paid ten years later, the second nine years 
 later, the third eight years later, and so on, while the last 
 ninety days are paid immediately. The calculation is as 
 follows : — 
 
 10 + 9 + 8 + 74-6 + 5 + 44-3 + 2+1 55 
 
 loo ^ lOO' 
 
 That is to say, on the average the hundred da, vs of l abour a.ra 
 paid in about half a vea.r. Say that the prodiiction of another 
 good were also to demand in all a hundred days of labour, 
 likewise spent in the course of a tEn years’ period, but spread 
 over it in such a way that twenty days’ work was expended 
 ten years before, other twenty days’ work nine years before, 
 five days’ work in each year from the eighth to the first 
 successively, wliile the last twenty days were spent immediately 
 before the completion of the work, t he average would cnme out 
 quite differently and much higher : — 
 
 200 + 180 + 40 + 35 + 30 + 25 + 20 + 15 + 10 + 5 560 
 
 100 ~ 100 ’ 
 
 or more than five and a h alf year_s^ It is highly probable, 
 moreover, that in both cases some fraction of a day’s work will 
 have been spent centuries before, but such a small element 
 will scarcely influence the average, and may in most cases be 
 simply neglected.^ 
 
 1 The first of the above schemes corresponds to the case of a production 
 where one single tool is employed, and where the total process extends over ten 
 years — for instance, the making and using of an axe of Bessemer steel. The 
 second scheme, again, corresponds to a production where, besides the axe, a 
 number of other capitalistic tools, auxiliary mechanism, and materials, are 
 employed, the existence of which, however, does not date from farther back than 
 ten years. This compari.son clearly shows how, without incieasing the absolute 
 length of the nroduction period, the degree of capitalism may be very considerably. 
 
90 
 
 CAPITALIST PRODUCTION 
 
 BCOK 11 
 
 Where I have spoken above of extension or prolongation 
 of the roundabout process of production, and of degrees of 
 capitalism, I must be understood in the sense just explained. 
 
 ;^ The length or the shortness of the process, its extension or its. 
 curtailment, is not to be measured by the absolute duration of 
 
 tJip. p eriod that lies between the expenditure of the first atom 
 of labour and the last — otherwise the cracking of nuts with a 
 liammer which might chance to be made of iron brought from 
 a mine opened by the Eomans would perhaps be the most 
 “ capitalistic ” kind of production. Nor is it to be measured 
 
 the number of independent intermediat e me mbers which 
 the production process embraces — otherwise when, by means 
 of the three intermediate products, twig, hme, and bird-lime, 
 a boy catches birds on the same day as he commences making 
 these three forms of capital, his bird-catching would be more 
 capitalistic than the far-back labour of the miner who devotes 
 years to the sinking of a shaft. KBut it is to be measured bv 
 the average period which lies between the successive expendi- 
 ture in labour and uses of land and the obtaining of the final 
 good. It is only in methods' of production where the expendi- 
 ture in original powers is distributed equally over the whole 
 production period that the absolute length of the process 
 affords at the same time the proper measure for the degree of 
 capitalism.^ 
 
 Let us now apply what has been said of siugle acts of pro- 
 
 duction to the circumstances of an entire commmiity . Every 
 year a community comes anew into possession, and gets the 
 disposal of a certain quantum of original productive powers, 
 the powers represented by its labour and land. The farther 
 away its production is from capitalist production — there is no 
 production, of course, absolutely without capital — the greater 
 
 increased ; all that is necessary is to alter the proportion between the number 
 of early workers and that of the finishing ones. Whether it is ten workers 
 employed in the final stage against one worker employed ten years before, or one 
 worker in the final stage against ten workers ten years before, in either case the, 
 total produ ction process extends over a period of ten years . But in tlie former 
 case the finishing workers would be very sparingly provided with tools, machines, 
 etc. ; in the latter case they would be very amply provided. The latter. -o.C 
 ^ourse, would be far and away the more capitalistic of the two, 
 
 1 See the interesting calculation and graphic statement of the amount of 
 investment of capital in Jevons’s Theory of PoUtical Economy, second edition, 
 p. 249. 
 
CHAP. II 
 
 SUMMARY 
 
 91 
 
 will be the -propo riinTi nf t.hp ypar’s prnfliip. tive powers that is 
 changed into consumption goods during the same year . The 
 more capitalistic the production is, the smaller will be the 
 proportion of the year’s productive powers consumed within 
 the year, and the greater the proportion invested in inter- 
 mediate products that will come to maturity as finished goods 
 only in future years, ^nd again, the higher the degree of 
 capitalism is. the more remote will he thp . pprind at. wliirh 
 these intermediate products mature. Thus a community pro- 
 ducing from hand to mouth consumes in each year the fruits 
 of the productive powers of that same year. A capitalist 
 community consumes only to a small extent the fruits of 
 productive powers of the present year, and to a great extent 
 the fruits of the productive powers of past years, while it 
 again is making intermediate products for the service of 
 future years. And the higher the degree of capitalism , the 
 foiiher — h ack in the past, on the average, are the years 
 whose productive powp.r.ci it, c.nn.cimnes^ and the farther on in 
 the future are the periods for which it provides 
 
 And now, I trust, the following proposition, which puts 
 together the chief features of the capitalist production process, 
 will be understood beyond possibility of mistake. 
 
 All consumption goods which man produces come into j 
 existence through a co-operation of human power with natural (, 
 powers, which latter are partly economic, partly free. ^ 
 means of these primary productive powers man may make the - 
 consumption goods he desirps , piT.hp.r inimpdiately, or through. 
 the medium of intermediate products c alled Capita l.^ The latter 
 method demands a sacrifice of time, but it has an advantage in s 
 the quantity of product, and this advantage, although perhaps ' 
 in decreasing ratio, is associated with every prolongation of the 
 roundabout way of production. 
 
CHAPTEE III 
 
 THE FUNCTION OF CAPITAL IN PRODUCTION 
 
 After what has been said in the preceding chapter it should 
 not be difficult accurately to indicate the role which capital 
 plays in economic production. 
 
 Capital has, first, a symptomatic importance. Its presence 
 is always the symptom of a profitable roundabout production . 
 I say, deliberately, “symptom” and not “ cause ” or “ condition ” 
 of profitable methods of production ; for, as a fact, its presence 
 is rather the result than the cause. If men to-day are fishing 
 with boats and nets instead of picking the fish out of pools on 
 the shore with their hands, it cannot be said that they have 
 adopted those more fruitful methods because they possess boats 
 and nets. Obviously they possess bo ata mnd nets because they 
 ha ve adopted these meth ods. They must have already chosen 
 the roundabout way of production before these goods, speaking 
 generally, come into existence.’^ 
 
 This, however, does not exhaust the importance of capital. 
 At is. secondly . — and herein lies the chief point of its productive 
 efficiency, — an effective intermediate cause of the consummation 
 of th is profi table roundab out, process. ^ Every piece of capital 
 is, to a certain 'extent, a store of useful natural powers, the 
 working of which helps to bring to a successful issue the 
 roundabout process in the course of which the piece of capital 
 has come into existence. I say “ intermediate cause,” not 
 
 ^ It would be somewhat different if we were to adopt the other conception of 
 capital, and understand by it, not intermediate products only, but the entire 
 national siibsistence fund, which would therefore include the labourers’ subsist- 
 ence. In that case, but only in that case, nna tnip'ht sav that, rapiffll wns 
 cause of these profitable ro undabout ways of production being adopted . 
 
CHAP, ni 
 
 AS TOOL AND CA USE 
 
 93 
 
 “ cause.” Capital gives no independent impulse ; it_ only 
 transmits an impul.se given hy the nrigiual p roducti ve powers. 
 just as one billiard baU. transmits motion to another. The 
 function of capital, indeed, has been called the “ prianninp- of 
 natural powers.” The expression is quite appropriate, and 
 very happy. Only it must never be forgotten that this 
 attribute belongs to the entire capitahst process, not only to 
 the “descending branch,” generally called the use of the capital, 
 but also to the “ascending branch,” in which the capital itself is 
 first made. Man does not first prison natural powers by 
 means of capi tol : capital itself originates as the_ result— of-a 
 previous imprisonment — by the original productive powers 
 that are at man’s own bidding — of certain comphant natural 
 powers. Taken all in all, among the many predicates which 
 economists have given to capital, the one that best fits this 
 aspect of the case is that of “ Tool of Production.” 
 
 But, thirdly, capital is also the indirect cause of other 
 
 profitahlft rnn rid about ways of production being e ntered oa — 
 other, that is, than those in the course of which it itself has 
 come into existence. When a people possesses much capital 
 not only can it successfully complete those processes in the 
 course of which the capital presently existing has come into 
 beiug, but it can also adopt other and new methods. For the 
 stock of capital in hand (which, essentially, is nothing else 
 than an aggregate of consumption goods in a transition state 
 throws off every year a certain quantity of its constituents , 
 which have just completed their transition state and becoma 
 finished good^ and places them at the disposal of the current 
 economic period for purposes of immediate consumption. In 
 this way t he greater the stock of capital, the larger is the 
 share taken bv the productive powers of the past in providing- 
 
 means of consumption for the present, and the less are the 
 new productive powers of the present drawn on for the present. 
 Thus a larger proportion of these current powers is free for 
 the service of the future, that is, for investment in more or 
 less far-reaching processes of production. 
 
 If a community is so poor that the consumption goods 
 
 ^ Schaffle very finely speaks of capital a-s “Consumption wealth as it were in, 
 the stalk, when it is still only swelling bud and ripening fruit (Schbnberg’s 
 Handhijch-, second edition, vol, i. p. 208). 
 
94 
 
 FUNCTION OF CAPITAL IN PRODUCTION 
 
 BOOK II 
 
 maturing out of capitalist intermediate products in any year, 
 say in 1888, scarcely cover ^ of that year’s wants, then the 
 remaining must be provided out of the labour and uses of 
 land of 1888, and only a fractional part of the productive 
 powers of that year remains over to initiate methods of pro- 
 duction that will turn out consumption goods in the years 
 following. If. on the other hand, the past has accumu- 
 lated a treasure of intermediate produ cts — raw materials, 
 tools, machines, factories, workshops, etc.^ — so great that their 
 successive maturing covers the consumption demand of the 
 year 1888 to the extent of that of 1889 to the extent of 
 3 ^^, that of 1890 to the extent of and so on, then only 
 one half of the productive powers of 1888 wi ll _be clai med to 
 make up the current wants, w hile the entire other half may 
 be spent unhesitatingly in producing intermediate products 
 which will come to maturity, as consumption goods, only in later 
 years — all the later in proportion as the next year’s wants 
 are already covered by accumulations of capital in the past. 
 
 V In this sense, but only in this sense, is it correct to say 
 
 tha t man must already have capital before h e can enter on 
 roundabout wavs of prod uct ion ; that want of capital prevents 
 man taking advantage of far-reaching and profitable methods of 
 production, such as the laying of railways, building of canals, 
 irrigation schemes, altering of river-beds, and so on. It would 
 be quite incorrect to understand this proposition as meaning 
 that a community must have, finished and ready to hand, that 
 kind of concrete capital with which the methods of production 
 in question are carried out, or even the concrete capital (raw 
 materials, tools, etc.) out of which are made the forms of 
 capital first needed. All that is required is, that the com- 
 munity possess so much capital, whatever its shape, as will 
 cover — while it is being gradually changed into consumption 
 goods — the demand of the present and near future for such 
 goods sufficiently to leave the current production powers free 
 for investment in intermediate products- of the kind required. 
 It would be essent ially m ore cor rect to sa x that_we- re quire 
 consurnftion goods before we can en ter upoiLrpundabimt_ways_ 
 o f production, whether these be in the form of finished stocks 
 of goods ready for consumption, or in the transition form of 
 intermediate products. 
 
CHAP, in 
 
 NOT AN INDEPENDENT FACTOR 
 
 95 
 
 Lastly, we can now answer, easily and categorically, the 
 much-disputed (T[up,stinn. w hpf.hpT- any indepeudent productive 
 power is inherent in capital : or, to put the question in its 
 usual form, whether capital is a third and independent “ factor 
 in production ” alongside of labour and nature ? 
 
 The answer must be a most distinci negative. This seeing 
 to me the only conclusion any one can come to, provided he 
 makes clear to himself the sense in which this question is put, 
 and must be put if it is worth the trouble of putting at all. 
 And this sense is a very emphatic one. The following 
 analogy will make it perfectly clear. A man throws a stone 
 at another man and kills him . Has the stone killed the 
 ma n ? . If the question is put without laying any special 
 emphasis it may be answered without hesitation in the 
 affirmative. But how if the murderer, on his trial, were to 
 defend himself by saying that it was not he but the stone that 
 had killed the man ? Taking the words in this sense should 
 we still say that the stone had killed the man, and acquit the 
 murderer ? 
 
 How it is with an emphasis like this that economists 
 inquire as to the independent productivity of capital. The 
 question comes up in the course of the inquiry concerning 
 the elements which constitute our material goods. A similar 
 interest to that which the chemist has in the analysis of com- 
 pound bodies leads the economist to analyse the multiform 
 transition stages of material goods, to trace them ban k. -to 
 their source , and to resolve the thousandfold instruments and 
 auxiliaries of production, to which, directly or indirectly, they 
 owe their existence, into the simple fundamental powers from 
 the co-operation of which everythiug proceeds. In this con- 
 nection the doubt arises whether capital is an independent 
 productive power or not. The whole spirit of the inquiry 
 allows only one meaning to be given to the question, and the 
 emphasis is very marked. AVe are not asking about dependent 
 intermediate causes, but about ultim ate in depeudeut elemeuts.' 
 The question is not whether capital plays a part in the bring- 
 ing about of a productive result — such as the stone does in 
 the killing of the man — but whether, granted the productive 
 result, some part of it is due to capital so entirely and pecu- 
 liarly that it simply cannot be put to the credit of the two 
 
96 
 
 FUNCTION OF CAPITAL IN PRODUCTION book ii 
 
 other recognised elementary factors, nature and labour. Now 
 can this question be answered in the affirmative ? 
 
 Emphatically it can not. Capital is an intermediate 
 ^product of nature and labour, nothing more . Its own origin, 
 its existence, its subsequent action, are nothing but stages in 
 the continuous working of the true elements, nature and 
 labour. They and they alone do everything from beginning 
 to end in bringing consumption goods into existence. The 
 only distinction is that sometimes they do it all at once, 
 sometimes by several stages. In the latter case the completion 
 of each stage is marked outwardly by the appearance of a 
 fore-product or intermediate product, and capital has emerged. 
 But, let me ask, is a thing any the less the work of its author- 
 
 that it is not prod uced- -all, at once, but in instalments? If 
 to-day, by allying my labour with natural powers, I make 
 bricks out of clay, and to-morrow, by allying my labour with 
 natural gifts, I obtain lime, and the day after that make 
 mortar and so construct a wall, can it be said of any part of 
 the wall that I and the natural powers have not made it ? 
 Again, before a lengthy piece of work, such as the building of 
 a house, is quite finished, it naturally must be at one time 
 a fourth finished, then a half finished, then three-quarters 
 finished. What now would be said if one were to describe 
 these inevitable stages of the work as independent requisites 
 of house-building, and maintain that, for t h e building of a 
 house, we require, besides building materials and labour, a 
 quartPT--fini.cthftd house , a half-finished house, a three-quarters- 
 finished house ? In form perhaps it is less striking, but in 
 effect it is not a whit more correct, to elevate those inter- 
 mediate steps in the progress of the work, which outwardly 
 take the shape of capital, into an independent agent of 
 production by the side of nature and labour. 
 
 This would never have been called in question had it not 
 been that the introduction of division of vocations and labour 
 had split up the united work of producing consumption goods 
 
 into a number of apparently independent acts of production. 
 It was this that made economists forget to look at it as a 
 whole, and made them, with singular modesty, bow before 
 the dependent intermediate creations of previous human 
 activity as if they represented an independent power. But 
 
CHAP. Ill 
 
 NOT AN INDEPENDENT FACTOR 
 
 97 
 
 even as it was, it was scarcely possible for any acute theorist 
 to make this confusion if another circumstance had not 
 conspired to assist it. That was th e aenepted parallelism 
 between factors of production and branches of income, and 
 
 the awkwardness economists feared to encounter in the 
 explanation and justification of interest if they had to 
 refuse recognition to capital as an independent factor of 
 production. All natural income, it was taught, is based on 
 participation in the production of goods. The various branches 
 of income are nothing else than the forms in which the 
 different contributories to production are paid. Kent of land, 
 is the payment for the factor of nature, wage the payment for 
 the factor of labour, and interest — well, interest appeared to 
 have no substantial foundation if it also could not be inter- 
 
 preted as a payment for a third independent factor of produc- 
 tioiu It did not seem to be explained theoretically, nor — 
 what indeed might be more serious to the theorists in question 
 — to be justified practically. Thus it was that many a learned 
 thinker was driven into a corner, and preferred rather to shut 
 an eye to clear facts than to sacrifice the independent pro- 
 ductivity of capital, and with it the welcome basis for the 
 current theory of interest. 
 
 Facts certainly spoke with perfect distinctness. It was 
 impossible to deny that capital is no element in the proper 
 sense of the word, inasmuch as it itself springs from the 
 co-operation of nature and labour. Not only so, but by a 
 siugular irony of fate this had to be expressly proved — as it 
 had been by Adam Smith before them — by those very theorists 
 who maintained its- independent productivity. In their theor y 
 of price , in having to show how all prices resolve themselves 
 finally into rent, wage, and interest, they were forced . to 
 demonstrate in the most minute wav that concrete capital is 
 noj an elemen t ; that, for instance, copper and steel, which 
 serve as capital in the manufacture of watches, originate in the 
 co-operation of the natural mineral deposits, of the work of 
 miners, and of older capitals, which themselves have originated 
 in similar ways, and so on.^ In the face of this, to maintain 
 the independent productivity of what they had just demor- 
 strated to be a dependent and intermediate product, they were 
 
 ^ e.g'. Say, Traite, seventh edition, p. 344, 
 
 H 
 
98 
 
 FUNCTION OF CAPITAL IN PRODUCTION 
 
 BOOK II 
 
 driven to adopt vft ry singii lar expedients ^' The favourite ones 
 were obscurity and brevity . Instead of making an earnest 
 effort to bridge the yawning contradiction, they either did not 
 suggest the doubt at all, or, if a doubt had already been raised, 
 they dismissed it with some laconic phrase or other. A long 
 series of writers make no scruple about expounding capital on 
 one page as a factor of production “ de rived ” from nature and 
 labour, and on the next as a third ind ependent, Jactoi. of 
 production along with nature and labour.^ Mill has so far 
 yielded to the pressure of facts as to admit that capital is 
 itself the product of labour, and that its instrumentality in 
 production is therefore in reality that of labour in an indirect 
 shape. But with a quick turn he saves its independence. 
 “ Not the less,” he continues, “ does it require to be specified 
 separately. A previous application of labour to produce the 
 capital required for consumption during the work is no less 
 essential than the application of labour to the work, itself.” ^ 
 Th erefore, because labour must be applied twice, in 
 different stages of productio n, something else besides l abour- 
 must be recognised as the independen t condition of prod uctionj 
 Some writers, of course, treat the matter more seriously. 
 They do not evade the difficulty, but try to get a real solution 
 of it. They cannot overlook the fact that capital first comes 
 into existence through combination of simpler factors. Quite 
 correctly, therefore, they do not attempt to claim for capital 
 itself the character of an element ; but they still require an 
 independent support for interest. This they obtain by resolv - 
 ing capital into its elements, and fin ding jthaLJaesldes nature 
 ^nd labour, there is stiU a t h i rd inde pend ent element •. Senior 
 ^alls it A bstinenceT Hermann calls it the Use of Capital. These 
 attempts at solution, which I went into in detail and 
 pronounced upon in my former book. Capital and Interest, 
 were certainly not very happy. Hermann’s, in particular, is 
 singularly unfortunate in being obliged to explain the “ use ” 
 which capital gives as more elementary than capital itself — as 
 if the egg which the hen lays is antecedent to the hen ! 
 
 ^ Of older writers, e.g. B. Fulda, Grundsdtze der Ode, pol. or Kameralwissen- 
 schaften, second edition, 1820, p. 135 ; Sclidn, Neue Untersuchung der Natimial- 
 Oekonomie, 1835, p. 47. Of later writers Cossa ■ himself, Elementi, eighth 
 edition, p. 34 ; and Gide, Principes d’£c. Pol. 1884, pp. 101, 145. 
 
 - Book i. chap. vii. § i. 
 
CHAP, in 
 
 NOT AN INDEPENDENT FACTOR 
 
 99 
 
 Nevertheless as regards our present question these theories are 
 very instructive. They show that several of our most clear- 
 sighted thinkers prefeiTed to take refuge in the most hazardous 
 and artificial constructions rather than agre p in t,hp. c urren t 
 doctrine that capital itaelf. while originating in the co-operation 
 of nature and labour, is. all the same, an " indpppridp.nf'. ” fac.tnr 
 of production along with them ! 
 
 We mny confidently, then, strike capital out of the list of ^ 
 independent productiv e powers , as a portion of the English 
 school did long ago, and as the Socialists have done more 
 recently. I may say, however, that the manner in which they 
 have done so is not quite appropriate. In the instrumentality 
 of capital they see only the instrumentality of the labour 
 expended in producing it ; they explain it as “ previous stored- 
 up labour.” This is not correct. Capital — to keep the same ^ 
 form of expression — is “ stored-up labour,” but it is something 
 more ; it is also stored-up valuable natural power . It is the 
 medium through whicBTthe two original productive powers exert 
 their instrumentality. To the instrumentality of gold, which 
 is employed as capital in gilding the lightning-rod, the labour 
 of the miner, who finds the ore and refines it, is not the 
 only contributory : nature also has contributed her share in 
 depositing the valuable vein or placer. 
 
 Although, then, we have traced its instrumentality in pro- 
 duction to nature and labour, is capital itself not productive at 
 aU ? Certainly it is, in more than one sense of that too ambiguous 
 word.^ It is, first, “ productive ” because it finds its destina-'^ 
 tion in the production of goods : it is, further, productive*^ 
 because it is an effectual tool in completing the roimdabout 
 and profitable methods of production once they are entered on ; 
 finally, it is productive indirectly because it makes the adoption ‘s 
 o f new and profitable methods possible . One thing, however, 
 it is not ; jL-ia _not indeyendentlv productive in the sense on 
 which the most important part of the controversy turns. As 
 the old economist Lotz expressed it, briefly and succinctly ; 
 
 ■“ Of any independent labour in capital there is simply no 
 question.” ^ 
 
 ' See Capital and Interest, p. 114. 
 
 - Handhuch der Staatswirthschaftslehre, Erlangen, 1821, i. p. 66, in note. 
 
CHAPTEK IV 
 
 THE THEORY OF THE FORMATION OF CAPITAL 
 
 In our science there are three views in circulation as to the 
 formation of capital. " ^One finds its origin in Saving, a second 
 in Production, and a third i n both together. Of these the 
 third enjoys the widest acceptance, and it is also the correct 
 oim Put the formulawill have to be amplified to some 
 extent, and presented in a way that is, at once, clearer and 
 more true to life than has Usually been the case.^ 
 
 The dispute as to the share which Savi ng plays in the fo r mation of capital 
 is almost as old as economic scien ce. The theory which ascribed it the prominent 
 place was the first to appear. Already suggested by the Physiocrats, it was 
 formulated by Adam Smith in the often-quoted proposition, “ Parsimony and not 
 industry is the immediate cause of t he inc rease of capital ” ( Wealth of Nations, 
 book ii. chap, iii.) Supported by his authority it was for a long time almost 
 the only one that held the field, and, although in later times it has suffered many 
 reverses, it still finds some notable apostles : thus, among others, Mill — “ Capital 
 is the re.sult of saving ” (book i. chap. v. § 4) ; Roscher — “Capital is mainly the 
 result of saving ” {Grundlagen, § 45) ; Francis Walker — “ It arises sulely ou t of 
 savin It stands always for self-denial and abstinence” {Political Economy, 
 p. 67). But from a very early period there was sharp opposition to the thenyy.,. 
 first from Lauderd ale- {Inquiry, 1804, chap, iv.) ; then, after some time, from 
 the socialist theorists, Rodbertus {Das Kapital, pp. 240, 267 — “Just as the 
 capital of the isolated individual originates and increases, so does the national 
 capital, — only through labour and not through saving ”) ; Lassalle {Kapital und 
 Arbeit, p. 64) ; Marx {Das Kapital, i. second edition, p. 619). To these opinion^ 
 a great many recent writers of otlier schools more or less incline : thus, very 
 clearly and decidedly, Gide {Principes, p. 167) ; less decidedly, Klein wiichter (in 
 Schbnberg’s Eandbueh, second edition, p. 213), and R. Meyer {Das Wesen des 
 Einkennmens, 1887, p. 213) ; more by way of reconciliation, Wagner {Orundle- 
 gung, second edition, § 298) ; and, a little obscurely and confusedly, Cohn 
 {Grundlegung, 1885, § 257). Although, however, this tendency to ascribe capital 
 to labour is unmistakably rapidly gaining ground, that view which ascribes to. 
 saving a share in the form a tion of capit al is stillAlie view of the majority . But 
 the later representatives of this view are in the habit of rightly limiting it, and 
 
CHAP. IV. 
 
 SA VING AND PRODUCING 
 
 101 
 
 To put the matter, first of all, in its simplest conceivable 
 terms. Suppose a recluse working a .bsnlntely w ithout capital 
 — say some Eobinson Crusoe thrown on a lonely shore without 
 either tools or weapons. Being without capital he must at 
 first support hfe in the most primitive fashion, as, for instance, 
 by gathering berries which grow wild. Now what must happen 
 before he can get possession of his first capital, say a bow and ^ 
 arrow ? ^ 
 
 Let us put the first theory to the test. Is saving by" ^. 
 itsp.lf .qnfRcient to call capital into existence ? Certainly not, 
 
 With the one possession that he has — his wild fruits — our 
 Crusoe may save and stint as much as he please; he will^ . , . 
 accumulate a store of berries — goods for consumption — but 
 that will never give him a single botv or arrow. As we can 
 easily see, these must be positively produced. 
 
 Ts i>, .<;nffip.ipnt l.bpTi for tbp. nriOTnatinn nf Piipital that it 
 be produced ? Again, certainly not. Of course, once Crusoe 
 has got the length of commencing to produce capital, the 
 formation of capital is as good, as accomplished. But before 
 he gets that length, thpre is something else to be done, and 
 that something is by no means self-evident. Productive- 
 powers are to be set free for the proposed formation of capital^ 
 
 and this can only be done- as we shall see, through saving_ 
 
 The amoimt of original productive powers which our 
 Crusoe has daily at his command is equivalent — leaving 
 natural gifts out of account — to one day’s labour, which we 
 shall assume to be ten hours of labour. Suppose, now, that 
 the berries within reach of his hut are so scarce that a ful l 
 da y’.c! Iflbnnr nf tp.n'hours is neces sar y to provide as. jmuGb -food 
 as wEL just support him in bare life, obviously no formation of 
 
 capital is possible. There is no use advising him to produce 
 a bow and arrows. Producing requires time and strength, 
 and all the time and strength our Crusoe has is fully claimed 
 
 expressly emphasising the fact that saving alone is not sufficient, and that there 
 Tnii.st also be “labour, ” or “ devotion to productive purposes,” or such like — 
 which, indeed, may very well have been the true meaning of many of the older 
 adherents of the Saving theory, and only not expressed by them because of its 
 assumed obviousness. See, e.y., {Volksicirthschaftslehre, eighth edition, i, 
 
 § 133), Eicca-Salemo {Sulla Teoria del CapUale, chap. iv. p. 118 — “II capitale 
 deve la sua origine aU’ industria e al risparmio ”), Cossa {ElemcTUi, eighth 
 edition, p. 39), and many others. 
 
102 THEORY OF THE FORMATION OF CAPITAL book ii 
 
 already to keep him in life. To produce capital, then, may be 
 difficult enough without something else ; and what that is will 
 appear immediately on our varying a little the assumed facts 
 of the illustration. 
 
 Suppose there is such wealth of berrie s, that the result 
 of nine hours’ gathering is sufficient to support bare life . whUe 
 ten hours’ gathering gives a return such as to guarantee a 
 subsistence amply sufficient to maintain Crusoe in health and 
 strength. Obviously, h.e„has now a choice betwe en two lines 
 of condu ct. Either he may take advantage of the opportunity 
 thus offered to complete his provision, and consume each day 
 the fruits of an entire ten hours’ day of labour — in which case 
 it is perfectly clear that he has now no time and strength left 
 to make a bow and arrows ; or, although the productive power 
 at his disposal would enable him to live better, he may content 
 himself with the barest liv iag. which, as we said, can be 
 provided by the nine hours’ labour of gathering ; then, and 
 then only, has he a tenth hour free in which to make weapons 
 for future use. This amounts to saying, in other words, that, 
 before capital can actu ally be formed, the productive pnwe.rp 
 necessary to its making must be _by enernaebin g nn th e 
 Tn oment’a enjoyment . 
 
 To anticipate and avoid a mistake very apt to be made, it 
 must be said distinctly that this encroaching on the moment’s 
 enjoyment .need by no means invol v e down right privation. 
 With more productive labour, Crusoe’s choice would not lie, as 
 in the above illustration, between bare Living and comfortable 
 living but, perhaps, between comfortable and ample living. It 
 is not a question of the absolute insignificance of these claims 
 on the moment’s enjoyment, but on their relation to that 
 amount which I may indicate in the shortest and most 
 generally intelligible way by the word “ Income ” — -an expres- 
 sion, unfortunately^ not yet strictly enough defined in scientific 
 
 usage. 
 
 1 On the many divergent and contradictory readings of the conception of 
 Income, see E. Meyer’s Baa Wesen des Einkommens, 1887, particularly pp. 1-27. 
 I purposely avoid going into the controversy as to this conception, which Meyer’s 
 work, notwithstanding its many merits, seems to me to have by no means 
 adequately settled. Where 1 use the word Income in the sequel it i^ to be 
 understood, not in Meyer’s sense, hut in a sense very much in agreement with 
 pop ular nsag e^ 
 
CHAP. IV 
 
 SAVING OF PRODUCTIVE POWERS 
 
 103 
 
 productive powers should not be entirely claimed for t.ha 
 immediate consumption of the current period, but that a 
 portion of this endowment should be retained for the service 
 of a future period. But such a retention will undoubtedly be 
 called a real saving of productive powers. 
 
 A saving of nroductive powers, be it noted : for productive^ 
 powers, and not the goods which constitute capital, are the 
 immediate object of saving . This is an important point, 
 which must be strongly emphasised because, in the current 
 view, too little consideration is given to it. Man saves 
 consumption goods, his means of enjoyment ; he thus saven 
 
 productive powers, and with these finally he cam. 
 
 capital. ^ It is only exceptionally that capital itself is the 
 immediate object of saving ; it may happen in the case of those 
 goods which, by nature, admit of being used either for con- 
 sumption or for production, such as grain. To the extent 
 that a man withdraws such goods from immediate use in 
 consumption, his saving directly lays the foundation of capital. 
 
 To build on that foundation, of course, the negative element of 
 saving must have added to it the positive element of devoting 
 the saved goods to production, as intermediate products. 
 
 It is easy to show that every further increase of the 
 
 existing stock of capital is limi t ed by the same conditions 
 the first formation. Assume that for a month our Crusoe 
 consumes daily only so much fruit as he can gather in nine 
 hours’ labour, and devotes the tenth hour to making weapons. 
 
 As result of this thirty hours’ work he now owns a bow and 
 arrows, and jn them hp. has the possibility of making his 
 living much more easi ly and amply than before. Naturally 
 his desires widen. He wishes decent clothes, a house, all sorts 
 of things that minister to comfort. But for these he requires 
 the suitable intermediate products — axes, nails^ braces, etc. 
 Now we ask further what kind of conditions must be fulfilled 
 that Crusoe may obtain this new capital ? 
 
 This is very easily answered. If he makes use of the 
 improved circumstances, which he owes to the possession of 
 
 ^ Adam Smith’s celebrated proposition therefore — “Parsimony and not 
 industry is the immediate cause of the increase of capital ” — is, strictly speaking, 
 to be turned just the other way about. The immediate cause of the origi n of. 
 capital is production ; the mediate cause is j. previous saving. 
 
104 THEORY OF THE FORMATION OF CAPITAL book ii 
 
 the bow and ar rows, simply ^ increa^ his 
 smnpti<2n — that is, if he spends the whole labour time at his 
 disposal in the service of the moment, hunting, gathering fruits, 
 and sleeping, — not only is it impossible for him to acquire new 
 capital, but he will lo s e the o ld. Bows and arrows do not 
 last for ever. In a month’s time, we shall say, his arrows will 
 be spent, and his bow worn out. If, therefore, his capital is 
 to remain in existence, he must, obviously, employ at least one 
 of the ten hours in renewing his weapons, and, at the most, he 
 can employ nine only in gathering and hunting. 
 
 To put it in propositional form. To retain capital in 
 {/ existence, man must make over, and devote to the service of 
 the future, at least so much of the productive powers of the 
 current period as he has consumed, during the current period, 
 of the produce of forimr productive powers. ^ Or, to put it 
 in other words, the consumption of the current period is 
 limited by the produce of as many productive powers — present 
 and past taken together — as come into existence anew during 
 the current period. 
 
 Finall y.— i£ -an increase of capital is to become, - possible, 
 obviously a still greater proportion . of tha curre nt productiv e 
 powers must be withdrawn from the consumption of tb^ 
 pr esent, and transferred to the serv ice of Uie fu^re^ of his 
 ten hours of labour our Crusoe must devote one to renewing 
 his weapons, and less than nim& to gathering berries and killing 
 game, if he is to make the new capital he desires in what 
 remains free of his labour time. To put it generally, he must 
 curtail the immediate consumption of the current period to 
 such a point, that it uses up the produce of fewer (past and 
 present) productive powers than come into existence anew in 
 the same period ; he must, in a word, save productive powers. 
 
 All this is quite clear and simple ; indeed it is even a 
 l ittle too simple for our purpose- Robinsonades and pictures 
 
 ^ It k only in cases -wlLere, in th e meanwhile, the technignB of the partienlar 
 production has improved , that the transference of a less anionnt_of 4)rQdiicj±Ee 
 powers to the service of the future is sufficient. If, for instance, Crusoe learns 
 how to make in fifteen days those weapons which formerly had taken thirty 
 days, it is, of course, sufficient for the upkeep of the capital if he works only half 
 an hour daily at the repair of his weapons, and nine and a half hours can 
 be spent in directly obtaining a more plentiful maintenance without prejudic to 
 his economical position. 
 
CHAP. IV 
 
 SAVING OF PRODUCTIVE POWERS 
 
 105 
 
 of primitive circumstances are very good when the object is to 
 present clearly the simplest typical principles — to give a kind 
 of skeleton of economical procedure, — and to that extent, I 
 trust, our Kobinsonade also has done good service. But, 
 naturally, they cannot give us an adequate picture of those 
 peculiar and developed forms in which this skeleton clothes 
 itseU’ in the living actuality of a modern economic community. 
 And it is just at this point that it becomes important to fill 
 out the abstract formula with explanation and illustration 
 taken from Hfe. We shall, therefore, leave the lonely shore 
 of our Crusoe, and come to the industrial conduct of a. great- 
 nation with its millions of people. 
 
CHAPTEE V 
 
 FOEMATION OF CAPITAL IN A COMMUNITY • 
 
 Let US take the case of a community embracing tp.n Tnillirms 
 o f able -bodied persons. Leaying out of account the current 
 uses of land, so as not to cumber the statement unnecessarily, 
 the annual endowment of such a nation — its original productive 
 powers — thus amounts to ten million years of labour. Its. 
 accumulated stock of cap ital, we shall suppose , re presents, tha 
 fruit of thirty m illion labour -years (and a corresponding 
 amount of uses of land) invested during previous economic 
 years in intermediate products. Now look at the constitution 
 of this stock of capital more closely. 
 
 Every capital is, by its nature, composed of a mass of inter- 
 
 mediate products, and the common goal of all these products 
 is to ripen into consumption goods or means of enjoyment. 
 They reach this goal through the continuation of that produc- 
 tion process in the course of which they themselves have come 
 into existence. They are all, as it were.j a iL the way towards 
 the goal of human consumption. But the length of the 
 road which they have had to travel is different. This is 
 partly because the various branches of production adopt round- 
 about ways of various length : mining, for instance, or railway 
 building, takes a much more roundabout and lengthy method 
 than wood-cutting. But it is partly, also, because those goods 
 which constitute the community’s capital at the moment are at 
 various points on their respective roa^. Many an inter- 
 mediate product has just entered on a very lengthy roundabout 
 road, as, for instance, a boring machine, whose life-work it 
 will be to drive a gallery in a mine. Some are midwaY . 
 Others, again, like clothing stuffs ready for making into coats 
 
Fig.1. 
 
 1 
 
108 FORMATION OF CAPITAL IN A COMMUNITY book n 
 
 and mantles, are near the end of the journey their particular 
 production process has to take. Now the inventory of capital 
 lays a kind of cross-section through the production -processes. 
 
 thus unlike in length and unlike in stage of progress, and 
 intersects them, of course, at the most different points, just 
 as a national census lays a section through the paths of life, 
 and encounters and registers the individual members of the 
 nation at the most different stages of life. 
 
 Considered with reference to the varying distances at 
 which intermediate products lie from the goal of consumption, 
 the total mass of capital divides itself into a nnmhp.r of annual 
 
 classes or stages of maturity, which may he very appropriately 
 piGtnrp.d hy a. rlia gram of concentric annual circles . The out- 
 most circle (Fig. 1) embraces those goods which will be trans* 
 formed into goods ready for consumption. 'within the coming 
 year ; the second circle represents those goods which will 
 ripen into consumption goods in the year after ; the third 
 circle, those which 'will be ready the year after that, and so on. 
 In a community where production is not yet strongly capital- 
 
 istic, the inn er circles will rapidly contrn.c t (Fig. 2), because, 
 in such a community, very lengthy roundabout ways of pro- 
 duction, such as turn out their finished goods only after many 
 years, will be rare. In rich and well-developed communities, 
 again, there will be a considerable number of comprehensive 
 circles, and of these the inner ones will have a content that, 
 although relatively smaller, is not inconsiderable. 
 
 V This representation of the stages of maturity by concentric 
 circles is peculiarly appropriate on this account that it also 
 g vpry hi^ ppy expression to the quantitative relations of 
 these stage s. Exactly as the outmost of the concentric circles 
 possesses the greatest area, while the inner circles possess a 
 gradually decreasing one, does the first of these cla sses — that 
 nearest to the completion of the process — alway.s. by its very 
 nature, embrace the largest q u ota of the total mass of capital. 
 while a decreasingly smaller quota falls to the more remote 
 classes. There are _ two reasons for this. The first is that 
 the various branches of production generally adopt processes 
 of different lengths — lengths varying with the technical cir- 
 cumstances of each branch. Many complete the entire work 
 of production, from the preliminary processes to the turning 
 
CHAP. V 
 
 STAGES OF MATURITY 
 
 109 
 
 
 out of the finished product, within a year ; many require two, 
 three, and five years ; only a few have a production period 
 extending over ten, twenty, and thirty years. The result is 
 that in the highest classes — those farthest removed in time 
 from the finished product — only a few branches of produc - 
 tion are found : intermediate products, for instance, in 
 the tenth circle can only be provided by those branches of 
 production which have at least a ten years’ production period. 
 But the lower circles are filled, not only by those last-named 
 branches of production (for the intermediate products of these 
 very long processes must pass circle by circle towards maturity), 
 but also by those branches of production which have shorter 
 periods. Thus the quantity of intermediate products grows 
 larger and larger up to the first class, and to this first class 
 every branch of production, without exception, sends its 
 representativ e. 
 
 But there is still another circumstance that works in the 
 same direction. The ripening of intermediate products into 
 consumption goods demands a steady addition of current pro- 
 ductive powers. At each stage of the production process new *^ 
 labour is added to the intermediate productS- 3vh.ich h ave been 
 passed on to it from the previous stage, and they pass on to 
 the following stage in a more advanced state. In one stage 
 the intermediate product wool is changed, by the addition of 
 labour, into the intermediate product yarn ; that again in a 
 following stage, by the addition of labour, into the intermediate 
 product cloth, and so on. This has the natural result that, 
 within each branch of production, the amount of invested 
 
 capital increases with each advancing stage of the production, 
 
 or, what is the same thing, at every change into a lower 
 
 circle. Consequently not only are the lower circles, as has 
 been shown, supplied from more branches of production, but 
 they are supplied with relatively larger amounts of capital, 
 and this gives the lower classes a twofold numerical superiority 
 over the higher ones.^ 
 
 On these lines we may now put our illustration into 
 figures. To facilitate our survey we shall assume that the 
 
 ^ Durable productive goods, which give off their use gradually in the course 
 of several years, belong naturall y (in various parts of their content as uleful goods, 
 or in various annual circles of their activitvi to several circles simultaneously . 
 
no FORMATION OF CAPITAL IN A COMMUNITY book ii 
 
 total capital of th e communit y is comprised in ten yearly 
 circle. If thirty million labour-years are embodied in this 
 total capital (for simpbcity’s sake I again leave out invested 
 uses of land) we may assume the following division of the 
 circles. The 
 
 1st circle contains the intermediate products of 6 million labour-years. 
 
 2d 
 
 5 ) 
 
 55 
 
 55 
 
 5 
 
 55 
 
 55 
 
 3d 
 
 
 55 
 
 55 
 
 4 
 
 55 
 
 55 
 
 4 th 
 
 15 
 
 55 
 
 55 
 
 3-5 
 
 55 
 
 55 
 
 5 th 
 
 11 
 
 55 
 
 55 
 
 3 
 
 55 
 
 55 
 
 6th 
 
 5 ) 
 
 55 
 
 55 
 
 2-5 
 
 55 
 
 55 
 
 7 th 
 
 51 
 
 55 
 
 55 
 
 2 
 
 55 
 
 >5 
 
 8th 
 
 55 
 
 55 
 
 55 
 
 1-7 
 
 55 
 
 55 
 
 9th. 
 
 15 
 
 55 
 
 55 
 
 1-3 
 
 55 
 
 55 
 
 IQth 
 
 51 
 
 55 
 
 55 
 
 1 
 
 55 
 
 55 
 
 In the normal course of things the outmost circle hecnme.ci 
 divided off from capital each year, and is changed into con - 
 sumption goods , but the succeeding circles press forward, each 
 circle, by the addition of new labour, advanced one stage, 
 both as regards nearness to maturity and amount of capital 
 invested. The first class, therefore, is changed into consump- 
 tion goods, the second class into the first, the third into the 
 second, and so on. Now the following important questions 
 suggest themselves. What use must the community make 
 of the original productive powers which come anew into its 
 possession during the current year — that is to say, the new 
 ten million labour-years if, for simplicity’s sake, we still leave 
 out uses of land — in order to conserve the capital that is in 
 existence ? And how must it act to increase that capital ? 
 
 I These questions are easily answered. To keep the capital 
 at the present level the community must not spend more than 
 f our milHon labour-years in presen t- time production. ^ 
 
 With the remaining six miUion labour-years the stock of 
 
 ^ Under this name {Gegenwartsproduktion) I mean to group, for the sake of 
 shortness, all those acts of production which agree in this, that the original prn - 
 d uctiye powe rs which are put fo rth^jnthes e acts reach their goal, and tunLc mt 
 consumption goods, within the s ame economic period . This applies to two kinds 
 of productive acts-; partly and principally to those of the final stages, the labour 
 required to transform the first circle of capital into consumption goods {e.g. agri- 
 cultural labour, the labour of the miller, baker, shoemaker, tailor, etc.), partly 
 to industries where the production process is short , and can be carried through 
 from beginning to end within a single ecohomic period. 
 
CHAP. V INVESTMENT OF PRODUCTIVE POWERS 
 
 111 
 
 capital, reduced by the separating ofi' of the first year’s circle, 
 must be brought up i n quantity and quality to its former 
 kvel. This demands that the nine other yearly circles be 
 brought each one step nearer maturity by the addition of the 
 requisite labour, and that the tenth class, which is now non- 
 existent, be new created. The amount of labour necessary for 
 this may be exactly determined. The former second class, in 
 which as yet only five million labour-years have been embodied, 
 needs, in order to make it entirely equal in value to the former 
 
 class 
 
 ij 3.11 
 
 addition of 
 
 
 1 million labour-years. 
 
 The 
 
 3d class needs an 
 
 addition of 1 
 
 55 
 
 55 
 
 >5 
 
 4th 
 
 55 
 
 55 
 
 0-5 
 
 55 
 
 55 
 
 
 5th 
 
 55 
 
 55 
 
 0-5 
 
 55 
 
 55 
 
 
 6th 
 
 55 
 
 55 
 
 0-5 
 
 55 
 
 55 
 
 )> 
 
 7 th 
 
 55 
 
 55 
 
 0-5 
 
 55 
 
 55 
 
 55 
 
 8th 
 
 55 
 
 55 
 
 0-3 
 
 55 
 
 55 
 
 55 
 
 9th 
 
 55 
 
 55 
 
 0-4 
 
 55 
 
 55 
 
 55 
 
 loth 
 
 55 
 
 55 
 
 0-3 
 
 55 
 
 55 
 
 And the creation of a 
 
 new 10th 
 
 
 
 
 class requires the labour of 
 
 1 
 
 55 
 
 55 
 
 
 
 
 In all 
 
 6 
 
 55 
 
 55 
 
 It should be noted that it is not a matter of indifference 
 
 at what point, in which partiV.nlar circles, the six: million 
 
 labour-years are spent . If, for instance, they were to be spent 
 in making intermediate products, but not according to the 
 above distribution — say they were aU spent in making inter- 
 mediate products of the first circle, which would come to 
 maturity in a year’s time — the disadvantage would be two- 
 fold : first, the production processes which had only got the 
 length of intermediate products of the higher classes would be 
 brought to a standstil l ; and second, as we know, the shorter 
 methods would be loss prndnctivp.. With six million labour-years 
 invested in a one year’s process, the present would hand over 
 to the future the same number of productive powers indeed, 
 but — what in the last resort is the important thing — these 
 powers would, in virtue of their one year’s process, be capable 
 of producing only a smaller amount of products than the 
 present has received for consumption from the past. The 
 next .year’s production, therefore, would necessarily be reduced, 
 
 and the stock of capital would not be maintained at its former 
 level 
 
112 FORMATION OF CAPITAL IN A COMMUNITY book i 
 
 A^ain. if the present stock of capital is to be increased, it 
 is evidently necessary that the community give up a portion 
 
 of the consumption which it might, havo enjoyp.tj- — while still 
 I maintaining the stock at its former height ; — that it withdraw 
 V/ a portion of the productive powers at its disposal from the 
 service of the present ; that it save and employ them for 
 additional future production. Productive powers may be 
 saved in various ways. (1) Other dispositions remaining 
 unchanged, a smaller portion of the current productive 
 powers — say three instead of four million labour -years — 
 may be employed in immediate “ present -time production .” Or 
 (2) the arrangements for saving may have been already made, 
 and the total capital organised in such a way that the circle 
 which is now passing over into the stage nf full malnrity cap - 
 tains a less quantity of capita l, say five instead of sLx million 
 labour -years. Inasmuch, then, as only five instead of six 
 million labour -years are now required for the replacement of 
 capital, there remains — if, as before, four out of the ten million 
 labour-years which are the current productive endowment are 
 spent in “present-time production” — one million over, available 
 for the -formation of pew capita l. Or (3) it is conceivable that, 
 at the last moment, the disposition of the capitn.1 - sh ould be so 
 ajtered that less passes into the stage o f _ full maturity than 
 was originally contemplated. It is a familiar fact that there 
 are many goods which admit of being employed in a 
 variety of ways. This often makes it possible to put back 
 goods which have already attained full maturity, or which 
 stand quite near to maturity, by several stages. Gxaic, for 
 instance, instead of being ground for food purposes, may be 
 stored for seed, or used in distilling ; coal may heat the blast 
 furnace instead of the domestic oven ; iron may build machinery 
 instead of park railings ; and so on. If, by thus disposing 
 goods differently, the amount of capital which arrives at 
 maturity becomes reduced from six to five million labour- 
 years, there will, after four million labour -years have been 
 expended in “ present-time production,” be one million labour- 
 years free for the making of new capita l. 
 
 All three methods, then. — of which, in practical life, the 
 s econd is most common, and the first is least so, — ‘agree in one 
 essential point, that during the current year the produce of 
 
CHAP. V 
 
 IN THE SOCIALIST STATE 
 
 113 
 
 ■millinn la bour-years only is constimed, while ten million 
 labour- yeaxs come forward ; that accordingly, in other words, 
 one m illion labour-years of the current productive endowment 
 are saved.^ 
 
 Hitherto we have spoken of the formation of capital by a 
 community as if in such a community there was one single 
 economy, guided by one individual wUl. Of course this is not 
 the case. It remains, therefore, for us to show how, in a 
 community where industry is divided up and managed by 
 many heads, the productive forces that conduce to the forma- 
 tion of capital are actually disposed, and to inquire whether , 
 as we have maintained, these dispositions presuppose “ saving.” 
 
 And since it is claimed, and not without reason, that universal 
 truths should be proved to hold not only in the present and 
 historical organisation, but in every social organisation, I pro- 
 pose in this inquiry to look both at the actual economic form, 
 wliich is pre-eminently individualistic, and at that form which 
 is at least conceivable, the sociahstic. We may begin with 
 the latter as being the easier from the standpoint of our 
 present problem. 
 
 In a socialist state from which private capital and private<^ 
 undertaking were banished, and where the entire national 
 production was organised by the state, the — frirmatinn pf 
 capital, and the •previnns saving of productive powers necessary 
 theiat p, would be control! pri nfiRpiflUy The method would 
 
 ^ If, during the current year, there should be introduced such improvements 
 in the technique of production that the capital, which had taken six million 
 labour-years to produce, could be fully replaced by an expenditure of five million 
 labour-years, there would be a change in the figures of our illustration, but the 
 principle would remain the same It would now be possible to preserve the 
 capital already in existence, even if five million labour-years were spent in 
 present production, and if the produce of eleven million labour-years in aU were 
 spent in immediate consumption (see above, note to p. 104). But in an^ case tlm 
 formatjuu-of new capital would require the renunciation of some portion of that_ 
 
 immediate consumption which would be possible i f it were only wished to preserve 
 capital at the same level ; in other words, would require that a portion of the 
 “income,” which might be consumed without diminishing the stock of capital, 
 be not consumed but saved. Moreover, if technical improvements did not con- 
 tinue to be made, then, after some years — that is to say, when the capital pro- 
 duced according to the old methods of production was quite used up, — the old 
 figures would come true again ; capital tvould be kept at the same level if in 
 _any period the produce immediately consumed just corresponded to the pin- 
 
 ductive powers which came forward anew in the same period. 
 
 I 
 
114 FORMATION OF CAPITAL IN A COMMUNITY book ii 
 
 simply be to put a considerable proportion of the national 
 workers to very lengthy processes, whereby the -makirig of . 
 capital, in the form of intermediate products, would . be very 
 ^eat. and the aTn oi^^it. nf ma tured profiucts iu the future would 
 l 6e much increased. Many workers, relatively speaking, would 
 be put to mining, railway-building, regulation of rivers, machine- 
 making, and the like, and few to wine-growing, silk-spinning, 
 lace-making, beer-brewing, cloth-making, and the like. The. 
 people would thus be compelled to,, save, by pres sure from 
 above, inasmuch as, of the national production thus conducted 
 by the state, in each year relatively few goods would b e put 
 at__ t.heir disposal for immediate consumpt ioji: — less, that is to 
 say, than might be annually produced and consumed if the 
 existing stock were merely to be maintained. The productive 
 powers left free would be invested in lengthy capitalist pro- 
 cesses of production. 
 
 Somewhat more complicated, but still easy to grasp in 
 principle, is the procedure in the individualistic organisation of 
 society as we find it in the present day. Here, in the first, 
 instance, it is the undertakers who decide how the productive 
 powers, as they come forward annua lly , shall b e employed, and 
 they thus decide the direction which the national production 
 takes. But they do not decide it at their ple asure ; they 
 '^fo llow impulses given by the pr ice s of products. Where lively 
 demand promises a profitable price they extend their produc- 
 tion, and curtail it in those kinds of goods where failing 
 demand can no longer take off the supply, and the prices fall 
 below a paying level. Extension and contraction of supply 
 continue till such time as production has adapted itself to the 
 desire for the particular commodities. Tp tbc l ast resort. 
 therefore, it is not the undertakers who decide the direction of 
 
 national production, but the consumers, the “public” All 
 depends on the effective desire they exert by means of their 
 income. The income of a people is, in the long-run, identical 
 with the return of its production. The circle that represents 
 a year’s income coincides, roughly,^ with the circle that re- 
 
 1 I have neither time nor desire to go into subtle distinctions here, although 
 there is material enough for them. Interesting investigations into the relation 
 between national product and national income — although I cannot altogether 
 agree with them — may be found in R Meyer’s book, pp. 5, 84. See also the 
 investigations of Lexis (which appeared while the present volume was passing 
 
CHAP. V 
 
 IN THE INDIVIDUALIST STATE 
 
 115 
 
 presents a year’s return of its productive powers. If every 
 individual in the community were to consume exactly his 
 
 year’s inoome in the form of consumption goods, there would 
 arise a demand for consumption goods which, through the 
 agency of prices, would induce the undertakers so to regulate 
 production that, in each year, the return of a whole year’s 
 circle of productive powers would take the form of consumption 
 goods. If ten million labour -years (and the corresponding 
 uses of land) form the annual endowment of a people, and this 
 people wishes, to consume, and does consume, the whole of its 
 income in the form of consumption goods, it is a necessity that 
 the produ pp. of t he whole ten million labour -years (together 
 witli the corresponding uses of land) be changed each year 
 into the form of consumption goods . In this case there is no 
 productive power left to dispose of in increasing capital, and 
 capital only remains .a s it was. 
 
 If, on the other hand, eacit individual consumes, on the 
 average, only three-quarters of his income, and saves the rest, 
 obviously the wish to buy, and the demand for, consumption 
 goods will fall. Only thrc p-fniirtbs of thp. f ormer, consumption 
 goods-wil l find demand and sj le>. If the undertakers, however, 
 were for some time to continue the old dispositions of produc- 
 tion, and bring to market consumption goods to the amount of 
 ten mi llion labour -years, the over -supply would very soon 
 press down the price, business would become unremunerative, 
 and the pressure of loss would compel the undertakers to 
 adapt their production to the changed circumstances of 
 demand. They will now provide that, in one year, only the 
 produce of seven and a half million labour-years is transformed 
 into consumption goods (whether it be by the maturing of the 
 first class, or by adding to “ present-time production ^), and 
 the two and a half millions wliich remain of the current year’s 
 endowment may and will be spent in the increasing of capital. 
 
 I- say “ will be .s pent.” for an economically advanced people 
 does not hoard.- but puts out what it saves- — in the purchase of^ 
 
 through the press), entitled Uehcr gewisse Werthgesammtheiten und derm Bezieh- 
 ungen zwm, Geldwerth {Tubinger Zeitschrift, forty-fourth year, part ii. p. 221), 
 where also the yearly “consumption sum.” “production sum.” and “primary 
 
 income sum’’ are treated as “quantitatively, approximately equal ” amniints. 
 
 ^ The change of disposition will, as we have seen, be made essentially easier 
 
 by the adaptability of many forms of capital to various uses. 
 
116 FORMATION OF CAPITAL IN A COMMUNITY book ii 
 
 valuable paper, in deposits in a bank or savings-bank, in loan 
 securities, etc. In these wavs the amount saved becomes part 
 Qf productive credit : it increases t he purchasing power of pro- 
 d.ucers for prod uctive purp oses ; it is thus the cause of an extra 
 demand for means of production or intermediate products ; 
 and this, in the last resort, induces those who have the regula- 
 tion of undertakings to invest the productive powers at their 
 disposal in these intermediate products. 
 
 We see, therefore, as a fact, an intimate connection bg,- 
 
 tween saving and formation of capitah If no individual saves, 
 the people, as a whole, cannot accumulate capital, because the 
 great consumpt of consumption goods forces the producers, by 
 the impulse of prices, so to employ the productive powers that, 
 every year, the produce of a whole year’s endowment is 
 demanded and used up in the shape of consumption goods, _ 
 B.ud no prndnp.t.iv e powers are left free for the increasing of 
 ca pital . But if individuals save, the altered demand, again 
 
 m 
 
 ilAAAUlAAi) . 
 
 X 
 
 CkVJlJ^ 
 Ccrwr, 
 
 through the impulse of prices, compels the undertakers to dis- 
 pose of the productive powers differently ; fewer powers are 
 put, each year, at the service of the present, and thereby 
 is increased the amount of those productive powers whose 
 produce will be found in suspense as intermediate products ; in 
 other words, the economical capital will be increased with a 
 view to an increased consumption in the future. 
 
 JSTow there is stiU a third possibility. Individuals may 
 consunle, on the average, more than their income : instead of 
 saving they may waste their parent sum of wealth . Accord- 
 ing to our theory, this must lead to a diminution of the 
 community’s capital, and, as a fact, it does so. The steps of 
 the process are as follows. By the prevailing extravagance 
 more than a year’s income of the community, and, therefore, 
 more than the produce of one year’s circle of productive powers, 
 is demanded in the shape of consumption goods. Production. 
 compelled by the impulse of pr ices, yields to the deinand. 
 
 V^or instance, the former disposition was that the first circle, 
 with its six million labour -years, should mature during the 
 current year, and that, of the ten million labour -years that 
 form the current endowment, four millions should be spent in 
 “ present- time production,” and the other six in replacing the 
 capital consumed. Now we shall suppose that, through the 
 
 'I 
 
 /W 
 
 
 
CHAP. V 
 
 NO MYSTERY ABOUT IT 
 
 117 
 
 
 extravagant manners of the citizens, the year’s demand for 
 consumption goods rises till it requires the produce of twelve 
 million labour-years. The undertakers will act in something 
 like the following manner. Of the current labour endowment 
 they will invest, perhaps, not four but five million labour- 
 
 years in present production, and, in correspondence with this, 
 the amount devoted to the replacement of capital will shrink 
 from six to five millions. This will cover one million of the 
 extra amount required. At the same time, by differently dis- 
 posing of such goods as allow of more than one employment, 
 they will perhaps divert the produce of another million of 
 labour-years from a more remote class into the first cla^jSj^aud^ 
 thus add it to the consumption of the current year. This will '' ' 
 cover the second million of the extra demand. The com - 
 munity now receives and consumes what it desires,, the pro- T ^ /T ^ 
 duce of twelve million labour-years in the form of consumption t 
 goods hut it does so at the expense of the stock of capital. 
 which is insufficiently replaced, and so diminished by two 
 million labour-years.^ 
 
 Possibly I have wasted too many words in proving a truth 
 so obvious that no thinking man unskilled in science would 
 ever doubt it. Every child knows that a piece of capital, say 
 a hammer, must be produced if it is to come into existence. 
 
 And to every simple man it is obvious that no stock of capital 
 can he made, or can increase, if men regularly consume their ^ 
 
 whole available income ; if, in other words, they do not save. 
 
 It was reserved for the sharp and subtle wits of learned 
 theorists to suggest the first doubt about it. This, however, 
 it would have been difficult to do if, instead of dogmatising 
 on the formation of capital, they had attempted to give a 
 complete and fai thful repre.senta.tion of the process by which, 
 capital is formed . Here lies the entire, but almost the only, 
 difficulty of these and many other economical doctrines ; and 
 this suggests, I might add, the reason whj^' so many abstract 
 
 ^ Viz. six million from the original proyision of the first circle, one million 
 diverted and added to that by changed disposition, and five millions from the 
 current labour endowment. 
 
 ® The stock originally embraced the return of thirty million labour-years ; it 
 now gives seven millions to the consumption of the current year, and it receives 
 only five millions to replace them, whereby it falls from thirty to twenty-eight 
 million labour-years. 
 
118 FORMATION OF CAPITAL IN A COMMUNITY book ii 
 
 deductions are discredited and fail of result. It is not the 
 deductive method that deserves the distrust, but the persons 
 who misap-ply it. Vulgar errors in thought, indeed, are quite 
 exceptional among capable thinkers; and here the fault lies 
 mostly in this, that the economists in question could not put a 
 sufficiently clear and life-like picture before their minds- of the 
 circumstances and processes which they introduced into their 
 deductive arguments as assumptions, or, at least, did not keep 
 it persistently enough before them through all stages of the 
 deduction. Hence, losing touch with life, they began to make 
 deductions, not from truth of facts, but from words of formulas, 
 and so fell without knowing it into the emptiest dialectic. It 
 is because so many economists, as it seems to me, have made 
 this mistake, that I risk being tedious rather than being sus- 
 pected of sophistry. 
 
CHAPTER VI 
 
 POSSIBLE OBJECTIONS 
 
 It is perhaps advisable to supplement our positive statement 
 by a brief critical consideration of the most important objections 
 that might be urged. Two of these appear to me particularly 
 worth noticing. TLp. firgf-. is that the majority of goods which 
 constitute t^aoital are, by nature, quite unfit ted tn iTnTnpdifltp. 
 consumption There is, therefore, no sacrifice in withdrawing 
 them from a use which they could never serve. Indeed, it is 
 ridiculous to speak of the “ non-consumption ” of steam-engines 
 and land improvements, of roofing tiles and bars of metal, as 
 an act of saving or abstinence.^ 
 
 To me this seems a somewhat cheap, but still perfectly 
 
 goo d, argument against those who formula te the theory of 
 saving superficially or falsely. But, as against the essence of 
 the theory, it proves nothing. If any one is stupid enough to 
 interpret the theory of saving as meaning that finished capital, 
 in its form as concrete capital, must be “saved,” he must 
 submit to the retort that man cannot eat iron machines.^ But 
 this is not at all the meaning of any thoughtful representative 
 of the theory. What is maintaiped is only that, without 
 saving, capital cannot he made or increased : that saving is as ^ 
 
 indiappusaLIp a npnrlif.ipn nf thp formatinu nf ca pital , 
 
 And this is literally correct. The machines themselves have 
 
 ^ This iH v ery strongly pnt by the Socialist writers, as, e.g., Lassalle {Kapital 
 und Arbeit, p. 69) ; Rodbertus (ZJas KapUal, p. 271). In a somewhat diluted 
 form the same doctrine appears in Wagner {Gruvdlegung, second edition, p. 600), 
 who makes a distinction between goods in which the peculiarities of capital are 
 inherent, and those in which they are not. The former are not, at least “ directly .” 
 objects of saving. Similarly Kleinwachter (Schbnberg’s Handbuch, first edition, 
 p. 173). * Lassalle. 
 
120 
 
 POSSIBLE OBJECTIONS 
 
 BOOK II 
 
 not been saved, but built. B ut in order to build them. 
 men had previously to withdraw the productive powers 
 necessary to building them from the service of the present ; 
 
 they had, therefore, in the strictest sense of . the term, to 
 save them.^ 
 
 It may serve towards the settling of this controversy to 
 remark that t he idea of sacrifice, of renunciation, and thus of 
 moral desert, need n ot be associated wit h the conception of 
 saving .^ There may be sacr ifice in saving, and it may be 
 praiseworthy, but not at all necessarily. A man with a small 
 income will, of course, feel it a sensible privation, and it will 
 require strong self-denial in him to lay past anything ; while 
 one who has an income of £100,000, and is content to con- 
 sume one half of it, has little claim to be considered a hero of 
 asceticism because he saves the other half as capital. It is 
 
 / simply the fact of a saving that is indispensable to tbp. forma- 
 ti on of capital ,: whether there is sacrifice and moral desert in it 
 or not is all the same to the result. And it follows from this 
 that the theoretical truth, that saving ” is necessarY to the 
 formation of capital, cannot and must not be used to justify. 
 
 '^either morally or socio- politically, all and every taking of 
 
 1 In the second edition of Schdnberg’s SarndbucJi (p. 214) Kleinwachter comes 
 a long way nearer our conception in assenting to it, as regards at least one of 
 the chief forms of capital — tools of production. He allows that the making of 
 such tools “ always involve s, to a certain extent, the renunci ation of an immediate 
 enjoyment ,” because the materials which are made use of in making the tools of 
 production might have been employed in making some kind of consumption 
 goods ; and thus there is no reason for objecting to call such a renunciation of 
 enjoyment by the name of Saving. But it is different, he says, with the materials 
 of production. Such thin gs as raw wool, stone, and lime, etc., could not in any 
 way be objects of direct consumption, and so could not be saved ; they must be 
 looked on, therefore, economically as products of labour only, and not as the 
 result of saving. In this Kleinwachter is not logical. As regards the tools of 
 production he, quite correctly, does not consider whether the finished tools them- 
 selves might have been consumed, but whether, by the instruments from which 
 the tools were made, any consumption good might have been made ; and because 
 this is the case he answers the question as to saving in the affirmative. But if 
 he had kept to this line of thought as regards the materials of production, he 
 must have seen that, bv means of the same productive nowera as man uses to 
 quarry stone, to build a house, or obtain lime for mort ar, he might have made 
 h imself goods for immediate consumption.. — e.g. hunted wild animals or caught 
 fish, — and that here, consequently, on exactly the same grounds and in exactly 
 the same way as in the case of tools, saving does come into the question. 
 
 - See above, p. 102. 
 
CHAP. VI 
 
 SAVING NOT SACRIFICE 
 
 121 
 
 interest This i.s another instance of tliat, p,nnfuain,cr of the 
 theoretical with the socio-political problem of interest which I 
 adverted to in another place ^ as having done so much harm. 
 One side mixed up the theoretical doctrine that the formation 
 of capital must be preceded by saving, with the moral judgment 
 that interest is justified as the “ reward of abstinence,” and the 
 other side, which saw, quite correctly, that interest could not 
 be justified in such general terms, was misled, by the same 
 confusion of the problems, into denying not only the false 
 socio-political deduction but the true theoretical premiss. 
 
 If these two problems are kept distinct it will help us to 
 give both parties their due. To Eodbertus and Lassalle we 
 may grant at once that saving need not be moral heroism, and 
 therefore is no sufficient socio-political justification of interest ; 
 but we must stand for the recognition of the theoretical truth 
 that the fact of saving is in any case required to the formation 
 
 of capital 
 
 A second objection lavs emphasis on the fact that, for a. 
 
 man to be able to accumulate capital, he must ac/iuire. mn'ce. 
 than he uses, and draws the conclusion that it is essentially 
 the productmty of labour — industriousness and not abstinence 
 — to which the formation of capital is due. Thus Eodbertus 
 says, in so many words, that if, in the beginnings of economic 
 development, an “ isolated worker has no time to make a tool 
 because he must always live from hand to mouth,” the blame 
 lies simply in the productivity of labour being too small. If, 
 later, this producti%T.ty increases so much that, say, eight 
 hours’ labour is sufficient to produce the day’s maintenance, 
 then “ from the labour time, which up till now he had to devote 
 entirely to make what was absolutely necessary, he has a 
 portion over for other labour, and it is this spare labour which 
 he is now able to devote to the making of a tool.” And from 
 this quite correct consideration Eodbertus draws the conclusiop 
 tha,t it is only the increasing of the productivity of labour, and 
 
 not saving, which makes the p.xi.stencp. nf snob a prim ary rapital 
 possible .^ And stiU more briefly and strongly does Klein- 
 wachter give expression to* the same idea when he says : “ He 
 who transfers a portion, say a half, of his revenue to the bank 
 is merely industrious. He might, for instance, by a five hours’ 
 
 
 * Las KapUal, p. 242. 
 
 - See Capital and Interest, p. 3. 
 
122 
 
 POSSIBLE OBJECTIONS 
 
 BOOK II 
 
 day of labour earn his bare maintenance, and devote, say, 
 every afternoon to his recreation or enjoyment ; instead of 
 which the man works ten hours a day, and regularly carries 
 what he earns in the afternoon to the savings-bank.” ^ 
 
 ■J I think this objection is very easUy met. Tt is simply 
 not correct to say that the man is “ merely industrious. ” He 
 is industrious and saving. If he were simply industrious 
 he would, every day, spend the produce of the afternoon’s 
 labour, along with the produce of the forenoon’s labour, in 
 immediate enjoyment of life. That he does not do so is 
 
 because he is saving as well. I freely admit that greatei 
 industriousness, causing a return far exceeding necessary require- 
 ments, and, similarly, greater productivity of labour, very 
 much facilitate saving, just as I admit also that, without 
 acquisition, saving, as weU as formation of capital, is absolutely 
 impossible. But I must as emphatically claim recognition of 
 the fact that the greatest acquisition could not lead to the 
 formation of capital if a portion of it were not withdrawn from 
 present use and “ saved.” Production and Saving form two 
 vicqually indispensable conditions of the formation of capitaL 
 
 and it is only dialectical one-sidedness — which, unfortunately, 
 has already played much too great a part in the doctrine 
 of capital — that could deny the co-operation of either of 
 them.^ 
 
 ^ But does not this involve me in contxarliV.t.inn with the 
 
 proposition so ea rnpstly mnl-pnflpd fr»r in lagt. nhpptp.r, that all 
 goods (and consequently all capital! p roce ed from two elements^ 
 of which saving is not one, viz. from nature and labour ? ® 
 Certainly it does not, It is not my intention to do as Senior 
 
 ^ Kleinwachter, in Schonberg’s Handhuch, second edition, p. 215. 
 
 * A very striking illustration of these words may be found in the already- 
 mentioned utterances of Rodbertus on the subject. On p. 242, from the fact that, 
 if the productivity of capital is too small, there can be no saving and no forma- 
 tion of capita], he contents himself with drawing the quite correct conclusion 
 that “ necessarily some other element besides saving must intervene.” Thus he 
 ascribes to saving its proper place, as not suffici e nt by itse lf, but.^ all the same, as_ 
 a facUir^ o f the formation of c apital. It is only on p. 243 that the fact of a 
 certain degree of productivity of labour being indispensable is dialectically 
 changed into the statement that only the increase of productivity, and not saving, 
 makes the formation of capital possible. 
 
 ® A similar objection was urged by the old economist Lauderdale against the 
 Saving theory, Inquiry, pp. 207, 272. 
 
CHAP, VI 
 
 IS SA VING PUREL Y NEGA TIVEf 
 
 123 
 
 did/ and try to make Saving a third factor in production 
 along with Nature and Labour. Tt does not stand beside these 
 factors, but behind them. It does not share with them in 
 the work of production in such a way that any part of the 
 same is due to it solely and peculiarly ; it only effects that the 
 productive powers, nature and labour, which in any case must 
 do the whole work of production, are directed straight to this 
 and no other goal — the production of capital and not of con- 
 sumption goods. In a word, it has its nlace. not among tl^ 
 means of production, but among the motives of production- — 
 
 the motives which decide the direction of productiom The 
 proposition, then, that nature and labour are the only true 
 productive powers, can stand perfectly well beside the wider 
 assertion, that, if capital is to come into existence at all, there 
 must, first, hp. certain, intp.llop.tual dispositions through which 
 renunciation is made of a portion of the immediate consump- 
 tion that is otherwise possible ; in other words, there must be 
 “ Saving.” 
 
 Saving, it is objected again, is a “non -consu mption ” — 
 s omething purely negative : and a pure negation can bring 
 forth nothing.^ To my mind there is more dialectic than truth 
 in tins argument. Is it quite correct to say that saving is some- 
 thing purely negative ? How comes it, then, that, although 
 nothing is easier than a “ pure not-doing,” so many people feel 
 saving an uncommonly difficult and disagreeable thing ? In 
 truth, saving is a mental business ; and often, indeed, though 
 
 ^ Political Economy, third edition, p. 57, where three great agents or in- 
 struments of production are distinguished — LahfliiL,— J!Iat»iaL_AgentSj_an^ 
 Abstinence. 
 
 ^ Marx, Bos Kapital, second edition, i. p. 61 9, in note (English translation, 
 p. 608) : “It has never occurred to the vulgar economist to make the simple 
 reflection, that every human action may be viewed as ‘ abstinence from its 
 opposite ^ Eating is abstinence from fasting, walking abstinence from standing 
 stUl, working abstinence from idling, idling abstinence from working, etc. 
 These gentlemen would do well to ponder, once in a way, over Spinoza’s Deter- 
 mxtwiio est Negatio.” Gide, Prindpes d'ie. Pol. p. 168: “Un act purement 
 negatif, une abstention ne saurait produire quoi que ce soit. . . . Sans doute on 
 pent dire que si ces richesses avaient ete consommees au fur, et a mesure qu’elles 
 ont pris naissance, elles n’existeraient pas k cette heure, et qu’en consequence 
 Tepargne les a fait naitre une seconde fois. Mais k ce compte, il faudrait dire 
 qu’on produit une chose toutes les fois qu’on s’ahstient d’y toucher et la non 
 destruction devrait etre classes parmi les causes de la production, ce oui serait 
 
 une singuliere logique.” 
 
124 
 
 POSSIBLE OBJECTIONS 
 
 BOOK II 
 
 not always, a veiy troublesome mental business, preceded by 
 long deliberation and conflict between contending motives. 
 This, of course, does not constitute an act of production, and 
 the representatives of the above dialectical objection are, 
 in the end, quite right in raising it as an argument against 
 those theorists who would dignify saving by the name of a third 
 factor in production. But, indeed, simply mental a,s sa,ving 
 may be. it is. sii fRm'p.nt to effect, nally^-filL I.Vip. rnip which wp, 
 have assigned to it in the formation of capital, viz. exerting 
 an influence on the direction of production. 
 
 For the rest, whether it be a “ pure negation ” or not, we 
 can, in no case, allow dialectical considerations to interfere with 
 establishing important scientific facts. And it is an import- 
 ant scientific fact, which must be reiterated all the more 
 emphatically that it has been disputed, that the progress of 
 capital stands in a causal relation with the extension of the 
 immediate claims put forward by individuals and peoples. 
 
 Whatever body — be it an individual or a people — extends the 
 claims of the moment so far as to exhaust, during the current 
 period, the entire amount of consumption goods which its 
 income makes possible for the current period, can neither 
 make new nor increase old capital ; and this fact finds accurate 
 and straightforward expression in the proposition that saving 
 is an indispensable condition of the format ion of capital .^ 
 
 Suppose now that we have succeeded, after considerable 
 trouble, in establishing the proposition that capital comes into 
 existence through saving and devotion to production of what is 
 saved, we have still got but half the answer to our inquiry as 
 to the formation of capital. We have now to face the further 
 question : Dn what does it depend that people can, will, and , 
 ^ actually do save and produce intermediate products ? Strictly 
 speaking, this second question is the more important of the 
 two ; it noints to the impelling and working forces in th , g , 
 formation of capitaL while all that has preceded has merely 
 laid down the external forms of the process. 
 
 ^ I will not, g 'priori, deny that possibly one miglit contrive to hunt up some 
 
 subtle examples whars rapital Tpartip-nlarly social capital! comes into existence 
 
 without saTinpf properly so called. But all the more strongly do I hold by my 
 proposition that, as regards the great mass of the economic formation of capital, 
 saving, in the way I have indicated, has its place. 
 
CHAP. VI 
 
 TRANSITION TO VALUE 
 
 T25 
 
 The most general answer, but still, it must be confessed 
 
 
 insufficient for all its generality, runs thus : what people look, 
 to in economic life is the Value of goods. Here we touch a 
 subject which is too important and too difficult to be spoken 
 of merely in passing. To obtain the basis for the principal 
 part of our work — the explanation of interest — we require 
 to go into the theory of value. I shall, therefore, leave the 
 theory of the formation of capital at this stage, returning to it 
 shortly in the last chapter, where we shall give it the logical 
 conclusion that it still lacks, 
 
BOOK III 
 
 VALUE 
 
CHAPTEE I 
 
 THE TWO CONCEPTIONS OE VALUE ^ 
 
 In the science of Political Economy, as in ordinary speech, two 
 very di.stinot things have usually been p,1a.ssp.d tngethp.r nndor 
 
 the one name of Yalue . From the first it could scarcely escape 
 notice that there was a difference between them, but the full 
 extent of the difference was certainly underrated. Instead of 
 being recognised as phenomena belonging to entirely distine t 
 categories of thought, they were, quite falsely, represented as 
 members of one and the same group of phenomena, and, under 
 the not very felicitous names of Use Value and Exchange 
 Yalue. they were assumed to be .<^ub-.qpep ies of._nT ie imiver^ 
 
 ^ My views on the subject of Valae have already been published at lene-tli 
 in another place {Grundziiae der Theorie des WirthschaftlKhen Outerwcrths, in 
 Conrad’s Jahrhucher filr NationalokoTiomie und Statistik, vol. xiii. 1886, pp. 
 1-86 and 477-541). Since then I have seen no reason to change them. What I 
 have now to say on the same subject can, therefore, offer but few new features. 
 On the whole, what follows is an extract from my former work adapted to the 
 
 requirements of the theory of capital, and, in the composition of it, I have gone 
 on principles suggested by the nature of my present task. Those fundamental 
 ideas o n which the understanding of the whole depends, and those lines of thought 
 with which the theory of capital is specially connected, I have taken in all their 
 detail from my other book ; and, as a simple change of form would have been as 
 troublesome as it was useless, I have taken them, for the most part, without 
 change. T have omitted, on the other hand, ail those explication s, demonstra- 
 tions, and so on, which were important for the Value theory, but seemed not 
 altogether indispensable for the understanding of the theory of Capital. In place 
 of these I have added a good deal of matter in which I have taken advantage of 
 the newest literature on the subject, and have tried to give a still clearer formula- 
 tion to several ideas, and, particularly, to develop with more exactitude special 
 points where the value theory comes into more intimate connection with the 
 theory of capital. The most important additions occur in chapter vii. of the 
 present book, and at the end of chapter v. and in chapter vii. of the next book. 
 
 Readers who are interested in the theory of value and price for its own sake, I 
 should ask to consult the statement in Conrad’s Jahrbiieher, which is much more 
 complete, and which I tried to make easier by numerous references. 
 
 K 
 
130 
 
 THE TWO CONCEPTIONS OF VALUE book in 
 
 conception of Value, and distinguished from each other as such. 
 This distinction once made, however, the so-called Use Value 
 was almost entirely dropped out of sight . Economists took no 
 trouble to inquire any deeper into its nature, nor did they 
 make any use of it in further investigations- They simply 
 catalogued it, as it were, among the conceptions of political 
 economy, and left it lying in a corner of their systems like a 
 stone for which there was no use. It is only of very recent da^ 
 that economical investigation has disco vefed~~in this "stone~re-. 
 
 iected of the builders ” the basis and support of one of the most 
 
 important conceptions of economics, and has awaked to tlTe^fact 
 that on it depends a group of most notable laws — laws with 
 consequences reaching far beyond the boundaries of the theory 
 of value, and laws to which almost every branch of economic 
 theory must go back for its root and spring. 
 
 But, first of all, it is important that we give right names 
 to those things which tradition has handed down to us under 
 the inadequate designations of Use Value and Exchange Value. 
 The two groups of phenomena, to both of which popular usage 
 has given the ambiguous name Value,” we shall distinguish 
 as value in the Subjective and value in the Objective sense.^ 
 
 / Value in the Subjective sense is the importanop. which r. 
 r^ood. or a complex of goods, possesses ^^th regard to the welL- 
 
 1 being of a subject. In this sense I should say of any par- 
 
 ticular good that it was valuable to me, if I recognised that my 
 wellbeing was so associated with it that the possession of it 
 / .satisfied .some want, secured me a gratification or a feeling 
 )of pleasure which I should not have had without it, or saved 
 /me from a pain which, otherwise, I should have had to endure. 
 In eYTt^teuee of th e good means mv gain, thfi. 
 
 absence of it mv loss, in wellbeing : to me it is a matter of 
 importance, for me it has value. 
 
 By Objective value, on the other hand, is meant the Power 
 
 or Capacity of a go od to pr ocure some one ob jective result. In 
 this sense there are as many kinds of value as there are external 
 results with which man may be connected. There is a nutritive 
 
 1 I frankly confess that I would gladly exchange these pedantic and clumsy ex- 
 pressions for terms more euphonious and popular, if they could be got to indicate 
 the opposition referred to with even approximate correctness.* But I have not been 
 able to find such expressions. The words Use Value and Exchange Value are nol 
 ■suitable at all, because, as we sha ll see, there js a Subjectiy fl .ex change value . 
 
CHAP. I 
 
 SUBJECTIVE AND OBJECTIVE 
 
 131 
 
 value of food, a heating value of wood and coal, a fertilising 
 value of manures, a blasting value of explosives, and so on. In 
 any expressions of this kind all reference to the wellbeing or 
 
 illbeing of a subject is excluded from the conception of va.hif; . 
 If we affirm that beech has a superior heating value over pine, 
 we only express the purely objective and, as it were, mechanical 
 fact that with a definite weight of beech a greater amount of 
 heat can be raised than with the same weight of pine. In the 
 above connections, then, instpad of thp. word " Val ue ” we use, 
 as entirely synonymous with it, the expressions “Power” nr 
 “ Capacity ” — expressions which themselves suggest a purely 
 objective relation. Instead of “ nutritive value,” “ heat value,” 
 " explosive value,” we use “ nutritive power ” or “ nutritive 
 capacity,” “ heating power,” “ explosive power,” and so on, as 
 meaning exactly the same thing. 
 
 The varieties of Objp.rtive value iust mentioned bv wav of 
 
 illustration do not, however, belong to economical but to purely: 
 ^.bnipa.l rph tinns ; and, however frequently they are referred 
 to in economical text-books, they do not properly belong to 
 political economy at all. It does not fall within the province 
 of our science to expound the heating value of wood, nor, in 
 explaining other economical phenomena, has it occasion to lay 
 stress on this heating value any more than it does on any other 
 physical or technical fact. I have given these illustrations 
 purely as illustrations, with the intention of putting in clearer 
 relief the very intimately related nature with the above of that 
 branch of objective values which, of 'course, has the greatest 
 possible importance for political economy, namely, the objective 
 Exchange value of goods. By this expression B’^nean the 
 oi^ective worth of goods in excEahTOT“br. in other words, the 
 
 pr>ssTbT]ifry' nr nbtaiin'ng jn PYP.bapgp. fnr thprir^ . q . 
 other ecQiioini'car goc^s.Thi s possibility bping looked.- aipon as 
 a power or a property of the former goods. In this sense we 
 say that a horse'ls worth £50, or a house worth £1000, if, in 
 exchange for these, we can obtain, respectively, £50 or £1000. 
 
 Here, again, it must be noted that, as in the kindred 
 expressions heating value and the like, we say nothing at, all 
 as to the influence which goods mav exert on the, wellbeing of 
 
 any subject wha^iver ; we simply indicate the objective relation 
 that for a particular good a certain amount of other goods may 
 
132 
 
 THE TWO CONCEPTIONS OF VALUE book hi 
 
 be had in exchange. In this case also the characteristic 
 phenomenon recurs, that thp wor d “ Value ca,n be. gm'tp. 
 adequately, replaced by_the word. “Power” and is, indeed, so 
 replaced in popular speech. Besides the expression “value 
 in exchange” English economists use, quite indifferently, the 
 expression “ purchasing power, ” and we Germans are beginning 
 in the same way to put in general use the term Tauschkraft. 
 
 The economical theory of value has, then, the double task 
 of interpreting, on the one hand, the laws of Subjective Value, 
 a^nd, on the other, the laws of Objective Exchange Value, as 
 
 from the economic , point .. of view by far the mpst imp ortant 
 br anch of objective value. The first part of this task we 
 shall take up in the present book, the second in the follow- 
 ing book deaHng with the theory of Price. It is true that 
 the two conceptions, “ Price ” and “ Exchange Value,” are by 
 no means identical. Exchange Value is the capacity of a 
 good to obtain in exchange a quantity of other goods. Price 
 is that other quantity of goods. But the laws of these two 
 coincide. So far as the law of price explains that a good 
 actually obtains such and such a price, and why it obtains it, 
 it affords at the same time the explanation that the good is 
 capable, and why it is capable, of obtaining a definite price. 
 The law of Price, in fact, contains the law of Exchange Value.^ 
 
 1 The, foundations of the modern value theory have been laid by three writers 
 
 whose work is in substantial agreement — Carl Menger. Jevons, anil Walras. Of 
 these, in clearness and completeness, Menger's Ttat’ement takes the first place. 
 Twenty years before his time, several of the most weighty and fundamental ideas 
 had been already propounded by Gossen in his remarkable book, Entwicklung 
 der Gesetze des menschlichen Verkehrs und der daraus Jliessenden Begeln fur 
 menschliches Handeln, Brunswick, 1854. Like the book itself, these ideas sank 
 into complete but undeserved oblivion, and had to be rediscovered by the 
 economists just mentioned. That this was done almost simultanp-oiisly by 
 difF erent men, belonging to three different nations, and quite independently of 
 each other, is a very remarkable coinc idence, and is, at the same time, no 
 small guarantee for the correctness of the principles on which all three were 
 certainly agreed, although in thoroughness their statement of them was unequal. 
 Since then these principles have had a notable development, and received wide 
 acceptance. Not long ago, in the preface to his Theorie de la Mcmnaie (Lausanne, 
 1886), Walras could give an imposing list of writers as ad herents of the new 
 theory. Since then we may add the name of E. Sax {Grundlegung der fheo- 
 retischcn Staatswirthschgft, Vienna, 1887, p. 250), — with whom, however, I cannot 
 agree in many particulars, particularly in those where he tries to establish original 
 ideas that are not in harmony with those of his predecessors ; and that of R. 
 Meyer {Das Wesen des Einkommens, Berlin, 1887). 
 
CHAPTEE II 
 
 NATURE AND ORIGIN OF SUBJECTIVE VALUE 
 
 All goods without exception — indeed according to the very 
 conception of them as “ good ” — possess a certain relation to 
 human wellbeing. There are, however. twiL,esseatiaIlw distinct 
 grades of this relation . A goodUbilrags to the lower grade, 
 whenTl^ssesses the general capacity to snhsprvft human wpal 
 The higher grade, on the other hand, demands that a good 
 should be more than merely a sufficient cause ; it mu.st he an 
 indispensable condition of human wellbeing — a condition of 
 such a kind that some gratification stands or falls with the 
 having or wanting of the good. In the expressive vocabulary 
 of everyday Life we find a separate designation for these grades. 
 The lower is called Usefulness, the higher Value . This dis- 
 tinction, already recognised in common speech, we must try to 
 make as clear and well-marked as its fundamental importance 
 for the whole theory of value deserves. 
 
 A man dwells beside a bubbling spring of water . He 
 has filled his cup,- and the spring goes on pouring out enough 
 to fill a hundred other cups every minute. Another man is 
 travelling in thejieseifi A long day’s journey over glowing 
 sand still divides him from the nearest oasis, and he has 
 come to his last cup of water. What is the relation i n 
 each case between the cup of water and the wellbeing of, 
 
 its owner. ? 
 
 A single glance shows us that the relation is very dis- 
 similar ; but wherein lies the difference ? Simply tha,t, in tlie 
 former case, we haA'^e only the lower grade of the relation we 
 call wellheingr that ~ of usefulness ; in the latter case we ha^’e 
 the higher" ~^a'iTe~ a!s well. In the first ca^' “jtist as in the 
 
134 
 
 NATURE OF SUBJECTIVE VALUE 
 
 BOOK in 
 
 second, the cup of water is. aseful , that is, capable of satisfying 
 a~~Want7 and, moreover, in exactly the sam e degree ; for 
 evidently the refreshing qualities of the water — the qualities 
 on which its capacity to quench thirst is based, such as cool- 
 ness, taste, etc. — are not in the least degree weakened by the 
 fact that other cups of water chance to possess similar 
 properties ; nor, in the second case, are these refreshing 
 qualities in the least augmented by the accidental circum- 
 stance that there is no other water near. On the other 
 hand, the two cases become essentially distinct when con - 
 sidered with reference to the second grade. Looking at the 
 former case we must say that the possession of the cup of 
 water does not provide the man with one single satisfaction 
 more, nor its loss with one satisfaction less, than he could 
 have obtained without it. If he has that particular cup of 
 water he can quench his thirst with it ; if he has not that cup 
 — well, he can quench his thirst quite as well with one of the 
 hundred others which the spring puts freely at his disposal 
 every minute of the day. Tfjie likes, therefore, he may make 
 that one cun the cause, of his s^atisfactidn 'b;^que'nching his 
 
 thir.st with it: an indispensable condition of his satisfaction it 
 cannot be : for his wellbeing it is dispensable, unimportant, 
 indifferent. 
 
 It is quite otherwise in the second case. Here we must 
 say that, if our traveller had not that one last cup, he could 
 not quench his thirst ; he must bear its pangs imassuaged, 
 perhaps even succumb to them. In the cup of water then, in 
 this case, we se e not merel y a sufficient cause, but the ind is- 
 pensable condition, the sine, qua non of human wellbein g. Here 
 it is of consequence, even of urgency ; it possesses importance 
 for his wellbeing. 
 
 Now it is not too much to sav that t he distinction here 
 drawn is one of the most fruitful a nd fundamentaL in the 
 whole range of our science. It does not owe its existence to 
 the microscope nor to any hair-splitting distinctions of the 
 logician. It has its life in the world of men, who know it 
 and use it and take it as guide for their common attitude 
 towards the world of goods, not only as regards the intellectual 
 estimate they apply to these goods, but as regards their 
 actual business transactions. About goods _which are o nly: 
 
CHAP. II 
 
 THE INDISPENSABLE CONDITION 
 
 135 
 
 useful the practical businR-^ss man i.g carpi hss and indifferent. 
 
 The academic knowledge that a good may be “ of use ” cannot 
 evoke any efficient interest in the good, in face of the other 
 knowledge that the same use may be obtained without it. 
 Such goods are practically naught as regards our wellbeing. 
 
 and we treat them as such ; we are not put about when we 
 lose them, and we make no effort to gain them. Who would 
 fret at, or make an effort to prevent, the spilling of a cup of 
 water at the spring, or the escape of a cubic foot of atmo- 
 spheric air ? WTiere^ on the other hand, the sharpened glance 
 of the economic man recognises that some sati.qfaction. well- 
 
 being. gratification. ^ connected with a particular good, there 
 the effective interest whi ^’k -are tak^ in own -wellbeing is, 
 transfefred to the good which we recognise as its condition : 
 
 we see and value our own welfare in it ; we recognise its 
 importance for us as value ; and finally, we develop an 
 anxiety, proportioned to the greatness of that importance, to 
 acquire and hold the good. 
 
 Thus, formally! defined, value is the importance which a 
 
 good or complex of goods possesses with respect to the wflUbping* 
 of a subject . Any addition to this definition, regarding the 
 kind and reason of the importance, is, strictly speaking, not 
 necessary, since goods can only have an effective importance 
 for human wellbeing in one way, viz ^y the in d ispen .sabl e 
 
 condition, the sine qua non, of some one utility which sub- 
 serves it. In view of the fact, however, that in other defini- 
 tions of value it is very often translated as an “ importance,” 
 while the importance spoken of rests, erroneously, on a simple 
 capability of utility, or, not less erroneously, on the necessity 
 of expenditure of costs, or the like,^ we shall define it, un- 
 ambiguously and exactly, as : That importance which goods or 
 complexes of gooiks. jicgnire. as the r^ognised "condition of a 
 
 utility which makes for the wellbeing of a subject, and would, 
 
 not ~be obtained without them. 
 
 All gnnd.s bavp. usefulness, but all goods have not value. 
 
 For the emergence of value there must be ^ scarcity as well as 
 usefulness — not absolute scarcity, but scarcity relative to the 
 demand for the particular class of goods. To put it more 
 
 ^ See Conrad’s Jahrhiicher, vol. xiii. p. 11. 
 
136 
 
 NATURE OF SUBJECTIVE VALUE 
 
 BOOK III 
 
 exactly : goods acquire value when the whole available stock 
 of them is not sufficient to cover the wants depending on 
 
 them for satisfaction, or wlien the stneic would not he silfiReieot 
 ^ without these particular goods. Ou the other hand, those 
 ■ goods remain valueless which are offered in such superfluity 
 that all the wants which they are fitted to satisfy are com- 
 pletely supplied, and when, beyond that, there is a surplus 
 which can find no further employment in the satisfaction of 
 want, and which, at the same time, is large enough to spare 
 the goods or quantities of goods that we are valuing without 
 imperilling the satisfaction of any one want. 
 
 After what has been said as to the nature of value, it 
 should not be very difficult to prove these propositions. When 
 the supply of goods is not sufficient , and some of the wants 
 which they are adapted to satisfy must remain un.satisfied. it is 
 clear that the loss of even a single good involves the loss of a, 
 
 possible satisfaction, while the addition of a single good in- 
 volves the acquisition of a satisfaction otherwise impossible ; 
 and it is clear, consequently, that some gratification or form of 
 wellbeing depends on the existence of that good. Conversely, 
 it is quite as clear that, if goods of any class are to be had in 
 superfluity, there is no harm done if one of the goods be lost — 
 since it can be immediately replaced from the superfluous 
 stock ; nor any utilitv got if another such good be added — 
 since it cannot be employed in. fl.n y useful way . Suppose, for 
 instance, that a peasant requires ten gallons of water per day, 
 and no more, for general purposes — say, for his own drinking, 
 for that of his family and servants, for watering his cattle, for 
 cleansing, flushing, etc. — and suppose that the only spring within 
 reach supplies no more than eight gallons a day. It is quite 
 evident that he cannot spare one single gallon from his waters 
 supply without suffering, to a more or less sensible extent, 
 as regards the wants and aims of his economy. Every gallon 
 in this case is the Condition of a definite sphere of usefulness. 
 Even if the spring supplied just ten gallons this would still be 
 true But if the spring supplied twenty gallons per day, it is 
 just as obvious that the loss of one gallon would not do the 
 slightest injury to our peasant He can only employ ten 
 gallons usefully, and he must let the other ten gallons flow 
 away unused. If one gallon is spilled it is replaced from the 
 
CHAP. II ONLY ECONOMICAL GOODS HAVE VALUE 
 
 137 
 
 overflow, and the only effect is that now the unusable surplus 
 is reduced from ten gallons to nine. 
 
 Now' as it is the insufficient, or the barely sufficient, 
 goods that are the objects of economical care — the goods we 
 “ economise ” or endeavour to acquire and keep, — while such 
 goods as are to be had in superfluity are free to everybody, 
 we may express the above propositions shortly in the following 
 form: AH economical goods have value ; all free goods are 
 valueless. ^ In any case it must steadily be borne in mind 
 that it is only relations of quantity that decide whether a ny 
 particular good is merely capahle nf nsc or is also the con- 
 dition of a utditv for us. ^ 
 
 1 Some very interesting phenomena of value may, in certain circnmstances. 
 
 be exhibited by free ^ooda also . For the explanation of this see my Qrundziige, 
 p. 15. 
 
 ^ Those numerous writers of whom Scharling is the latest instance (Conrad’s 
 Jdhrhucher, vol. xvi. pp. 417 and 513, and particularly 424, 430, 551), who say 
 that the distinguishing criterion of “economical” and “valuable” goods is 
 difficulty of attainment, the necessity of expending labour, and the like. ar£. 
 giving a secondary ground of definition instead of the really decisive and 
 primary one. It is only when and because we are suffering, or fear to suffer, loss 
 of satisfaction from insufficient supply of goods that we decide, generally speak- 
 ing, to submit to the hardships of acquiring them, to labour, and so on. Ltb^i v 
 and hardship could not by themselves confer an economical character on grinds 
 
 were it not that, for the most part, another circumstance, and that the really 
 decisive one, is also present ; in other words, that those kinds of goods, which 
 are difficult or troublesome to obtain, are, at the same time, the goods that 
 
 remain scarce . That, however, it is not the, diffi i^nlty but: tb^ s carcity that 
 decides is vividly shown in those cases — not, I grant, very common — where the 
 technical circumstances are of such a nature that the good can be got only, indeed, 
 by conquering difficulties, but then in superfluous amount. When the peasant 
 obtains good drinking water, e.g., by bringing it along a pipe to a house, it may 
 occasion him a permanent expenditure of labour and costs for construction, 
 upkeep, and management of the water-.supply. But if this brings the water in 
 greater quantity than he requires, it will not occur to the peasant, in spite of the 
 labour, that he must “economise” the water. 
 
CHAPTER III 
 
 THE AMOUNT OF VALUE 
 
 In asking what is the principle that reflates the amount of 
 
 value, we pass fco a sphere where lies the chief taaV of a. t.hftnry 
 
 of value, and where at the same time lie its greatest difficulties. 
 
 These difficulties are the result of a peculiar coincidence of 
 circumstances. Erom one point of view the true principle 
 almost suggests itself. If the value of a good is its importance 
 to human wellbeing, and if this “ importance ” means that some 
 portion of our wellbeing is dependent on our having the good, 
 it is clear that the amount of the good’.ci value must he 
 determined by th^ am ount of wellbeing which depends on it. 
 l^^^^-^oods will have high value if our wellbeing depends on them 
 to any important extent, low value if it does not. 
 
 But from another point of view, there are certain facts in 
 the economical world which seem to give the lie to this very 
 
 simple and natural explanation. Everybody knows that, in 
 practical economic life, precious stones possess a high value, 
 while bread and iron have a moderate value, and air and water 
 usually no value at all. Now everybody knows that without 
 air and water we simply could not exist, and that the uses of 
 bread and iron are extremely important, while precious stones , 
 for the most part, only satisfy the love of ornament, and have, 
 accordingly, a very inferior importance for human wellbeing. It 
 would appear, then, that one who holds fast by the principle that 
 the amount of a good’s value is determined by the importance 
 of the services which it may render to human wellbeing, must 
 expect to find in precious stones a low value, in bread and iron 
 a high value, and in water and light the very highest value. 
 But facts show that exactly the opposite of thi g is the case . 
 
CHAP. Ill 
 
 THE OLD PARADOX 
 
 139 
 
 This startling phenomenon has been a veritable rock of 
 offence in the theory of value. The highest utility acconi r 
 panied by the sTnallp.cit value is a strange paradox. It is 
 true that, in confusing Usefulness and Use Value , economists 
 did not apprehend and describe the state of the case quite 
 exactly. When they falsely ascribed to the iron a high “ use 
 value ” and to the diamond a low “ use value,” the only 
 reason for surprise was that the “ exchange value ” of these 
 goods went so entirely in the opposite direction. But this was 
 only to change the name of the opposition, not to take away 
 any of its sharpness. There were plenty of attempts to bridge 
 the fatal contradiction by involved explanations, but these were 
 unsuecessful ; and so it happens that, from Adam Smith’.s time, 
 to our own, innumerable theorists- have. -despaired of finding 
 the~Sature andT measure of value in any rft1a.tion to human 
 wellbeing, and have fallen back upon quite foreign and often 
 wonderful lines of explanation, such as labour or labour time, 
 costs oF~ production, resistance of nature to man, and the like. 
 Btrtrunable to get rid of the feeling that the value of goods 
 must have sometliing to do with utility and human wellbeing, 
 they put down the want of harmony between the utility and 
 the value of goods as a rare and perplexing contradiction , a 
 contradiction 4conomiq%ic. 
 
 In what follows I mean to prove that the older theory had 
 no need to abandon the most natural explanation. The 
 measure of the utility which depends on a good is. actually 
 
 and p.vprywbp.re. the measure of value for that good. To prove 
 this nothing more is necessary than a dispassionate but keen 
 casuistical investigation into the question. What is the gain 
 to our wellbeing that, in any given circumstances, depends on 
 
 a good ? I say deliberately “ casuistical ” investigation ; for 
 the entire theory of subjective value is, properly, nothing else 
 than a system of casuistry , determining when, under what 
 circnmstances, and how far our wellbeing is dependent upon 
 any particular good. It is very remarkable that the ordinary 
 man in everyday life is constantly making casuistic distinc- 
 tions of this kind, and making them with great certainty. 
 He seldom makes a mistake, and he never makes a mistake in 
 
 the principle. He may, of course, ascribe a trifling value to a 
 diamond if he mistakes it for a glass bead. But the theoretical 
 
140 
 
 THE AMOUNT OF VALUE 
 
 BOOK HI 
 
 consideration — wliicli is quite irrelevant here — that without 
 water tlie human race could not continue in life, would never 
 lead him to the casuistical conclusion that every gallon of 
 water which flows from the village spring is a good of priceless 
 value, or worth thousands of pounds. Our task, then, is to 
 hold the niir r ar up . to those casuistical distinctions which men 
 make in the ordinary affairs of life., and to bring those laws, 
 which the ordinary man instinctively handles with certainty, 
 to clear and conscious presentation. 
 
 What human wellbeing may gain from a good, and thus 
 the advantage which is dependent on a good, is, in most cases,^ 
 the .satisfaction of a. wanL The casuistical consideration that 
 really determines how far a person’s wellbeing depends upon 
 a particular good is found in the answer to two questions : 
 
 first, which, among two or more wants, depends on it ? and, 
 
 second, what is the urgency of the dependent want or of its 
 satisfaction ? 
 
 For convenience we shall take the second question first, 
 and answer it in the present chapter. Jt is a famil iar faet 
 that our wants vary very greatly in importance . We are 
 accustomed to rank them according to the seriousness of the 
 consequences which their non-satisfaction has on our wellbeing. 
 Thus we attach the greatest weigh t to those wants the non- 
 satisfaction of which would T;)e followed by. deat h. Next to 
 these we place wants the non-satisfaction of which would 
 result in some serious permanent injury to our health,, h^onour, 
 or happiness. Below these again come such wants as expose 
 us to more tem porary injuries , pain, or deprivations. Finally, 
 we put in the very lowest class those wants the non-satis- 
 faction of which costs us nothing more than a very slight 
 unpleasantness , of the deprivation of some qtiite"TnsTgnificant 
 pleasure. Arranging our wants according to these characteristics 
 we, obtain a regularly grad uated scale of wan ts. Of course 
 as differences of bodily and mental disposition, culture, and so 
 on, result in very marked difi’erences of wants, this scale will 
 come out very different for different individuals, and even for 
 ^the same individual at different times. All the same, every 
 practical man whose means are limited must have a scale 
 
 On certain comparatively rare exceptions see Conrad’s Jahrhiieher, vol. 
 xiii. p. 42. 
 
CHAP. Ill 
 
 KINDS OR CONCRETE WANTS? 
 
 141 
 
 ■mnrpi nr less clearly before Vn's mind i£ - hp wniilrl tthiVp. a cVinicf 
 
 among thRSP. wants, and even theorists have often had occasion 
 to sketch such a scale from the “ objective ” standpoint of 
 impartial scientific consideration. 
 
 So far everything would be simple and certain were it 
 not that there is an ambiguity when we speak of graduation 
 OP ranking of wants. We may mean by these terms either 
 the graduation of wants as kinds of wants, or the graduntinn 
 of degr ees of wants , the concrete individual feelings of want ; 
 and these two are essentially different, even divergent. If 
 w^e compare kinds of wants, looked at as a whole, according 
 to their importance for human wellbeing, there is no doubt 
 whatever that to t he needs of subsistence would lie allotted 
 the first ranb;. to the needs of housing and clothing a rank 
 not much inferior, to the wants satisfied by tobacco, spirituous 
 liquors, music, etc., a very much less important place, while 
 the wants of ornament and the like would have a very in- 
 significant rank indeed. 
 
 the graduation of coTiCTete feelings of want is esseh- 
 tially different from this. Within one and the same kind of 
 want the feeling of want is not always uniform, not always 
 equally strong. Every feeling of hunger is not equally 
 intense, and every satisfaction of hunger is not equally per- 
 fect. In the class of “ needs of subsistence,” for instance, 
 the concrete want of a man who has not eaten a morsel for 
 eight days is infinitely more urgent than that of another man 
 who has already got through two courses of his ordinary dinner, 
 and is meditating whether he should have a third. In 
 the graduation of concrete wants we have to deal with an 
 entirely different state of affairs, and with a much greater 
 variation. In t he s cale -of- fa^Zs-olvscants-dhe “ne eds of su b- 
 sistence” came far and away befo r e the d esim for tobacco, for 
 liquor, for ornament, etc. In the scale of concrete wAuts , 
 wants~5eIongm^ to the most various kinds cross and intersect 
 
 each othen It is” true that, everrTefe, the' most important- 
 concrete wants in the most important classes of wants stand 
 at the top of the scale ; but the less important concrete wants 
 of these classes are frequently overpassed by concrete wants 
 of much inferior classes — th e bottom members of the highest 
 class, perhaps, overpassed by the top member of the lowest 
 
142 
 
 THE AMOUNT OF VALUE 
 
 BOOK III 
 
 class, It is very much the same as if a geographer were one 
 time to arrange the Alps, Pyrenees, and Harz by their height 
 as mountain ranges, and another time were to arrange their 
 single summits. As ranges the Alps would, of course, come 
 before the Pyrenees, and the Pyrenees before the Harz. But, 
 in comparing individual heights, a great many of the Alpine 
 summits would take rank below individual peaks of the 
 Pyrenees, some even below hills in the insignificant Harz. 
 
 And now the question is. When goods have to be valued. 
 by wbip.b seale shn11 wc measure the importance of the wants 
 . they siihserve — the scale of kinds or the scale of concrete 
 
 wants,? When the older theory came to this dividing~of~the 
 
 ways — the very first opportunity offered it of making a mis- 
 take — it chose the wrong wav. It adopte d f.be seale, nf kinds, 
 On this scale the class “ Needs of Subsistence ” occupies one of 
 the most conspicuous places, while the class “Desire of Orna- 
 \/ ment ” has a subordinate place. Thus the older theory decided 
 that bread, universally, has a high “ use value,” and diamonds 
 a low “ use value,” and, naturally, was very much astonished 
 that the value practically put upon those two kinds of goods 
 was exactly the reverse of this. 
 
 Now their conclusion was quite wrong. What the casuist 
 must say to himself is : If I have a slice of bread I can indeed 
 still this or that concrete feeling of hunger as it arises, but— I 
 can never satisfy the totahtY of such feelings — the actual and 
 p ossible, present and future, feelings of hunger wliich. togeth er- 
 make up the kind “ needs of subsistence.” Obviously, then, it 
 is quite out of place to attempt to measure the service which 
 the piece of bread can render me by the fact that the totality 
 of such feelings possesses much or little importance. To do 
 so would be like the act of a man who, on being asked 
 as to the height of the Kahlenberg, an insignificant off-shoot 
 of the Alps near Vienna, were to ascribe to it the height of 
 the Alpine chain ! As a fact it would never oeoiir to n.s 
 in practical life to value every bit of bread in our posseu - 
 |ion as a treasure of infinite importance . We do not rejoice 
 every time we buy a baker’s roll as if we had saved a life, 
 nor do we blame a man as spendthrift when he carelessly 
 gives away a slice of bread or throws it to a dog. Yet this 
 is the judgment we must pass if we would transfer the import- 
 
CHAP. Ill 
 
 THE SCALE OF SATISFACTION 
 
 14:5 
 
 ance of the kind “ needs of subsistence,” on the satisfaction of 
 which our very life depends, to the goods which actually 
 minister to that satisfaction. 
 
 This much is clear, then, that the value we ascribe to goods 
 
 has nottitrrg Tn~r1n wi't-.h thp graduation of kinris of want, hut 
 
 only .witimie~^aduation of concrete wants. In order to bring 
 out a]jr~fhat is^ihvdrved in this conclusion, it may be desirable 
 to put more clearly certain points relating to the composition 
 of this graduated scale, and to put the whole argument on a 
 surer basis than has been done in the foregoing analysis. 
 
 Most of OUT wa.uts arc divisible, in the sense that they are 
 susceptible of piecemeal satisfaction. When hungry I am not 
 compelled to choose between satisfying my hunger completely 
 and going entirely unsatisfied. I may take the edge off my 
 appetite by a moderate meal, intending, perhaps, to dispel the 
 feeling of hunger altogether later on by a full meal, or, perhaps, 
 to make shift with the partial satisfaction I have got. Naturally 
 the partial satisfaction of a concrete want has another and a 
 smaller importance for my wellbeing than a complete satis- 
 faction of the same ; and, to a certain extent, this of itself would 
 suffice to call attention to the above-mentioned phenomenon 
 that, within a kind of wants, there are concrete wants (or 
 degrees of want) of varYing importance . But with this is 
 connected a further notable fact. Tt is an experience, as 
 familiar as it is deep-rooted in human nature, that jthp. .same 
 enjoyment, when constantly repeated, gives us. heyonr l a. certain 
 point, a constantly decreasing gra tification, till, in the end, it 
 changes into its opposite. Any one can prove for himsedn 
 that at a meal when the fourth or fifth course is reached, the! 
 appetite is not nearly so keen as at the first course, and that, f 
 if there are too many courses, a point is reached where enjoy- 
 ment turns into discomfort or disgust. The same occurs in 
 too long a concert, lecture, walk, play, and, generally speak- 
 ing, in the case of most physical as well as intellectual 
 enjoyments. 
 
 If we put the essence of these weU-known facts into 
 technical language we get the following proposition : The con - 
 crete degrees of want into which our sensations of want may 
 he divided, or the successive degrees of satisfaction obtained 
 from similar amounts of goods, are usually of very dissimilar- 
 
144 
 
 THE AMOUNT OF VALUE 
 
 BOOK III 
 
 importaace — -indeed, of importance which diminis h es st ep b_v_ 
 step to zero. 
 
 This will explain a whole series of propositions which were 
 simply asserted above. It explains, firstly, how, in one and 
 t he same kind of wants, there may be concrete wants, or- defp-ees 
 of want, of varying urgency . Indeed in the case of all divisible 
 satisfactions as the term is defined above — that is, in the great 
 majority of cases — this not only may be but must be so, quite 
 normally and, so to speak, organically. It explains, again, that, 
 even in the most important kinds of wants, there are lower and 
 
 lowest grades of importance . Properly speaking, the more 
 important kind is marked off from the less important only by 
 the fact that, to some extent, its head rises higher than the 
 others, while its base stands on the same level as all the others. 
 And, finally, it explains that, not only may it occasionally 
 happen, as I have just said, that a concrete want belonging to 
 a kind which, on the whole, is more important, may be out - 
 weighed by some individual concrete want of a kind, on th,p. 
 whole, le ss importan t, but that this happens as a perfectly 
 normal, ordiWry, and organic occurrence. There will always, 
 for instance, he innumerable concrete subsistenop. wa.nt.<i whip.h 
 are weaker and less urgent than many a concrete want of quite 
 unimportant classes ; such things as the desire of ornament, the 
 love of dancing, the craving for tobacco, etc., will often be stronger 
 than the need of good food and warm clothing. 
 
 If we try to represent the classification of our wants by a 
 typical scheme we must, on the principles just laid down, give 
 it something like the following shape ^ : — 
 
 1 II III IV V 
 
 10 
 
 9 9 
 
 8 8 8 
 
 7 7 7 7 
 
 6 6 6.6 
 
 5 5 5.5 
 
 4 4 4 4 4 
 
 3 3 3.3 
 
 2 2 2.2 
 
 11111 
 0 0 0 0 0 
 
 VI VII VIII IX X 
 
 5 
 
 4 4 
 
 3 . 3 
 
 2.22 
 1.111 
 0 0 0 0 0 
 
 ^ See Menger’s Grundsdtze der Volhsioirthschaftslehre, p. 93. 
 
CHAP. Ill 
 
 A TYPICAL SCHEME 
 
 145 
 
 In this scheme the Eoman figures indicate the various kinds 
 
 of wants , decreasing in order of importance from I to X. I 
 indicates the most urgent kind, say the needs of subsistence ; 
 V indicates a kind of medium importance, say that of spirituous 
 liquors ; while X indicates the least important conceivable 
 kind. 
 
 The Arabic figures 10 to 1, again, indicate the concrete 
 
 wants and degrees of want that occur in the different kinds. 
 
 their rank being shown by assigning the figure 10 to the 
 most important conceivable want, the figure 9 to that next in 
 importance, and so on, tdl the last figure 1 indicates the most 
 insignificant want likely to occur. 
 
 This scheme now puts before us the fact that the morn . 
 important the kind, the higher stands the -mnst important 
 concrete want contained in tbp. Id ml ; but it shows at the 
 same time that in each kind there are all grades of importance, 
 from greatest to leas^ . The only exceptions in the scheme 
 occur in classes IV and VII, in which some individual members 
 of the descending scale are wanting. These represent the 
 (comparatively rare) kinds where, on technical grounds, ^ 
 successive sa±.isfa. p.f-.inn fiy means of partial acts is either incom- 
 plete or quite impossible , and where, accordingly, the want 
 must either be entirely satisfied or not satisfied at aU. The 
 want met by kitchen ranges, for instance, is generally met so 
 completely by one range that we should have absolutely no 
 use for a second. Finally, the scheme shows that in the most 
 important kind (I) there occur concrete wants, which bear the 
 lowest figure of importance, while, in almost all the other 
 kinds which stand imder it in importance, there are concrete 
 wants that bear higher figures. 
 
CHAPTER IV 
 
 THE MARGINAL UTILITY 
 
 Turning now to the second question suggested in last chapter 
 we ask, Of several or many wants which one is it that actually 
 depends on a particular good ? 
 
 This question would not be put at all if the circumstances 
 of economic life were so simple that single wants always 
 stood over against single goods. If a good were adapted 
 to satisfy a single concrete want, and if it were at the same 
 time the only one of its kind, or, at least, the only one of 
 its kind available, it would be quite clear without further 
 consideration that the satisfaction of the single want depended 
 on our command over the single good. But in practical life 
 the matter is scarcely ever so simple as this ; on the contrary, 
 it is usually complicated simultaneously from two sides. Eirst^ 
 one and the same good is usually adapted to satisfy various 
 
 concrete wants, which wants again possess various degrees of 
 importance ; and second, several goods of one and the sam e 
 kind are frequently available , thus leaving it to caprice which 
 good will be used for the satisfaction of an important, and 
 which for an unimportant want. To give the simplest possible 
 example. I have been shooting for a few days on the mount- 
 ains, and by some accident I miss my companions./ I am far 
 from any house or village, and'tEe only food I have for myself 
 and my dog is two entirely similar baker’s rolls. It is clear that 
 the satisfaction of my hunger is of infinitely more importance to 
 me than the sa.tisfaction of the dog’s hunger and it is just as clear 
 that it lies with me which of the two rolls I shall consume and 
 which I shall give to the dog. And now the question arises. 
 Which of the two wants here is dependent o n the bread ? 
 
CHAP. IV 
 
 THE LEAST IMPORTANT WANT 
 
 147 
 
 One is tempted to answer, That want to which the bread 
 was actually devote d. But it is evident at once that this is 
 an erroneous conclusion. It would amount to saying that the 
 two rolls, devoted as they are to the satisfaction of wants of 
 different importance, must possess different values ; while it 
 does not admit of question that two similar goods, available 
 under similar conditions, must be entirely equal in value. 
 
 Here, again, an easy casuistical consideration gives the 
 proper solution. The problem is : Which, among several 
 wants, is dependent on a commodity ? This resolves itself 
 very simply when it is known which want it isThaIrwoTiM/ai/ 
 9f if ^ba, t commodity were not present : that 
 
 want is evidently the dependent one. And now it is easy to 
 show that the want which failed of its satisfaction would not 
 be that want which the particular commodity was, accidentally 
 and capriciously, selected to satisfy, but would always be the 
 least imvortant among all the wants irL qup-stioD ; that is to say, 
 among all those wants which would formerly have been pro- 
 vided for out of the total stock of this class of goods. 
 
 Consideration for one’s own convenience, as obvious as it 
 is imperative, induces every reasonable man who acts economic- 
 ally to maintain a certain fixed order i n the s atisfaction of 
 his wants. No one woidd be so foolish as to exhaust the 
 resources at his command in satisfying trifling wants, or wants 
 that could be easily ignored, and thus to deprive himself of 
 the means of satisfying necessary wants. On the contrary, 
 every one would take care to use the resources at his command, 
 in the first instance, to provide for his most important wants ; then 
 for wants that come after these in importance ; then for those of 
 the third rank, and so on ; — always arranging in such a way 
 that the lesser wants were only provided for wlip n all thp hialipj- 
 wants had been supplied, and there still remained some means of 
 
 satisfaction to snare. We act according to the same obvious 
 and reasonable principles when our stock undergoes a change 
 by the loss of one member of that stock. Naturally this will 
 alter the plan according to wliich we have been employing our 
 resources. Not all the wants we had arranged to satisfy can 
 now be provided for, and some abatement in the totality of 
 satisfaction is unavoidable. But, of course, the wise man will 
 try to lav the burden on the least sen .sitive .gpnt ; that is to say. 
 
148 
 
 THE MARGINAL UTILITY 
 
 BOOK III 
 
 if the loss chances to be in a commodity which was destined 
 to a more important use, he will not give up the satisfaction 
 of this more important want, and, by holding on obstinately 
 to his old plan, provide satisfaction for the less important 
 wants. We may be sure that he will satisfy the more 
 important want , and will do so by withdrawing provision from 
 that want, among all the wants hitherto marked out for 
 provision, on the satisfaction of which least depends. To put 
 it in terms of our former illustration : if our sportsman loses 
 the roll which he has meant for himself, he will scarcely feed 
 his dog with the one that remains, and expose himself to the 
 danger of starving. He will suddenly change his plan, elevate 
 the roll that remains into fulfilling its more important function 
 only, and shift the loss to the least important function, the 
 feeding of the dog. 
 
 The case, then, stands as follows. Wants which are more 
 important than this “ last ” want will not be alfectftd~by th^ 
 
 loss of the good, for their satisfaction is, as before, guaranteed 
 
 in case of need by the replacement of substitutes . Nor will 
 those wants be affected which are less important than this 
 “ marginal want,” for they go unsatisfied whether the good is 
 there or not. The only want affected is the last of those that 
 otherwise would be satisfied : it will be satisfied if the good is 
 there ; it will not be satisfied if it is not there. It is thus the 
 dependent want we were seeking. 
 
 Here then we have reached the goal of the present inquiry, 
 and may formulate it thus : the value of a good is measured 
 by the importance of that concrete want, or partial want, which 
 
 is least urgent among the wants that are met from the avail - 
 
 able stock of. similar goods. What determines the value of a 
 good, then, is not its greatest utility, not its average utility, 
 but the least utihty which it, or one like it, might be reason- 
 ably employed in providing under the concrete economical 
 conditions. To save ourselves the repetition of this circum- 
 stantial description — which, all the same, had to be somewhat 
 circumstantial to be quite correct — we shall follow Wieser ^ 
 
 ^ Veher den Ursprung und die Hauptgesetze des wirthschaftlichen WertMs, 
 p. 128. Jevons has the exp ressions “fina l degree of utility” ariH “tprminnl 
 utility .” With MengR r: who first formulated the above law with entire clear- 
 ness, but gets along without the convenience of a short technical expression. 
 
CHAP. IV THE KEYSTONE OF ECONOMIC THEORY 
 
 149 
 
 in calling this least utility — the utility that stands on tlie margin 
 of the economically permissible — the economic j\farginaU Ttililiy 
 of the good. The law which governs~a3noiint of value, then, 
 may be put in the following very simple formula : The value 
 of a good is determined bv the amount of its Marginal ITtiUta r 
 
 This proposition is the key-stone of our theory of value. 
 But it is more. Tn my o nininn it is the rnaster-key to the 
 action of practical economic men with regard to goods. In the 
 simplest’ cases, as in all the tangle anct' complication which our 
 present varied economic life has created, we find men A^aluing 
 the goods with which they have to deal by the marginal utility 
 of these goods, and dealing with them according to the result 
 of this valuation. And to this extent the doc trjnp of marginal 
 utility is not only the key-stone of the theory of -value, but. 
 
 as affording the explanation^^ of . aU . economical transactions, 
 it is the key-stone of all economical theory^ Those who 
 ha-^observed practical life closely will, I think, be convinced 
 that this claim is not exaggerated. Kightly to observe 
 and rightly to interpret what has been observed, however, is 
 an art not always easy ; and in what follows accordingly we 
 shall make use of the value theory to guide us in observing 
 and interpreting what falls within its sphere. We begin, then, 
 with an illustration of the greatest conceivable simplicity. 
 
 A colonial farmer, whose log-hut stands by itself in the 
 primeval forest, far away from the busy haunts of men, has 
 
 the law runs as follows (p. 98) : “ In every concrete case, accordingly, of the 
 satisfactions of want guaranteed by the total quantity of goods, it is only those 
 which have the smallest importa nce for t he person that are dependent on hi.s 
 commanfl over ,n. flelimte parNqii.antitv of the amount of goods at his disposal ; 
 and the value of aTiart-quantity of the available amoun t of goods is, accordingly, 
 equal to the importance which the satisfactions of want that are least urgent 
 among all the satisfactions guaranteed by the total quantity, and obtainable 
 with a similar part -quantity, have for that person.” 
 
 ^ Even where men d o not act egoisticall}' but altruistically , they have occasion 
 to consider the marginal utility, viz, that marginal utility which the goods given 
 away have to the persons who get them. One gives donations, charities, and the 
 like, when the importance of such, measured by marginal uti lity, is very much 
 
 highe r as regards the wellbeing of the receiver than as rega r ds- th a i of the giver, 
 and almost never when the converse is the case. I am glad to know that, in the 
 idea expressed above, I am at one with so distinguished an economist as Walras. 
 I can only express my entire concurrence with what he says, in the preface to his 
 Theorie de la Monnaie, p. 11, as to the universal importance of the idea of marginal 
 utility, both as regards theory and as regards the practice of economic life. 
 
150 
 
 THE MARGINAL UTILITY 
 
 BOOK III 
 
 iust harvested five sacks of corn, Tliese must serve him 
 till the next autmnn. Being a thrifty soul he lays his plans 
 for the employment of these sacks over the year . One sack 
 he absolutely requires for the sustenance of his life till the 
 next harvest. A second he requires to supplement this bare 
 living to the extent of keeping himself hale and vigorous. 
 More corn than this, in the shape of bread and farinaceous food 
 generally, he has no desire for. On the other hand, it would 
 be very desirable to have some animal food, and he sets aside, 
 therefore, a third sack to feed poultry. A fourth sack he 
 destines for the making of coarse spirits. Suppose, now, that 
 his various personal wants have been fully provided for by this 
 apportionment of the four sacks, and that he cannot think of 
 anything better to do with the fifth sack than feed a number 
 of parrots, whose antics amuse him. ISTaturally these various 
 methods of employing the corn are not equal in importance. 
 If, to express this shortly in figures, we make out a scale of 
 ten degrees of importance, our farmer will, naturally, give 
 the highest figure 10 to the sustenance of his life ; to the 
 maintenance of his health he will give, say, the figure 8 : then, 
 going down the scale, he might give the figure 6 to the im- 
 provement of his fare by the addition of meat, the figure 4 to 
 the enjoyment he gets from the liquor, and, finally, to the 
 keeping of parrots, as expressing the least degree of importance, 
 he will give the lowest possible figure 1. And now, putting 
 ourselves in imagination at the standpoint of the farmer, we 
 ask. What in these circumstances will be the importance, as 
 regards his wellbeing, of one sack of corn ? 
 
 This, as we know, will be most simply tested by inquiring, 
 How much utility will he lose if a sack of^ corn-ge ts los Ji-? 
 Suppose we carry out this in detail. Evidently our farmer 
 would not be very wise if he thought of deducting the lost 
 8ack from his own consumption, and imperilled his health and 
 life while using the corn as before to make brandy and feed 
 parrots. On consideration we must see that only one course 
 
 is conceivable : with the four sacks that remain our farme r 
 
 / — - 
 
 will provide for the four most urgent groups of wants_ aiid 
 give up only the satisfaction of the last and least importan L 
 the marginal utility — in this case, the keeping of parrots. The 
 only difference, then, that his having or not having the fifth 
 
CHAP. IV 
 
 THE SACHS OF CORN 
 
 151 
 
 sack of corn makes to his wellbeing is that, in the one case, 
 he may allow himself the pleasure of keeping parrots, in the 
 other he may not ; and he will rightly value a single, sack of 
 his stock acp.nrrimg to this unimportant utility . And not 
 only one sack, but ^ery single sack ; for, if the sacks are 
 equal to one another, it will be all the same to our farmer 
 whether he lose sack A or sack B, so long as, behind the one 
 lost, there are still four other sacks for the satisfying of his 
 more urgent wants. 
 
 To vary the illustration, assume that our farmer’s wants 
 reniam the same, and t hat he has only three sacks of grain. 
 What now is the value of one sack to him ? The test again 
 is quite easily applied. If he has three sacks he can and will 
 provide for the three most important groups of wants. If he 
 has only two sacks, he will be obliged to limit himself to the 
 satisfying of the two most important groups and give up the 
 satisfying of the third, that of animal food. T he possession of 
 thp. tbirr] sack — and the third sack, be it remembered, is not 
 a definite sack but any of the three sacks, so long as there are 
 other two behind it — directly carries witli it, therefore, the 
 s atisfaction of his third most important want ; that is, the last 
 or least of those wants covered by the three sacks which 
 constitute his total stock. Any estimate other than that 
 according to the marginal utility would, in this case also, 
 obviously run counter to facts, and would be quite incorrect 
 
 Finally, suppose that our farmer’s wants remain as before, 
 and that Viq nuly possesses one single sack of corn . In this 
 case it is perfectly clear that all less important methods of 
 employing the corn are out of court, and that it will be devoted 
 to and spent in sustaining the farmer’s life — a function for 
 which it just suffices. And it is as clear that if this single 
 sack fails the farmer wiU no longer be able to support himself 
 in life. His possessio n of the sac k, therefore, means life ; his 
 loss of it means death : the single sack of corn has the greatest 
 conceivable importance for the. wellbeing of the farmer. And 
 all this is still in conformity with our principle of marginal 
 utility. The greatest utility — the preservation of life — is hern - 
 the sol e^ as well as the last or marginal utility. 
 
 These estimates according to marginal utility are not merely 
 “ academic.” No one will doubt tliat our farmer on due occasion 
 
152 
 
 THE MARGINAL UTILITY 
 
 BOOK III 
 
 — say, on an offer made him for the corn — -would act practi- 
 cally according to the same estimat es. Any one of us, placed 
 in his position, would undoubtedly be inclined tb let one of the 
 five sacks go pretty cheap in consideration of and in correspond- 
 ence with its small marginal utility. He would charge con- 
 siderably more for one of the three sacks. And he would 
 not let the irreplaceable sinaU sack, with its enormous Tna.rgina.1 
 
 ntib'ty, go for any price whatever . 
 
 Transfer, now, the field of illustration from the solitary in 
 the primeval forest to the bustle of a highly organised economic 
 community. Here we encounter, in an altogether dominating 
 position, the empirical proposition that quantity of goods, stands 
 in inverse ratio to value of goods, The more goods of one 
 kind there are in the market, the smaller, ceteris parih.cs, is the 
 value of the single commodity, and vice xersd. Every one 
 knows that economic theory has made use of this empirical 
 proposition — the most elementary proposition in the doctrine 
 of price — to establish the law of Supply and Demand . ’ But 
 this proposition maintains its validity quite apart from exchange 
 and price . For instance, how much more value does a collector 
 put upon the single specimen, which represents a class in his 
 collection, than upon one of a dozen of such specimens ? It 
 is easy to show that well-authenticated facts of experience like 
 these follow, as a natural consequence, from our theory of 
 marginal utility. The more individual goods there are avail- 
 abl ft in any p.1a.ss, the more completely can the wants to which 
 they relate be satisfied, and the jess important are the wants 
 which are last .satisfied- — those whose satisfaction is imperilled 
 by the failure of one of the goods. In other words, the more 
 individual goods there are available in any class, the smaller 
 is the marginal utility which determines the value. If, again, 
 there are available so many individual goods of one class 
 that, after all the wants to which they are relative are com- 
 pletely satisfied, there still remains a number of goods for 
 which no further useful employment can be found, then the 
 marginal utility is equal to zero, and a commodity of that 
 particular class is valueless. 
 
 Here, then, we have an entirely natural explanat ion of 
 .phenomenon which originally struck us as so surprising, t hat 
 comparatively “ useless ” things, such as pearls and diamonds. 
 
CHAP. IV 
 
 THE OLD PARADOX EXPLAINED 
 
 153 
 
 have so high a value, while infinitely more “ useful ” things, 
 like bread and iron, have a far less value, and water and air 
 no value at all. Pearls and diamonds are to be had in such 
 small quantities that the relative want is only s atisfied— tCL-a. 
 triflin g eid^ent. 6ind the point of marginal utility which the 
 satisfaction reaches steinds relatively high.^ Happily for us, 
 on the other hand, bread and iron, water and light, are, as a 
 rule, to be had in such q^uantities that the satisfaction of all 
 the more important wants which depend on them is assured 
 Only very trifling concrete wants, or no wants at all, are 
 dependent, for instance, on the command over a piece of bread 
 or a glass of water. It is, of course, true tha t in abnorma l 
 circumstances — as, for instance, in besieged towns, or in desert 
 journeys, where water and food are scarce, and small stores 
 only suffice to meet the most , urgent concrete wants of meat 
 and drink — the msTj c final utility flies up . According to our 
 principles the value of those goods, otherwise of so little 
 account, must rise also, and the inference finds ample empirical 
 confirmation in the enormous prices paid in such circumstances 
 for the most wretched means of subsistence. Thus those very 
 facta wbieb, at fi rst sight seemed to eontradict our theory tha t 
 t he amo unt nf v alue is dependent on the am oun t of utility 
 conditioned, on closer examination afford a striking confirma- 
 
 _tinn-of..i^ 
 
 ' To guard against possible confusion it should be noted that the German 
 writers on value generally speak of “satisfaction of want” under the metaphoj 
 of a descending Bc.a1fi : the increasing satisfaction cree|)s down the scale, and the 
 point of saturation is zero, not 100. — W. S. 
 
CHAPTEE V 
 
 COMPLICATIONS 
 
 The cases we have hitherto considered have been comparatively 
 easy of interpretation ; but practical economic life brings out a 
 great many complications which the practical man treats with 
 easy assurance, but the theorist finds considerable difficulty in 
 explaining.^ To understand these everything depends on the 
 correctness of our casuistical decision as to that amount of 
 utility;_ whic h, the__giyen__circumst^ces,'~^is the marginal 
 utility. For this purpose the following general direction may 
 serve as master-key to all the more difficult problems of value. 
 We must look at the economic position of the person who is 
 
 estimating the value of a good from two points of view . First, 
 we must in thought .add the good to his stock, and consider 
 what further and lesser concrete wants can nmo. be satisfied. 
 Second, we must in thought deduct A he go o d , from his stock 
 and consider again what concrete wants will still be satisfied. 
 In the latter case, of course, it becomes manifest that a certain 
 layer of wants, viz. the lowest layer, has lost its former pro- 
 vision ; this lowp st laypr hnrlipat es the marginal utility that 
 determines the valuation.^ 
 
 1 On the rfilation of theory and practice in the sphere of valuation see 
 Conrad’s Jahrbucher, vol. xvi. p. 74. 
 
 ’ Generally speaking, there are two occasions on which a man is called on to 
 form a judgment as to value. One is on parting with a f^ood in Lig-p»sR ession, 
 e.g. in giving it away, or exchanging, or consuming it ; the other, on ac quiring a 
 good. In the two cases the form which the valuation assumes in thought is, 
 externally, a little different. A good which a man has he values according to the 
 injury which he would suffer by its loss ; he values it, therefore, according to the 
 last satisfaction which is assured him by having it. A good which a man has not 
 he values, on the contrary, according to the increment of utility which its acquisi- 
 tion brings ; i.e. according to the most urgent among those satisfactions which, 
 
CH. V VALUE DETERMINED BY A FOREIGN UTILITY 155 
 
 The first very obvious but, theoretically, not unimportant 
 application, leads us to recognise that in valuing a good some- 
 times it is the importance of some one individual concrete want 
 that is taken into consideration, sometimes it is the import- 
 ance of many concrete wants that has to be summed up. That 
 is to say, in the nature of things the layers of want that 
 depend on the object we are valuing may turn out to be very 
 
 various, in compass and extent accm-dino- to the c.nTistitiiti.nD_Df 
 
 that object . If it is a single individual of a perishable group 
 of goods, for instance a food, the marginal utility will usually 
 include no more than one single concrete want, or even a 
 partial want. If the object, again, is a durable good, and thus 
 susceptible of repeated acts of use, or if it is a number of goods 
 considered as a whole, it is natural that an entire sum — in 
 certain circumstances, a very great sum — of concrete wants may 
 be included in the layer of wants that depends on it. On the 
 possession or non-possession of a piano, for instance, depend 
 hundreds of musical enjoyments ; on the possession of a cask of 
 wine hundreds of pleasures of the palate ; and the importance 
 of those pleasures naturally must be summed up in valuing 
 these goods.^ 
 
 To pass on now to another far-reaching complication . It 
 follows from our earlier analysis that the marginal utility 
 which determines the value of a good is not (or is only acci- 
 dentally) identical with the utility which the good itself 
 actually afibrds.^ As a rule, the marginal utility of any good is 
 a foreign utility, the utility of the last individual good (or of 
 the last similar part, which may be takeiTTo replace it. In 
 simple cases this utilitj^ although the utility of another good, 
 is at the least the utility of a, good o f-tbe-sa me kin^ . In the 
 illustration already madp use of, the value of each individual 
 
 in the conditions of his fortunes up till the present time, he has not been able to 
 obtain. Naturally we g et the same resul t by either method, for the final satis- 
 faction which is assured hv a g'ondls always identical with the first which would 
 be lost without the good. In the text I have put the formula in such a way 
 that it will sufficiently embrace either method. 
 
 ^ On certain far-reaching complications which may be connected with this, 
 see Conrad’s Jahrhucher, vol. xvi: p. 34. 
 
 ^ The latter occurs only with individual goods, or with those particular 
 goods which may liave chanced to be selected just for the most insignificant 
 service. 
 
156 
 
 COMP Lie A LIONS 
 
 BOOK in 
 
 sack of corn — and therefore the value, for instance, of the first 
 sack — was determined by the utility of another, the last sack 
 of corn, but always by the utility of a sack of corn. The 
 existence of org anised excha nge, however, may cause consider- 
 able coinpIicatiouB here. In making it possible to exchange 
 goods of one kind, without loss of time, for goods of another 
 kind, it also makes it possible to shift a loss, which occurs in 
 one kind of goods, over to another kind . Instead of replac- 
 ing the loss of an individual good by withdrawing another 
 good of the same kind from a less important employment, 
 and leaving there a vacancy, we may summon goods of 
 entirely different kinds from tlie occupation in which they 
 have previously been employed, and, by way of barter, procure 
 the good required to supply the loss. What is here lost in 
 losing a good of class A is really the utility which the goods 
 taken from class B would otherwise have afforded ; and since, 
 of course, we should not think of taking the replacing good 
 from the more important but from the least important employ- 
 ments in their spheres of utility, the loss comes u pon t.Ke 
 m arginal utility of the foreign good. tha,t transferred from clas s. 
 E to class A. Here, therefore, the marginal utility and the 
 value of a good of one kind is measured by the marginal 
 utility of a good of another kind — by the good (or portion of 
 goods) devoted to replace it. 
 
 To illustrate this. My only overcoat has been stoleni ^f" 
 There is no question of replacing it directly by another coat o:^ 
 the same kind, because I had only the one. But, all the 
 same, I shall not willingly let the loss caused me by the theft 
 rest where it originally fell. For the want which now makes 
 itself felt — that of warm winter clothing — is a very urgent 
 one ; its non-satisfaction may involve the most serious conse- 
 quences to my health, and even endanger my life. .1 shall 
 accordingly try to shift the incidence of the loss on to other 
 
 kinds of goods , and I shall do so by parting, in exchange for a 
 new overcoat, with goods which, in other circumstances, woidd 
 have been put to other uses. The goods needed for this ex- 
 change I shall, naturally, withdraw from those uses which are 
 of least consequence to me ; that is to sav. I shall take the 
 goods which are of least marginal utility to me. If I am well 
 off I sliall probably take the £3, the price of a new greatcoat, 
 
CHAP. V 
 
 THE SUBSTITUTIONARY UTILITY 
 
 157 
 
 out of my cash-box, and I shall be able to buy oue luxury the 
 less with my diminished funds. If I am not weU off, but am 
 not exactly a poor man, 1 shall have to fill up the deficit in 
 the cash-box by economising on my house-keeping expenses 
 for a couple of months. If I am so poor that I neither have 
 the money nor can save it out of my monthly income, I may 
 have to sell or pawn some articles of furnitnrp., which can be 
 most easily dispensed with. Finally, if I am so far reduced 
 that I can provide only for the most urgent concrete 
 wants in all the other classes, t hen I cannot shift the loss to 
 other classes of wants, and needs must get along without an 
 overcoat. 
 
 If we put ourselves for the moment into the position of 
 the owner of the overcoat, and ask what it is. as regards his. 
 wellbeing, th at depends on the coat being stolen or not, we 
 shall tind that the dependent circumstance is, in the first 
 case, the spending of money on some luxury ; in the second, 
 some little curtailments in house-keeping ; in the third, de- 
 privation of the utility of the goods sold or pawned ; in the 
 fourth, the actual preservation of health. Only in the last 
 case, therefore, is the value of the coat determined by the 
 
 immediate marginal utility of its own class. (which marginal 
 utility here happens to coincide with the utility of the good 
 itself because the class is represented by a single individual) ; 
 in aU the other cases it is determined by the marginal utility 
 of foreign classes of goods and wants. 
 
 Under the present econouno system , where exchange is 
 very highly organised, a notable importance attaches to. the 
 casuistical modification we have just descriheal . We might 
 almost say that it includes the majority of subjective estimates 
 of value. For reasons which may be easily inferred from 
 what has been said, we scarcely ever value goods that 
 are indispensable to us bv their direct utility., but, almost 
 always, according to the “substitutionary utility ” of foreign 
 classes of goods. I should say, however, empluitically that, 
 even where exchange is most highly organised, we do not 
 always have occasion to employ this latter method of valuation ; 
 it is only under certain conditions, although of course con- 
 ditions that very often occur. That is to say, we employ the 
 “substitutionary” method only when the marginal utility of 
 
158 
 
 COM PLICA TIONS 
 
 BOOK III 
 
 flip, rpplaciiig good is less than the immediate marginal utility 
 
 of the class into which it is transferred to put it more 
 exactly, when the prices of goods, and, at the same time, the 
 circumstances of provision for the various kinds of wants, are 
 such that, if a loss occurring in one kind were borne inside the 
 kind itself, wants relatively more important would go unsatisfied 
 than if the purchase price of the replacing good were drawn 
 from other kinds of wants. But through all complications it 
 is always the lemt utility, mediately or immediately depend put 
 
 on a good, that determines its true marginal utility and value. 
 
 Casuistical complications similar to those made possible by 
 exchange may be caused by the fact that replacing goods can 
 be quickly obtained by production . This kind of complication 
 also has a very notable place in the theory of value, from the 
 fact that it gives the kev to the influence of cost of p roduc tion 
 on value. It requires, on that account, particularly careful 
 treatment. But it will be more appropriate to give an inde- 
 pendent consideration to this and to certain other casuistical 
 complications somewhat later, and to return meantime to the 
 simple fundamental law, the statement of which requires to be 
 supplemented in a particular direction. 
 
CHAPTER VI 
 
 WHAT DETERMINES MARGINAL UTILITY 
 
 Thus, far we have traced the amount of value which goods 
 possess to the amount of their marginal utility. We may, 
 however, pursue the causes which determine value one step 
 I'arther back, a nd ask on what circumstances the amount of thi s 
 marginal utility itself depends . The answer is ; — on the rela - 
 tion between Wants and their Provision. The way in which 
 these twolactors influence the amount of marginal utility has 
 been suggested so often and so fully in the foregoing analysis, 
 that I need not say anything further in way of explanation. 
 I shall content myself with shortly formulating the law relating 
 to it. It runs thus: the mo^e cnmjrphe nsive and tl]f. more- 
 intense the want, the higher the marginal utihty. and vice versd: 
 
 That is to' say, the more numerous and the more intense the 
 wants demanding satisfaction on the one hand, and the less the 
 quantity of goods available to satisfy them on the other hand, 
 the more important are the layers of want that must remain 
 unsatisfied, and the higher, therefore, the marginal utility . 
 And conversely, the fewer and the less urgent the wants, 
 and the more goods there are to satisfy them, the deeper 
 down the scale goes the satisfaction, and the lower falls the 
 marginal utility and the value. It comes nearly to the 
 same thing, only in a less precise form, to say : Trsefalness 
 ^d Scarcity are the ultimate determinants of the value 
 
 nf _gi7orls In so far asC| he degree of jisefulness inLdic9,tes 
 wheth er, i n its way, the good is capable of more or less 
 important services to human weilbeing, so far, at the same 
 time, does it indicate the height to which the marginal utility , 
 in the most extreme case, mav rise. .Rut it is. the scarcity 
 
160 WHAT DETERMINES MARGINAL UTILITY book iii 
 
 that decides to what point the marginal utility actually does 
 
 r ise in the concrete case. ^ 
 
 ^ In his recently published essays on Wcrtlithcorien nnd JFcrtligesetzc (Conrad’s 
 Jahrbucher, N. F., vol. xvi. pp. 417-437, and 513-562) Scharlina; will not allow 
 that t he relation of Wants and Prov ision is_th^ultimate un iversal determ in ant of 
 the value of goods, and would substitute Difficnltv of Attainment in its place 
 {ibid. p. 425, and particularly p. 430 in note, and p. 551). Notwithstanding 
 some striking things in it I frankly confess — and all the more frankly that I 
 attach so much scientific importance to the Danish economist, and so much 
 weight to anything he says — that I consider not only this proposition, but the 
 whole treatise he has written in its proof, as a lamentable relapse in scientific 
 analysis^ Scharling has done everything possible to re-entangle certain things 
 that had up till now scarcely escaped from confusion. And what makes it worse 
 is that he has done it with skill, and with a certain semblance of truth. I con- 
 sider “ difficulty of attainment ” one of those unlucky catch-words which can be 
 stretched and stretched like an indianibber band ; it leads out of one ambiguity 
 into another, and it either explains things falsely or does not explain them at all. 
 I mean that either one connects with it a definite, limited, and narrow meaning, 
 and holds fast by that — in which case the explanations that one would base on 
 this narrow conception prove to be positively false ; or one draws and stretches 
 the rubber band, and, by making perverted and violent constructions, forces all 
 sorts of foreign things under the elastic — in which case we avoid open contra- 
 diction, but at the cost of making the proposition expressed by the catch-word 
 an insipid and weak phrase, which does not explain, but goes round about an 
 explanation. And just this has been Scharling’s fate. What does he mean by 
 “difficulty of attainment ” ? He explains it as the amount of effort that every 
 one must take on himself to obtain a g5od7~or the effort which is spared him by 
 the possession of the good fp. 430). And what does the word “effort,” again, 
 mean ? If any precise conception is to be attached to it, it can scarcely be under- 
 stood as anything else than as some sort of exertion, pain, or labour. But if this 
 is the meaning attached to it then the appeal to “saved effort,” as the principle 
 of the value of goods, is positively false. To give one example out of a thousand, 
 take the case of a pensioner past work with an income of ^60. He is told to 
 value the overcoat which he possesses according to “saved effort.” What kind of 
 effort may that be ? Perhaps the effort which he would have to expend to produce 
 the overcoat himself? Certainly not ; he would never himself make the coat, but 
 always buy it. Or the eft’ort which he would have to put forth if he were to pro- 
 duce those goods which he had to give away as equivalent for the coat ? Neither 
 can this be the case ; for, past work as he is, he would never acquire this purchase 
 price through effort, but simply take it from his income, and for that, of course, 
 he must curtail the satisfaction of other less important wants. What^ therefore. 
 the possession of the overcoat snares him is not an effort, but a deprivation, and 
 a deprivation the amount of which, as I have indicated in the work disputed by 
 Scharling, depends exactly on the importance of those last needs which are satis- 
 fied by the good, which lose their satisfaction in losing it, and the urgency of 
 w^hich itself, again, is determined by the existing relation of Wants and Provision. 
 It is only in those rare cases mentioned by me in Conrad’s Jahrbiicher {ibid. p. 42) 
 — the exceptional character of which I most distinctly maintain in spite of 
 Scharling’s remarks (p. 430, note 11 — that the amount of an eff ort or the pain of 
 l abour can he the immediate standard of v alue. — Now I admit that Scharling 
 
CHAP. VI RELATION OF WANTS AND PROVISION 
 
 161 
 
 This proposition, that the h eight of marginal utility is 
 determinerl hy th p rplatlmis of Wa nts and Provision, arlmits ^ 
 a great Dhrnher"(Trusi^uT application s. Just now I shall only 
 emphasise two of these, wliich we shall have to make use of 
 later on in the theory of objective exchange value, first, since 
 the relations of Wants and Provision among individuals are 
 extremely various, one and the same good may possess a n 
 entirely distinct subjective value for different persons — without 
 which, indeed, it is difficult to see how there coidd be any 
 exchanging at al l. And thus, second, under otherwise .similar 
 circumstances, the same quantities of goods have a different 
 value to rich and poor ; to the rich they have a smaller, to the 
 poor a larger value. The rich being amply supplied with all 
 classes of goods, their satisfaction extends, generally speaking, 
 to the more unessential wants, and the added or deducted satis- 
 faction dependent on any particular good is, consequently, 
 inconsiderable ; while to the poor man, who is generally able 
 to provide for only his most urgent wants, the utility which 
 depends on each good is much greater. Experience also 
 shows that poor men find it a pleasant thing to acquire goods 
 
 and a painful thing to lose them , where a similar gain or loss 
 does not affect the rich at all. We would scarcely compare 
 the state of mind of a poor clerk, who received his month's 
 salary of £5 on the first day of the month and lost it on his 
 way home, with that of the millionaire who dropped the same 
 sum. To the former the loss would mean most painful priva- 
 tion over a whole month ; to the latter it would only invoh'e 
 the want of some idle luxury. 
 
 sometimes gives the word “eS'ort ” quite another meaning from that of a pain. 
 To avoid repetitions, however, I will show' what that leads to, a little later, under 
 the theory of price. — Finally, the illustration, with which Scharliiig thinks he 
 has signally refuted my doctrine, will not mislead any one who has rightly under- 
 stood the doctrine of marginal utility. If a boy, who hitherto had only had a 
 single apple, were allowed for once to pull as many apples as he liked in a 
 neighbour’s garden, he would, I admit, immediately reduce the value he put upon 
 the good called “ apple.” But why ? Not, as Scharling thinks he may assume as 
 self-evident, because “ his relish and his enjoyment in consuming the fruit remain 
 unchanged.” This enjoyment may run down a whole graduated scale from the 
 consumption of the first and single apple to entire satiation with apples, but it is 
 perfectly clear that tb e boy with the single apple sacrifices the enjoyment which 
 stands highest in th is scale, while, “ with one of many apples to choose from,” he 
 sacrifices only a very trifling one. 
 
CHAPTEE VII 
 
 ALTERNATIVE USES 
 
 In the present and following chapters of this book we shall 
 continue the discussion of various casuistical comphcations 
 
 which arise in practical life in the formation of value. We 
 must go into these for two reasons : first, in order to put on 
 a surer foundation the perfect agreement of our theory of 
 value with the phenomena of actual life , and, second, because 
 the conclusions arrived at now will find important applicationa 
 later when we come to the theory of capitaJ . 
 
 It often happens that a commodity permits of being 
 
 employed or used in two or even several eutirely difFp.rp.nt way s. 
 Wood, for instance, can be used for burning or for building; 
 grain for bread, for seed, or for distilling ; salt as a relish, or 
 as an auxiliary material in the making of chemicals. Since, 
 then, in each different employment the commodity supplies 
 different wants, and these wants have, of course, different 
 degrees of importance ; since, further, in these different classes 
 of wants, the relations of want and its provision are frequently 
 dissimilar ; and since, finally, the good, if it possesses a complex 
 usefulness, does not usually possess this usefulness in the same 
 degree at all times, — on all these grounds it is easy to .gee that , 
 the increment of utility which a good causes, or the marginaJ 
 utility which it rrm.v afford, may vary very greatly from one 
 pm piny merit tn ^nnthp. 7 - For instance, it may very well be 
 that a pile of boards, used for building material, affords its 
 owner a marginal utility that may be indicated by the figure 
 8, while the same boards, used as fuel, would only afford a 
 marginal utility indicated by the figure 4. The question now 
 is : In Auch cases which is the true economical m arginal utility 
 that determirips the value of the good ? 
 
CHAP. VII 
 
 THE HIGHEST MARGINAL UTILITY 
 
 163 
 
 The answer is easy enough . it is always the highest . 
 marginal utility. As has been already shown at length/ the 
 true marginal utility of any good is identical with the least 
 utility which it may be employed, economically, in proAuding. 
 
 If, then, several mutually exclusive employments compete for 
 any particular good, it is clear that, in any rational scheme of 
 economy, the most important among them will get the prefer - 
 ence ; it alone is economically permissible : all less important 
 uses are excluded ; and, as the good cannot be used in these 
 employments, they can have no influence on the value set upon 
 it. To put it in terms of our concrete example. If a peasant, 
 after using his stock of wood to provide for all the more urgent 
 wants of building and fuel, has still two uses for wood — two 
 employments to which he could profitably put it — indicated by 
 the numbers 8 and 4, but has only one pile of boards remain- 
 ing, it is clear that he will apply them to the more important 
 of the two uses, and leave the less important unprovided. 
 
 So long as he can get a utility indicated by 8 in building, 
 he will not burn the wood to get a utility indicated by 4. 
 'V^^lat depends, then, on his having or not having that particular 
 pile of boards, is the obtaining or not obtaining of the greater ^ 
 utility 8. We may put the rule in general terms thus i in 
 the case of goods which allow of alternative usesor emp loy- , 
 men ts, and are capable of furnishing diflerent marginal ut ilities 
 in these uses ^ that employment which yields the highe^ marginal 
 utilitvAs~the standard for the exionomical value of the gpods. 
 
 This 5e~ found amply confirmed by experience. 
 
 ISTobody wo uld price oak furniture at its value ah fuel, or s ell a 
 fine picture f or the price of old canvas, nr estimate a lady’s 
 hunter by its capac ity to draw a bu tcher’s cart ! 
 
 The formula, however, as now stated might easily give rise 
 to mistakes, and it will be advisable to anticipate these before 
 going further. It might seem as if what I have just said was 
 contradictory of what was said a little ago. I now sav that. 
 among several alternative employments having different marginal 
 
 utilities, the highest is the standard, while a few pages ago it 
 was demonstrated that, if the immediate marginal utility of a 
 good (say the utility of the last good of its own class) was 
 greater than its mediate marginal utility (say the marginal 
 ^ See above, p. 147. 
 
164 
 
 ALTERNATIVE USES 
 
 BOOK HI 
 
 Utility of goods of another class employed as substitutes), the 
 lower marginal utility was the standard.^ The seeming con- 
 tradiction is very simply explained. In the former case we 
 were dealing with a distinction between several ways in which 
 a stock of goods could be employed ; now we are dealing with 
 a distinction between two or more employments for which the 
 stock of goods is not sufScie nt. and, as I have already shown ^ 
 on a former occasion, the least of those uses to which a good 
 is put always coincides exactly with the greatest of those uses 
 which fail of provision if there is no such good. 
 
 When, then, in the above formula I spoke of several alterna- 
 tive employments and of alternative marginal utilities , it must 
 be understood as a method of expression which, literally speaking, 
 is not quite correct. For, naturally, of those competing employ- 
 ments only one cail, economically, be the last ; pnly nnp there- 
 fore, can be the true “ marginal employment ” — that in which 
 we find the marginal utility — while all the other employments 
 are, economically, inhibited. They make the more demand on 
 our attention, however, as being the first or most conspicuous 
 representatives of an entire branch of employment. As soon 
 as we think of this latter branch at all, these representatives 
 force themselves, in the first place, on our consideration, and 
 it is by choosing between them that we, as it were, give a casting 
 vote for one among entire groups of employment, such as 
 carving and burning of wood, hacking and knacking of horses, 
 and so on — an actual psychological procedure which appears to 
 me best and most concisely indicated by the above formula. 
 
 Here, however, it must be emphasised that the precedence 
 given in the course of our inquiry to those pseudo-marginal 
 employments is only formal : in our economical decisions they 
 enjoy no sort of material preference. Generally speaking, 
 th e fact that th^ employments to which a good mau he^ynt. 
 fall into several distinct branches has really not the slightes t 
 influence on our calculations pL value. Just as we do not value 
 goods according to kinds of wants,® so we do not distribute 
 them according to tranches of employment . Every concrete 
 employment is only looked on as a possible employment 
 according to the rank which it maintains in virtue of its 
 importance among all competing employments of every branch. 
 
 ' See above, p. 157. ^ See above, p. 154 in note 2. ® See above, p. 142. 
 
CHAP. VII 
 
 THE PSEUDO-MARGINAL UTILITY 
 
 165 
 
 And thus, in obedience to the principle of economic conduct, 
 we always follow one and the same course ; we ^ocate our 
 stock of p-Qods among the concrete uses which are of most 
 
 importance_Qm-aur sca^ and the lagt^ of these determines for 
 
 us the marginal utility andPtE^alue of the good^ 
 
 Now in doing so it will often happen that only one single 
 branch of employment is taken into consideration. This will 
 of course be, quite regularly, the case where we have only a 
 single individual commodity to dispose of. But it will also 
 happen where a whole series of concrete employments of one 
 kind outweighs that of another kind in importance, and where, 
 at the same time, this series is long enough, or the available 
 stock of goods is small enough, to leave no provision for_ em - 
 ployments of less importanc.e. If, for instance, in any branch 
 of industry, there are a hundred opportunities of employing 
 certain goods, and the importance of each opportunity is indi- 
 cated by the figure 8, while the opportunities in another branch 
 of employment are indicated only by the figure 6, and if our 
 stock of goods consists of fifty individual commodities only, 
 naturally all the fifty will be devoted exclusively to the -fixst, 
 kind of employment, and their value will be. fixed, ar-cnrHir^g 
 to the highest utility, at 8. But often it will happen that 
 wants representing different branches of employment — say, for 
 instance, timber wanted for building and for burning — demand 
 satisfaction simultaneously ; in such eases it is the ratio that 
 chances to exist between the opportunities and the goods that 
 
 decides to what branch of want the “ last ” employment will 
 belong ; that is to say, the employment which determines the 
 value. Suppose that in one branch of employment there are 
 four opportunities, indicated, according to importance, by the 
 figures 10, 8, 6, 4; and that in another branch there are 
 four opportunities, indicated by the figures 9, 7, 5, 3 ; and 
 suppose that a man possesses in all five individual goods ; 
 there is no doubt that the five goods will be allotted to the 
 opportunities 10, 9, 8, 7, 6, and that the last figure (which, 
 accidentally, belongs to the first branch of employment') is the 
 real marginal utility and deternnines the value of the good, 
 while the employment that comes next in the second branch, 
 that indicated by the figure 5, must, according to our formula, 
 become the' “ pseudo-marginal utility. ” 
 
CHAPTER VIII 
 
 SUBJECTIVE EXCHANGE VALUE 
 
 We are now ready to consider a concrete application of what 
 has just been said, and one that lies at the root of a very wide- 
 spread phenomenon. Hitherto we have mostly had before us 
 cases where a commodity, in virtue of some technical adapta- 
 bility pecuhar to it, becomes susceptible of being employed in 
 various ways. Quite apart from any such special assumption, 
 however, the existence of an organised system of exchange 
 gives almost nvery good a second kind of eTnpInympjit, — that 
 of being bartered for other goods. It is customary to put this 
 against, and in opposit ion to, all other kimls of 'umployiirent, 
 and to associate this opposition betweeiVHJ^’^d “Exchange” 
 with a division of value into “Use Value” and “Exchange 
 Value.” 
 
 Understood in a certain sense, to which in this place 
 we shall adhere, both of these — exchange value as well as 
 use value — are kinds of subjective value . Use value is 
 the importance which a good obtains for the welf are of a 
 person, on the assumption that it is used immedia tely in 
 furthering"hTs wellb eing; and, similarly, exchange value is the 
 importance which a good obtains for the welfare of a person 
 through its capacity to procurj^. other goods by wavj)f barter . 
 The amount of use value is measured, according to rules 
 already known to us, by the amount of the marginal utility 
 which the good in question brings its owner when used by 
 himself. The amount of (subjective) exchange value, on the 
 other hand, obviously coincides with the amm int-. nf tbp nsp 
 v alue of the goods got in exchange. When I employ a good 
 by bartering it I procure for my welfare exactly what the 
 
CH. VIII A SPECIAL CASE OF ALTERNATIVE USES 
 
 167 
 
 goods I get iu exchange procure for me in utility. Tlie 
 amount of the good’s subjective exchange value, therefore, is 
 
 to be measured by the marginal utility of the goods got in 
 exchange for it. 
 
 Now nothing is more common than that the use value and 
 the exchange-^alue-of a good to its owner are of unep[u^ 
 
 amount . To a scholar, for instance, the use value of his books 
 would, as a rule, be considerably greater than their exchange 
 value, while to the bookseller the contrary is likely to be the 
 case. The question now recurs. Which of the two values in 
 such cases is the true one ? ^ 
 
 Here we have only to deal with a special case out of a 
 group for which we have already laid down the general rule. 
 Employment in personal use and employment in exchange are 
 two different ways of employing one good. If the good 
 affords a different marginal utility in each employment, it is 
 
 the higher utHitv that gives the standard forntsTsconomical 
 value,^ If. therefore, the use value and the exchange^vulue of 
 aTgood are different in amount, the higher of them is its true 
 value. We recognise this principle in practical life. We 
 always employ our goods in that which corresponds to the 
 higher and the true value. The scholar keeps his books ; the 
 bookseller sells his^ Or, if the scholar gets into reduced cir- 
 cumstances, he also sells his books ; but in this case, while the 
 use value and also the objective exchange value of the books 
 remain unaltered, their subjective exchange value to him has 
 risen. That is to say, there are now more urgent wants of other 
 classes clamouring in vain for satisfaction, and the possibility 
 of satisfying these other wants through the sale of the books 
 acquires for him an increased importance, and an importance 
 that easily outweighs the use value of the books. 
 
 The recognition that there is a subjective exchange value. 
 
 and that this is something entirRly^istirTctrfrnm what is usnallv 
 called exchange value (that is, objective exchange value), is of 
 
 1 It is easy to see that we can only speak of two values in the same loose way 
 as we spoke above of several “ alternative marginal employments,” for, naturally, 
 a good can never have anything ^but one value to a person. Valnp is yVip 
 impo rtance g l^ip.li g^nnrl has for the wellbeing of a man, and this importance 
 cannot be at the same time~~greaL and smallydii^er or lower. But we do 
 now and then use this rather inaccurate way of thinking and speaking, and, 
 therefore, I have here, as on the former occasion, adapted my formula to it. 
 
 V 
 
168 
 
 SUBJECTIVE EXCHANGE VALUE 
 
 BOOK III 
 
 fundamental imporf.anne in guiding us among the phenomena of 
 
 value,. It may be advisable, on that account, to devote a little 
 more attention to the subject. The illustration of the scholar 
 is enough to convince us that the subjective importance, based 
 on the possibility of barter, may take a different direction from 
 that taken by the objective power-in-exchange and price of 
 goods. Fo r, price remaining unaltered, the subjective exch ange 
 v alue of the goods may rise. But the two exchange values 
 may even move simultaneously in opposite directions. Take 
 the case of a poor student, whose last and sole possession — the 
 only thing he can call his own — is a Jubilee sovereign. There 
 is no doubt that this sovereign will have a high subjective 
 importance for the satisfaction of his own wants ; and there 
 is no doubt that this importance is an exchange value, for 
 sovereigns have no use value. Now suppose that our student 
 falls heir unexpectedly to a fortune of ten thousand pounds, 
 while, simultaneously, on account of the limited number 
 issued, the sovereign goes up from 20s. to 40s. How is it 
 now with the “ exchange value ” of the sovereign ? Here the 
 difference between the two conceptions becomes manifest. The 
 ohiective exchange value, the current value of the coin, luis gone 
 up from 20s. to 40s . ; but the importance which it has for the 
 satisfaction of its owner’s wants, tbo Rnhjp.r.f.ive exchange value 
 of the sovereign, haa, owing to the changed relations between 
 the student’s wants and his resources, ij n gn psti on a 1)1 y fa 11 en . 
 Yesterday our student would have lamented the loss of the 
 sovereign as the loss of his last defence against extremest 
 hunger and misery ; to-day, perhaps, he gives it away with a 
 light heart to a friend who collects coins. In spite of its 
 increased current value it has become a mere bagatelle to him. 
 
 This fundamental and real difference between the two con- 
 ceptions of exchange va.bie is the principal reason why we can - 
 not accep t ordinary division of TTse Value and Exchang-e 
 ■\^aliig^as the ultimaJg~divisiOirbrthe total phenomena of value. 
 To do so would be to separate related things, and to mix up 
 matters which are really so heterogeneous that it is scarcely 
 possible to find a, common definition for them. Obviously. 
 .subjective exchange value is much more nearly related to sub- 
 
 jective use value than to obje ctive exchange value. If we 
 wish to find our way with certainty among those phenomena 
 
CHAP. VIII 
 
 DIFFERENT FROM OBJECTIVE 
 
 169 
 
 to which the name of “ value ” has been attached, it is ad- 
 visable to do as we have done : place objective exchange valne 
 by itself on one side , and subjective value on the other side , 
 and afterwards separate tlie latter into subjective use valu e 
 and subjective evcb.sn ap vnbic, ' 
 
 ^ Notwithstanding the ohjentions of Diehl (/'. J. Proudhon. Seine Lchre und 
 scin Lcben, vol. i., Jena, 1888, p. 109), who approves of the “traditional dis- 
 tinction of Use Value and Exchange A'alue,” I must bold bv evervtliing 1 have 
 .said above. 
 
CHAPXEE IX 
 
 THE VALUE OF COMPLEMENTARY GOODS 
 
 It very often occurs that, in order to obtain an economic 
 utility, several goods requi re to r.n -opp,ratp. in such a way that, 
 if one good falls out of its place, the utility cannot be obtained, 
 or cannot be completely obtained. Goods whose uses thus 
 supplement each other we may follow Monger in calling (lom- 
 
 plementary goods. ' Thus, for instance, paper, pen and ink, 
 needle and thread, cart and horse, bow and arrow, right and 
 left hand, gloves, and so on, are complementary goods. This 
 complementary character obtains generally, indeed almost uni- 
 versally, among productive goods. 
 
 It is easy to see that the intimate Co-relation of comple- 
 
 mentary go ods — the co-relation in which they afford this 
 utility — will be reflected in the formation of their value . 
 This leads to a number of peculiarities, all, however, occurring 
 within the limits of the universal law of marginal utility. 
 In stating these we must distinguish between the value which 
 belongs to the complete group, and that which belongs to 
 individual members of it. 
 
 The total value of the com plete group adapts itse lf, as a 
 i/^ule, t5 the amount of the marginal utilj t^y if-lc-o.QpQLIp 
 
 of Affordii ' i£r ~SA a group. Tf, for instance, three goods. A, B, 
 and C, form a complemen tary group, and it the smallest util ity 
 economically obtainable by the .joint employment of these th ree 
 goods amounts to a value of a hundred, the three goods A . B, 
 and~C taken together will be worth a hund red. 
 
 The only exception to_ this rule occurs in those cases where, 
 he general principles with which we are now famjliar, the 
 -pr a good is to be measured, not by the immediate 
 
CHAP. IX 
 
 HOW DIVIDED OUT 
 
 171 
 
 marginal utOity of its own, class, hut by the marginal utilitv 
 of other' classes of goods drawn on to serve as siihstitutos . 
 In the speciaT'case^nder consideration this will occur if every 
 individual member the cbmplete group is repl^eable by 
 purch ase, or production. or~~eTOn by taking a si ^stitute out of 
 some other isolated e mployment, and if. at the aame~fini e. the 
 total sum of the utility 
 
 would 
 
 otherwise (in isolation) have had is less than the ma rginal 
 utilityTHey~a&rd as combined. If the latter, for instance, 
 amounts to 100, while the substitutionary value, the value of 
 the three members individually, is only 20, 30, and 40 — that 
 'is in all 90, — the thing that depends on the group of three is 
 not the obtaining of the combined utility of 100 — which is, 
 in any case, assured by the substitutionary goods — but only 
 the obtaining of the smaller utihty, the- 90, which fails of its 
 provision when the members are taken away and become 
 substitutes in the group. Since, however, in such cases the 
 complementary character has, properly speaking, no influence 
 on the formation of value, and the value is simply determined 
 according to the ordinary laws already famihar to us, we need 
 not give any separate, consideration to this. In what follows, 
 then, I shall give particular attention only to the normal case , 
 where the marginal utility attainable by goods in joint employ- 
 
 ment is. at the same time, the true marginal utilitY. 
 
 As was before remarked, this marginal utility, first of all, 
 determines the united value of the whole group. But in the 
 manner in which this total value is divided out ambng~the 
 single membefs 'df'the "^bup, considerable differences emerge. 
 varyin g with the ca suistical peculiarly of the case. 
 
 First, if none of the membe rs admits of any use other 
 than thg jomf:SsL-B.nd if. at the same time, no one member^ 
 which co-opsrates towards the joint utility can be replaced, 
 then one single member has the full total value of the group, 
 
 and the other members are entirely v alueless. Suppose, for 
 instance, I pay five shillings for a pair of gloves, five shillings 
 is the total value of the pair. If I lose one of the gloves I 
 lose the whole utility, and, with it, the whole value of the pair ; 
 and the remaining glove has no value. Of cnur.se pitber nf th e 
 ltWP-g1rt yes equally admits of either valuation, and it is simply 
 circumstances that decide which of them is to rank as all. 
 
172 THE VALUE OF COMPLEMENTARY GOODS book in 
 
 and which as nothing — the glove needed to complete the pair, 
 or the useless single glove. Cases of this kind are relatively 
 scarce in practical life. 
 
 Second, and mnrp. common, is the case where the indi- 
 vidual mernhers of the group can afford anothpr, thnnph a loss 
 utility, outside of their joint emnloyinent Here the value 
 of the single member does not lie between everything and 
 nothing, but between the amount of the marginal utility which 
 it is capable of affbrdm^ in isolatibh^’as minimuniTahcnhe 
 amount of the joint marginal utility, after deductin g th e isolated 
 marginal futility of the'oEheFniembers, as nTaximum. Suppose, 
 for instanceythnJHire'e gbdds, 3 l 7B, and C, in co-operation afford 
 a marginal utility of 100; tliat A by itself has a marginal 
 utility of 10, B by itself of 20, and C by itself of 30; the 
 value of A is determined as follows . If a merchant owns this 
 good by itself he can get from it only its isolated marginal 
 utility of 10, and the value of the good, accordingly, is only 
 10. But suppose he owns the tohole group, and is asked to 
 seU or give away the good A out of that group, what he has 
 to consider is that, with the good A he can get a marginal 
 utility of 100 ; without it, only the smaller (isolated) utility 
 of the goods B and C, that is 20-f-30 = 50; and that, ac- 
 cordingly, on the having or losing of the good A depends a 
 difference in value of 50. As complement of the group it is, 
 therefore, worth 100 — f20-f30) = 5Q: as an isolated good it 
 
 is worth only 1 0. ^ Here the difference in value is not so 
 extreme as in the first case, but still it is very considerable. 
 
 Thmd, and more common still, is the case where some 
 indj yidnal ■mprnh'p'rs of the group are not onlv employed for 
 other purposes, hut are, at the same time, replaceable hv other 
 goods of the same kind . Bor instance, building ground, bricks, 
 beams, and labour are complementary goods in the building of 
 a house. But if a few carts of bricks, intended for the build- 
 ing, go astray in transit, or some of the labourers engaged for 
 
 1 Of nnnrsf! in tliia case also the peculiarities of the case dsnide which member. 
 
 i a fn Vip m lng rl as th ecompleti ng member of the group , and which as simply 
 the isolated piece. If, for instance, the owner of the complete group is asked 
 to sell the good A, he will value it as completing member, and the other goods 
 B and C as isolated pieces. But if he is asked to sell C, he will value it as 
 completing member at 100 - (10 + 20) = 70, while A and B will he valued as 
 isolated pieces. 
 
CHAP. IX 
 
 THE REPLACEABLE MEMBERS 
 
 173 
 
 the job refuse to work, in normal circumstances this does not 
 in the least hinder the obtaining of the joint utility — the built 
 house. The labourers and materials are simply replaced 
 others. The consequences as regards the formation of value 
 are as follows ; — 
 
 I 1. The replaceable members , even if they are needed as 
 complements, can never obtain any higher than their “ substi - 
 tution value ” — viz, the value conferred b y th e utility in those 
 branches of employment from which the replacing goods are 
 obtained.j,-^ ~~ 
 
 2 . ^ This fact considerably contracts the li mi ts within 
 whicli the value of the individual good — estimated some- 
 times as complementary, sometimes as isolated good — giay be 
 determiued. particularly when it is a common marketable 
 good. The more numerous the available goods of any kind, 
 and the more numerous the opportunities of using them, the 
 smaller will be the difference between the importance of that 
 u^ from which a replacing sample might be drawn, as maxi- 
 mum, and the use next to it in rank, in which a superfluous 
 isolated good might be employed, as minimum of value. If, for 
 instance, besides the good A, which we shall call Aj, contained 
 in the complementary group, there are two other similar goods 
 A 2 and A 3 , and if the possible opportunities of use (outside of 
 employment in the complementary group) possess an import- 
 ance indicated by the numbers 50, 20, 10, and so on, only 
 the uses indicated by 50 and 20 would be filled by the goods 
 Ao and A 3 , and if one of these two were taken to replace the 
 good m utility of 20 would be lost . On the other hand, if 
 the complementary group were broken up, and the good A^ 
 itself obliged to seek for an isolated and inferior employment, 
 its only chance would be the third, that indicated by 10 . 
 Thus its value would always lie between 10 (isolated 1 and 20 
 (complementary). But if. instead of three, there are a thou - 
 sand goods, and a thousand opportunities of nsiug them tbp 
 difference between the 1000 th employment (from which the 
 good required to replace the other must in case of need be 
 
 1 To put it concretely : although a load of bricks were absolutely indispen- 
 sable to finish a bouse, the load could never obtain any higher value than that 
 determined by the marginal utility of bricks generally ; that is, as determined 
 by all the uses to which bricks generally are put. — W. S. 
 
174 THE VALUE OF COMPLEMENTARY GOODS book m 
 
 drawn) and the 1001st (in which the good must look for 
 employmen t if it becomes superfluous through the breaking 
 up of the group) will certainly fall to a quite, insigm'ficn.n t 
 amoimt . 
 
 Now, of course, it is not likely that any one individual, 
 within the limits of his own economy, will possess a thousand 
 goods of one kind, and a thousand different opportunities of 
 employing them. But, all the same, the efficiency of the 
 influences just described is in no wise annulled ; it is only 
 the scene of their operation that is changed, from individual 
 economy to the market, and that in the following way. Jxu 
 dividnals buy what they require, and sell their surpluses in 
 
 the market . Here, then, all the stocks of goods and all the 
 opportunities of employing them over the entire field covered 
 by the market, come together. And now — exactly as before — 
 everything depends on whether, in the market , commodi ties 
 and opportunities of employing them are scarce or not. If 
 the commodity is very scarce, it makes a very considerable 
 difference in the determination of price whether we approach 
 the particular good as buyer or as seller . For instance, 
 suppose, as before, that there are only three similar goods, and 
 three buyers each wishing to acquire just one such good, with 
 the view of using it in employments that will yield 50, 20, 
 and 10. Then, if one of these goods be withdrawn from the 
 market to serve in a complementary employment, the two 
 remaining goods are bought for the employments indicated by 
 60 and 20, and — according to laws which will be explained in 
 next book — t he purchase price must be fixed between 1 0 and 
 20, !^ay atA A But if now the complementary employment- 
 fails, and the tliird good also is thrown on the market, it must 
 — if it is to find a sale at all — fall to the buyer who can get 
 10 by employing it, and the result is that the market price is 
 in all cases fixed helovj the level of 10. Here, then, the price 
 — and the subjective exchange value based on it — varies not 
 inconsiderably. 
 
 If, on the other hand, there are a thousand similar goods 
 offered, and a thousand buyers demand them, evidently it will 
 not make the smallest difference to the market price whether 
 there appears a thousand and first buyer, or a thousand and 
 first seller ; the good obtains a price and value independently 
 
CHAP. IX 
 
 THE IRREPLACEABLE MEMBERS 
 
 175 
 
 of whether it finds a place in the single complementary 
 employment or not. 
 
 Thus, under the assumptions now laid down, the value of 
 the replaceable men^ms is fixed a t a p.prtq,]> level ind ependently 
 of their concrete complementary employment, and this value 
 they have when we distribute out the total value of the group 
 aniongTS individual members. The distribution, then, will 
 be made~thus : of the total value of the whole group — which 
 is determined by the marginal utility of the joint employment 
 
 this fixed valup i.'s prpvin nsly assig riPrl tr. rppIgppgVilp 
 
 members?~an(n^b p rpmaind^r — which varies according to the 
 
 an idunt o f , t^e marginal utility — -is reckoned tn tbp. non- 
 
 replaceable Tnembers as their individual value. To use our 
 old~iIIustration again; say that the joint marginal utility 
 amounts to 100, and that the members A and B have a fixed 
 “substitution” value of 10 and 20 respectively, 70 must be 
 reckoned the individual value of the non-replaceable good C ; 
 or, say that the marginal utihty of the group amounts to 120, 
 the individual value of C will be 90.^ 
 
 Of the three cases we have discussed the last mentioned is 
 by far the most common in practical life, and, accordingly, in 
 the great majority of cases, the value of complementary goods 
 is determined according to the latter formula. The . jnost 
 important application of it is in the distribution of the product 
 
 among the various productive powers co-operating in producing. 
 
 it Almost every product is the result of the co-operation of 
 a group of complementary goods consisting of uses of ground, 
 labour, fixed and floating capital. Of the complementary 
 members the great majority are marketable coumnodities . and 
 replaceable at wiU ; as, for instance, the labour of wage-earners, 
 the raw materials, fuel, tools, etc. Onh^ a few of them are non- 
 replaceable, n r not easily replaceable ; as, for instance, the 
 land on which the peasant works, the mine, the railway hnes, 
 the factory walls, the activity of the undertaker himself with 
 his peculiar and high qualifications, and so on. It is easy to 
 see, therefore, that here we have exactly those casuistical cir- 
 cumstances in which the foregoing formula of distribution 
 
 ^ If C also were replaceable by a substitute of less value the case mentioned 
 on p. 170 would emergej and the marginal utility of the joint use would not 
 determine the value of the complementary group. 
 
176 THE VALUE OF COMPLEMENTARY GOODS book iii 
 
 obtains, and, as a fact, it is acted upon in practical life in the 
 I most accurate way. In actual business the cna taiL.a TP, firal. 
 deducted from the total return . If we look closer, however, 
 we shall see that what is deducted is .not all the msta. — for, 
 if so, the use of ground, or the undertaker’s activity, as both 
 valuable goods, would come under costs — but only the expendi - 
 / ture for the replaceable means of production with a given 
 \ substitution value, viz. the wage of labour, raw materials, wear 
 I and tear of tools, etc. The remainder , under the name of 
 / “ net return,” ^s ascribed to the non-replaceable membe r or 
 ‘ members : the peasant calculates it to his land, the mine- 
 
 owner to his mine, the manufacturer to his factory, the 
 
 merchant to his undertaking activity. 
 
 If the joint returns increase, it would not occur to anybody 
 
 to ascribe the surplus to the replaceable members ; it is 
 
 always the ground or the mine that “ produces more.” And, 
 similarly, if the joint returns decrease, nobody would credit 
 the “ costs ” with the reduced amount ; the deficiency also is 
 conceived as exclusively due to the diminished productiveness 
 of the ground or the mine. And this is entirely logical and 
 correct : on goods replaceable at any moment only the fixed 
 su bstitution value is actually dependent ; the entire remainder 
 of the joint amount of utility obtainable depends on the goods 
 that cannot be replaced. * 
 
 The theory of the value of complementary goods is the l^ey 
 
 which will solve one of the most important and difficiflt 
 
 problems of politica l econoTTiy — the_ ,problem of the _diS-tlib.utiQn 
 of goods as made in the present state of society, where 
 competition is more or less free and prices are determined by 
 free contract. All products come into existence through the co- 
 operation of the three complementary “ factors of production,” 
 labour, land, and capital. Now our theory, in showing, how 
 much of the joint product n^ economically^ be c onsidered as 
 
 ^ Not physically. It would, in most cases, be absolutely impossible to 
 calculate the physical share — how could one be supposed to distinguish what 
 percentage the material and what percentage the artist had contributed physi- 
 cally to the making of a statue ? — but it is also a matter of no importance. On 
 the other hand it is, in most cases, quite easy to determine what share of the 
 utility, or of the value, would have to be done without if one were not in pos- 
 session of a definite -individual factor, and this quota, conditioned by the 
 possession of one factor, I call its economical share in the total product. 
 
CHAP. IX 
 
 ITS BEARING ON DISTRIBUTION 
 
 177 
 
 due to each of these, and what shar e of the t otaLvalue may, 
 accordingly, be assigned to each of them, lays down, at the 
 same time, the most decisive basis for determining the amount 
 
 of remuneration which each of the three factors obtains i ~~Snd 
 thus although, as we know, capital as “ factor of production ” 
 does not exactly coincide with capital as " source of income,” 
 yet this gives us at least a rough indication of the way in 
 which the amount of the^three branches of income — wage, rent, 
 and interest — is determined. 
 
 It does not indeed do this quite directly. That quota 
 which the workers receive, and that other quota which the 
 owners of the co-operating ground receive, is directly identical 
 with wage and rent. But the quota which falls to the 
 co-operation of capital is not interest — as, in theories of dis- 
 tribution, economists have repeatedly assumed ever since the 
 days of Say with fatal precipitation. It is. first, the gross 
 remun eration for the co-operation of capital ; and, out of 
 this, interest is got, like a' kernel out of a shell, because, and 
 to the extent t'hat.~ something remains over after deducting 
 from the gross rem uner ation the value of the worn-out capital. 
 To explain how this is^ so is a problem in itself. To make 
 it quite clear by an illustration, suppose that a commodity, 
 produced by the co-operation of aU three factors, is worth 
 £100. The law of complementary goods will carry us thus 
 far ; it will enable us to determine that the share of labour 
 (the labour directly employed in the production) amounts 
 to, say, £20, that of ground to £10, that of capital to 
 £7 0. But it does not tell us what, or how much, of tha t 
 ^70 remains over nd, as interest, after deduction of the wear 
 and tear of capital. On the contrary, the law of com- 
 plementary goods in itself would rather lead us to the 
 conclusion that nothing remains over. For, according to it, it 
 would be most natural to assume that the capital, to the 
 co-operation of which the return of £70 is ascribed, and which 
 has been consumed in obtaining that return, had already been 
 valued at the entire £7 0 ; and, if this were the case, the 
 return to capital would naturally be entirely absorbed by the 
 wear and tear of the capital. That this is not the case is, so 
 to speak, an internal mattei u^a matter which plays its part 
 inside, the gross share of capital determined by the law of 
 
178 THE VALUE OF COMPLEMENTARY GOODS book iii 
 
 complementary goods, and is the object of an independent 
 problem, the peculiar problem of Interest . But before we can 
 discuss interest there is still a great deal to be explained.^ 
 
 ^ The confusion, so common in economic literature, between the gross share 
 assigned to the co-operation of capital {Jtohzins) and net interest, has been 
 fully discussed in my Capital and Interest (see the criticism of Lauderdale, p; 146 ; 
 of Carey, p. 155 ; of Strasburger, p. 175 ; of Say, p 189, etc.) It will not be 
 expected of me to give a complete theory of distribution in the passing, as 
 
 it were! I purposely refrain from going deeper into the subject than is necessary 
 
 for my special task, the development of the Interest theory. And for this it is. 
 sufficient to sketch only in the broadest lines the principles which limit the 
 gross share of capital, as against the shares of labour and uses of land that 
 co-operate with it : our special task will be to lav down what is the state of the 
 c ase as regards the gross share of capital. Moreover I hope that on this question 
 of the shares allotted to the various factors, which I am compelled to treat in a 
 very cursory way, the eagerly expected work of Wieser will very shortly shed a 
 clear light. (Wieser’s Der Naturliche Werth, Vienna, 1889, appeared while this 
 was passing through the press. — W. S. ) 
 
CHAPTEE X 
 
 THE VALUE OF PRODUCTIVE GOODS. VALUE AND COSTS 
 
 It has been almost a commonplace of economical teaching that 
 the valne of gnnris is rAgnlatprl hy the costs of their prodnctioiL 
 
 This doctrine has very seldom been questioned on grounds of 
 theory/ but very often IfAvalidity has been closely hmited by 
 the enumeration of exceptions/ and insertion of all sorts of 
 saving clauses. In this contracted sphere, however, it has held 
 almost unquestioned authority down to our own times ; it has 
 a certain amount of support in practical experience, and, what 
 is most serious, it seems to contradict the theory o f va.bip. jn.cq, 
 put forward. For “Costs of Production” are uothiTior p.Irp 
 t han the sum of productive goods which must .■he used up in 
 the making of a good — the concrete capital consumed, the 
 labour expended, and so on. Now to the question as to the 
 ground and amount of value which a good has, our theory 
 answers : it depends on the marginal utihty which a good is 
 capable of render iug : that. is to sav. it depends on \t?^^uture, 
 employment. But the other thedry''ahswef s ; it depends on 
 the value of the productive goods consumed in producing it : 
 that is to say, on the conditions of its origin . Putting aside 
 this contradiction for a moment, and forgetting everything we 
 have been taught as to costs, let us inquire impartially what 
 
 1 Among ol der writers it was disputed by Say . Traite, vol. ii. chap. ix. 
 seventb edition, ”p. 404 : “ Ce qui nous ramene i ce principe deja etabli, que les 
 frais de production ne sont pas la cause du prix des choses, mais que cet.t.e. cause 
 est dans les besoins que lea prodnits peuvent satisfaire. ” In more recent litera- 
 ture wbat M'Leod has said {Elemmis of Political Economy, 1858, p. iii) is worth 
 notice. But the mat ter was really first grasped in its entirety bv Menger. 
 Jevons. and Walras, whose books mark an epoch as regards the whole value 
 theory, and of these again the work of Menger was the most profound. 
 
180 
 
 THE VALUE OF PRODUCTIVE GOODS book in 
 
 our theory of maroinal utility, logi call y carried ou t^ has_tO- say 
 as to the valu p of pmrl na tive g-nof1<s . and as to “costs. ” 
 
 For the sake of clearness it is desirable, before goins 
 further, to define with more exactness the object of our present 
 inquiry, viz. Reductive Goods . As compared with consump- 
 tion goods (Gemissguter), which directly serve to satisfy human 
 wants, all productive goods have this common feature — 
 they serv e tn sati. sfy human wants only indirectly. But they 
 differ, again, from one another in the degree of indirectness . 
 The flour, for instance, from which bread is baked, stands 
 nearer the final satisfaction of want by several degrees than 
 the field which grows the wheat. To express these degrees — 
 which we shall find to be of importance both theoretically and 
 practically — we shall avail ourselves of Monger’s division of 
 goods into ranks. ^ In the first rank we shall place consump- 
 t ion goods — those goods which serve immediately for the satis- 
 faction of wants ; such as bread. In the s econd rank we place 
 
 ^ those goods which assist in producing the goods of first rank — 
 the goods which co-operate in the production of bread ; as the 
 flour, the oven, and the baker’s labour. In the third ranl^ we 
 place those goods which serve for the production of goods of 
 second rank ; as the wheat from which the flour is ground, the 
 mill in which it is ground, the building materials of the oven, 
 etc. I n the fourth rank we nut the means of production of 
 go ods of third rank ; as the land which gTows the corn, the 
 implements used in cultivation, the labour of the agricul- 
 turist, the building materials of the mill, etc. And so on to 
 the fifth, sixth, and seventh ranks, which embrace those goods, 
 the useful service of which consists in producing goods of the 
 rank immediately below them. 
 
 On the lines of our conception of value it must be self- 
 evident tha^. -a productive good, like any other good, can 
 onl y nltto.in.- .value for US through our recognit iom that im 
 its possession or non-possession depends our gain or loss of 
 
 ^ s ome one, utility, of some on e satisfaction of want And it 
 is equally self-evident that its value will be high when the 
 dependent satisfaction is important, and low when it is unim- 
 portant. The only difference is that, in the case of goods for 
 immediate consumption, the good and ««ti,sfacti'^Ti stancL 
 
 ' Grurtdsdtze, p. 8. 
 
CHAP. X DERIVED FROM VALUE OF PRODUCT 
 
 181 
 
 hpgirlq papVi nthpr in a dir p.ct, rans al relation : while, in the 
 case of productive goods, there is interposed, between them and 
 the satisfaction finally dependent on them, a more or less 
 lengthy series of intermediate -m embers, their successive pro- 
 ducts. In this prolonged connection there is both matter and 
 occasion for the development of new and legitimate relations, 
 particularly between the value of means of production and 
 that of their products. But the great law of value is neither 
 destroyed nor disturbed by these relations. Exactly as in the 
 analogous case of complementary goods it is only obscured, as it 
 were, by a mass of details, to which the more ample development 
 of the phenomena gives occasion. These details we have now 
 to consider. To this end let us take a typical productive series. 
 
 A gnnd for immed iat e consum p<~i^n, wln'pli wp ah a ll pall A, 
 is made from a group of productive goods of second rank^- 
 which we shall call Gg ; this from a group of goods of third 
 rank, G3 ; and this, finally, from a group of fourth rank, G4. 
 For simplicity’s sake assume, first, that each of these productive 
 groups passes wrEEbut loss of time into the product which it 
 creates, and that, at the same time, this particular employment 
 is the only one of which it is capable. We have now to find 
 out what is the relation of dependence between each member 
 of the above series, and the wellbeing of its owner. 
 
 "What depends on the final member, the good A. we already 
 know . It is its marginal utility^ Our inquiry, tlien, begins 
 at the member Gg. If we had not the group Gg we should 
 not have its product A ; that is to say, of the class of goods to 
 which A belongs, we should have one fewer than we should 
 otherwise have had. But , as w a_^lready know, one good less 
 means one satisfaction less, and that the least satisfaction to 
 which, economically, one good of the stock would otherwise 
 have been devoted. In other words, i t means the loss of tlie 
 margin?rt utility of the product A. On the group Go, therefore , 
 exactly as on the final product A itself, depends the marginal 
 
 utility of A. Looking now at the next member we find that, 
 if we had not the group Gg, we could not have the group Gg 
 which is made from it ; and, as consequence, we should lose 
 one good of the class A, or its marginal utility. On the group 
 Ga, then, depends exactly the same utility and importance for 
 wellbeing as on the members which come after it in the pro- 
 
182 
 
 THE VALUE OF PRODUCTIVE GOODS book in 
 
 duction series. The same thing again follows in the case of 
 the group If it fails us, we, of course, lose one of the 
 
 group Gg, which otherwise might have been produced from it ; 
 we lose, further, one of thft group Gg, one of the class of good 
 A, and, finally, the marginal utility of A. Thus we arrive at 
 the following general proposition : On all groups of Means of 
 Production of- jem pter rank which successively pass into one 
 another, f hpyft dp pends~o]ifi .and the same gain to h uman well- 
 being; that is, the m.ar£mal utility of thp.ir fin al product. No 
 one wiU be surprised at this result. It is a foregone conclu- 
 sion that a series of productions, which has no relation to our 
 wellbeing except through its final member, can neither tend 
 towards any other utility, nor condition any other utility, than 
 that which this final member itself conditions. In every 
 member of the chain successively we hold in our hand the 
 condition of this final utility, sometimes at a further, sometimes 
 at a nearer stage on the way to it. 
 
 From what has been said we may deduce the following 
 general principles as regards the value of means of production. 
 First, s ince on one and the same utility depend all the groups 
 01 means of production which successively pass into one 
 another, the .^alue of all these groups must be substantially 
 the same. ^Sp.cnnd , tbp. amount of this, their common value. 
 is regulated for all, i n the last resort, by the amniiut of the 
 marginal utilitv ofytheir finished product . I emphasise “in 
 the last resort.” t^ For, thirdly, the value of each group has its 
 i mmediate measure in the value of . it s product , the succeeding 
 group. In the first instance, the utility and service of the 
 means of production consist and exhaust themselves in the 
 making of their product, and, naturally, the more important 
 and more valuable the product is for us when made, the higher 
 will be the estimate put on the importance of this utility, and 
 of that which provides it. Substantially the third proposition 
 is fully covered by the second, for, in the value of the g.oods 
 of ^igher rank^ the marginal utilitv of the jfinal ^jodu^ Ja 
 mirrored. From this marginal utility value is conducted to 
 all the groups of means of production, but the conduction is 
 done, as it were, by stagey First , and immediately, the 
 amount of the marginal utility stamps itself on the value of 
 the final product. This then forms the measure of the value of 
 
CHAP. X 
 
 IDENTITY OF PRODUCT AND COSTS 
 
 183 
 
 the group of goods from which this product comes. This again 
 measures the value of the third group ; and the third group, 
 finally, the value of the last group, the goods of fourth rank. 
 From stage to stage the name of the determining element 
 chaflges, bu^ USfel' tEe ^ifierenTT-rrarngsrirls always the same 
 thing that acts-^^ p margi nal utility of the final product. 
 
 Although the second and third propositions, then, agree in 
 substance, it is necessary to formu1atft -il»fe third explicitly . It 
 is important as being a convenient abbreviated formula which 
 we use in practical life much more frequently than the prin- 
 cipal formula. If we are estimating what amount of wellbeing 
 a productive instrument brings us, we look, naturally, first of 
 all to the product which we get from it . and then, beyond 
 that, to the wellbeing which that product brings us. If we do 
 not know this, we must, I admit, go over the entire course of 
 the conduction of utility, member by member, till we come 
 finally to the marginal utihty of the final member, the finished 
 product. But very often this is not necessary. From previous 
 consideration, or from experience, we meet with some opinion. 
 
 aireadv fnrmprl^ n n the value of the products, and, without 
 further consideration, we make this the ground of our opinion 
 as to the value of the means which produced them. A wood 
 merchant, buying timber for cask staves, will not take long to 
 consider the value of the wood to him. He estimates how 
 many staves he can get out of the timber, and he knows what 
 the staves are worth in the condition of the market at the 
 time. Further than this he need not trouble himself. 
 
 Thus far we have formulated these principles as to the 
 value of means of production on purely theoretical grounds : 
 to some extent, as postulates of economical logic. If. now, we 
 ask what experience says to these postulates, we shall find 
 
 that it confirms them. Indeed we can appeal for confirmation 
 to that very “ law of costs ” which is apparently so hostile to 
 our theory of marginal utility. Expe rience show s that the 
 value of most goods is equal to their “costs.” But costs ” 
 are notfidjig else than the complex of those productive goods 
 which have value — the labour, concrete capita l, uses of wealth, 
 and so on, which must -ha p.xpftndp.rl in tbp. Tna.kina of 9 prnrlup,t 
 The weU-knowp identity of costs and value is only an other 
 form of expressing the identity of valueb^ween groups of goods 
 
184 
 
 THE VALUE OF PRODUCTIVE GOODS book hi 
 
 oL-¥ajiou s ranks which pass into on e another. I am quite 
 aware, of course, that, as regards the cause of this identity, 
 those who adopt the law of costs usually read it in the con- 
 verse way. While we say that the value of means of pro - 
 duction. and therefore the value of the costs, is regulated by 
 the value of their products, the usua l way of in te rpreting the 
 law is ~lo say tnat the^v alu e of products is determined by the 
 value of their costs — that is, by the value of the means of 
 productionduT^ which they are made. Later on we shall 
 have occasion to go thoroughly into this difference of opinion 
 as to the cause of the identity. M eantime all J intend to do 
 is simply to confirm the statement, that the asserted iden tity 
 of val ue between groups of productive instruTnp.rits which 
 success ively pass into one another — whatever be its cause, — 
 is a n actual empirical fact. 
 
 course this identity is not absolute, but approximate ; 
 ^,c-/j(/t5^we can only speak of a tendency towards identity of value. 
 
 par tly irregular, part ly normal. 
 fact that production costs time^ 
 
 identity are of J.w .q kinds 
 Both kinds arise from 
 
 the 
 
 In the long periods which 
 often intervene while goods of sixth or eighth rank are passing 
 gjadtTally through all the transformation stages into the finished 
 consumption good, both men a.nd things may change . Wants 
 
 rMx/ .A'^consur 
 
 change ; the relations between wants and their provision 
 may change ; and, not less important, the knowledge of these 
 relations may change. With them, of course, changes the 
 valuation of the goods at various stages on their way to the 
 matured product. It is easy to understand that the fluctua- 
 tions which proceed from this cause may be sometimes great, 
 sometimes small, sometimes upwards, sometimes downwards ; 
 thy are>rT^u1a.r fluctuations. But, besides these, we notice 
 ay&i^^ence from complete identity which is constant and 
 ^rmal. It is a matter of observation that the total value of 
 a compip.tp. group of remote rank lags somewhat behind the 
 value of its product, and in a definite ratio : and that, indeed,^ 
 the amount of this difference in value is graduated according 
 to th e time required to change the group of means of produc- 
 tion into its product. If the value of the product, for instance, 
 is £100, experience teUs us that the total value of the labour, 
 uses of land, fixed and floating capital spent in producing it, is 
 
CH. X WHERE PRODUCTS ARE OF VARIOUS VALUES 185 
 
 something less than £100 — perhaps £95 if the production 
 process lasts a year; perhaps £97 or £98 if it lasts only half 
 that time. This difference of valu e is the crease, as it were . 
 in which Interest is^au^t T explahaSonis^a subject by 
 itself, with which we^^all have enough to do in following 
 chapters. It would be very far from advisable to mix it up with 
 our present inquiry, where we are dealing with the general 
 relation between the value of means of production and that of 
 their products, and for the moment we shall therefore entirely 
 disregard the existence of this particular difference of value. 
 
 Up to this point we have expounded the law which 
 governs the value of productive goods under the simple 
 hypothesis that each group of productive instruments permits 
 of o nly one quite definite employ ment. But i n actual life th e 
 cases in which this hypothesis correspond s with fac ts are very 
 limited^ It is, indeed, characteristic of productive goo ds that 
 they^^dmit of an infinitel y more various use than co nsumption 
 goods: The" vasU^majority of them are adapted to several 
 productive uses, while many of them, like iron, coal, and, 
 above all, human labour, are adapted to thousands .of different 
 uses. In theoretical research we must, of course, take note of 
 these actual circumstances, and see whether they do not involve 
 some modification of our law, that the value of a group of goods 
 of remote rank is determined by the value of its product. 
 
 Suppose, then, we vary the assumptions of our tyj 
 illustration. A man possesses a great stock of groups of pro-" 
 ductive instruments of second r an k (Gg)- From one sue 
 group he can, at will, make a finished commodity of the kind^ 
 
 A, or one of the kind E. or one of the kind C. Naturally h^ 
 will provide for his various wants harmoniously, and w: 
 therefore, by means of different parts of this stock, produce 
 simultaneously finished goods of all three classes according to 
 the measure of his requirements. In a scheme of provision 
 that was really harmonious, the amounts produced would be 
 so regulated that, in each kind, wants of something like the 
 same importance would depend on the last sample of the kind, 
 and the marginal utility of every sample would therefore be 
 
 approximately equal. ^ Nevertheless there will be differences, 
 
 ' This is demapded by the prinniplp, of “ftfionoinin r.onHiint .” See Wieser, 
 Ursprung und Hauptgesetze des vyirthschaftlichen Werthes, p. 148. 
 
186 
 
 THE VALUE OF PRODUCTIVE GOODS book in 
 
 and e ven considftTa.h1p. diffp.rpinp.pis. of marginal utility , because, 
 as we a lready know.^Jdie gradation of thft p.n-nnrfttp. wants ip 
 any kind of want is not always uniform and unbroken . One 
 fireplace in a room, for instance, wlU give me a very consider- 
 able utility — which I may represent by the figure 200 — while 
 a second fireplace would not be of any further use to me. 
 Naturally, in providing for my wants, I shall therefore, in any 
 case, stop at fireplaces when I have one fireplace with its 
 marginal utility of 200, even if in other branches of wants 
 the provision goes down, on the average, as low as a marginal 
 utility of 100 or 120. To make our typical illustration true 
 to nature, therefore, we must assume that the marginal utility 
 of one sample is of different amount in the three kinds A, B, and 
 C — say 100 in A, 120 in B, 200 inC. The question now 
 is. In these circumstan p.pa what is tb^ v alue of ? 
 
 After the practice we have had in drawing distinctions of 
 a similar kind, we can give the answer without hesitation — the 
 value will he equal to 100. For if one of the available groups 
 were lost the o wner would naturally shift the loss to th e least 
 
 J sensitive part : he would neither limit the produc tion of the 
 k ind B, where he would lose a marginal utility of 120, n or of 
 the ki nd C. where he would lose a marginal utility of 200. 
 He would simply produce one less of the kind A, whereby his 
 loss of weUbeing would be only 100. To put it generally: 
 The value of th p pmrlnprivp. n ni t-adjusts- its elf tO the marginal 
 utility and value of that nroduct which possesses^ the least 
 
 arginal utihlv amnncr all the products wl^e ~pnjt d.uetioq 
 ^e economically, have been e-mpin^.d jA.ll the 
 
 ^relations which we found to hold as regards the value of 
 means of production and of theii' products under the simple 
 hypothesis of the single employment, hold, therefore, generally 
 between the value of means of production and their ha^t 
 mhwhle, prodncl, . 
 
 And how does it stand with the value of the remaining 
 classes of products. B and 0 ? This question brings us to the 
 ^urce of the “ law of costs.” 
 
 If, under aU circumstances, the marginal utility attainable 
 within the kind itself were to decide, the kinds of goods B and 
 C would possess a value diverging, as well from the value of 
 
 1 See above, p. 145. 
 
CHAP. X 
 
 SOURCE OF THE LAW OF COSTS 
 
 187 
 
 tlie kind A, as from the value of its costs Go. B would have 
 a value of 120, C a value of 200. But this is one of tho se 
 
 of goods' is 'Shifted to another kind, and consequently the 
 marginal ntilTT^y~7)F~the latter— beemaes the^j^ staadardTfoir'the 
 former. ^ “That is~to say, if one of the kind C gets lost there 
 is no occasion to give up the marginal utility of 200, which it 
 would have directly afforded ; we can and will immediately 
 procure a new C out of a productive unit Gg, and we shall 
 prefer to produce one less of that kind of good in which the 
 marginal utility, and with it the loss of utility, is least. This, 
 m our illustration, is the kind A. In virtue of the opportimity 
 of substitution offered by production a good of the kind C is 
 therefore valued, not at its own marginal utHitv 200. but at 
 100, the marginal utility of the least valuable cognate product. 
 
 A The same holds, of course, of the value of kind B, and 
 
 would hold, generally speaking, of every kind of good which is 
 “ cognate in production ” ^ with A, and has at the same time 
 an immediate marginal utility greater than that of ^e kind A. 
 
 This leads to several important consequences. ^ First of all .^ 
 in this way the value of goods which have a higher individual 
 
 Tna.Tgina.1 nt.ibty is put on a level with the va l ue o f the j 
 “ marginal produc t ” — as we shall call that product which has 
 the least marginal utility — and thus with the value of thp | 
 means of production , from which both in common come ; the 
 theoretical rȣ..Vgl 2 TP anrl rinat s. therefore, holds in 
 
 casa-^alsQ. But it is well worthy of notice that here the 
 agreement between y ^ie and costs is brought about in a way 
 essentially diff erent from the agreement between costs and 
 marginal product. In the latter case the identit y was brought 
 about by the value o f means of produc tionadapting" itself 
 to the valuffoT th e product; the value of th e product was the 
 determi ning, that of the means of produ ction the determined. 
 In the present case, on the nontrary^ it, k the value of the 
 product that must adapt itself In the last resort, of course, 
 it adapts itself only to the value of another product, the 
 marginal product of the cognate production ; but, in the first 
 instance, it accommodates itself also to the value of the means 
 of production from which it comes, and which are mediated 
 
 ^ See above, p. 156. 
 
 ® "Wieser, p. 146. 
 
188 
 
 THE VALUE OF PRODUCTIVE GOODS book in 
 
 by the substitutionary connection with the marginal product. 
 Here the cond u'^ti'^" of flpsp.rihp s; as it, were^ a broken. 
 
 Jine, First it goes from the marginal product to the means 
 of production and fixes their value ; then it goes in the opposite 
 direction, from the means of production to the other products 
 which may be made from them. In the end, therefore, products 
 of higher immediate marginal utility get their value from the 
 
 side of thair mpans of production . To translate this from the 
 abstract formula into practice. If we are considering what a 
 I good B or C (generally speaking, a product of higher immediate 
 I marginal utility) is worth for us, we must say first of all : It 
 / is worth exactly as much as the means of production from 
 \ which we could replace it at any moment. Then if we examine 
 I further how much the means of production themselves are 
 I worth, we come to the marginal utility of the marginal product 
 A. But very often, indeed, we may save ourselves this further 
 inquiry, as we already know the value of the goods that make 
 up the cost without having to begin at the foundation and 
 follow it from case to case ; and in all such cases we measure 
 the value of the products in an abbreviated form, both accurate 
 and convenient — that is to say, simply by their costs. 
 
 Here, then, we h ave the whole truth about the celeb rated 
 Lawrf Co^ As^aTTact people are right when they say that 
 costs regulate value. Only they must always be conscious of 
 the limits within which this “ law ” holds, and the source from 
 
 ( which it gets its strength. It is, first, only a particular law. It 
 holds only in so far as it is possible to obtain, at will and af; 
 
 tlTe right time, substitutes through production. If there is no 
 
 opportunity of substitution the value of every product has .to 
 be measured by the immediate marginal utility of its own 
 kind, and its agreement with the value of the marginal pro- 
 duct, and with the intermediate means of production, is dis- 
 turbed. Hence the well-known empirical proposition that the 
 law of costs holds only as regards goods “ reproducible at will,” 
 or “ freely produced,” and that it is simply aiT approximate 
 law w Eic!r~does not bind the value of the goods that come 
 un der it with slavish~~exactitu de to the level of co sts, but — 
 according as production for the moment comes short of demand 
 or runs beyond it — permits of fluctuations now on one side, 
 now on the other. 
 
CHAP. X 
 
 THE LA W OF COSTS SECONDARY 
 
 189 
 
 But it is still more important to emphasise, in the second 
 place, that, even where— tbe-4a^ of cos ts hnlHs . costs are not 
 the final hut only the intermediate cause of A'alue. In the 
 
 last resort they do not give in il miv products, but receive h , 
 
 from them. In the case of productive goods whicli have only 
 a single employment this is perfectly clear. That Tokay is 
 not valuable because there are Tokay ^^neyards, but that the 
 Tokay vineyards are valuable because Tokay has a liigh value, 
 no one will be inclined to deny, any more' than that the value 
 of a qu icksilver mine depends on the value of quicksilver, the 
 wheat field on the value of wheat, the brick kdn on that of 
 bricks, and not the other way about. It is only this many- 
 sided character of most cost goods — their capacity of being 
 employed in many different uses — that gives the appearance 
 of the contrary, and a little consideration shows this to be an 
 appearance and nothings more. As theji OQn .- tefle.c ts -tli e suu '^ 
 ravs on to the earth, so the many-sided costs reflect the value. 
 
 which they receive from their marginal product, on to their 
 
 ot her produc ts. The principle of value is never in them, but 
 outside them, in the marginal utility of the products. The 
 law of costs is not an independent law of value ; it only forms 
 an incidental case inside the true universal law of marginal 
 utility. It is simply the great counterpart to the law of Com- 
 plementary Goods. As the latter disentangles and explains 
 those relations of value which result from the temporary and 
 causal collocation — the simultaneous co-operation of several goods 
 to a common useful end ; so does the Law of Costs for the 
 value relations of those goods which act in temporary and 
 causal scqiicncc — the w'orking of goods after one another and " 
 through one another to the same final goal. If we think of 'i 
 
 o • o 
 
 the value relations of goods that work into one another as a J 
 
 much -tangled net, we might say that the former law < 
 entangles the meshes in their length and breadth, while 
 latter disentangles them in their depth ; but both fall un 
 the all-embracing law of Ma,rmna1 Utility, and are nothing 
 
 special applications of that law to special problems. 
 
BOOK IV 
 
 PEICE 
 
CHAPTEE I 
 
 THE FUNDAMENTAL LAW 
 
 Exchanges are not made simply for amusement. People who 
 take the — not always trifling — trouble to exchange the goods 
 which they possess for other goods, do so for a rational and 
 material end, and, in nine hundred and nuiety-nine cases out 
 of a thousand, this end is to better their economical condition 
 by the exchange.^ Whether this end be attaine d, and in what 
 degree it be attained, de^iends naturally on the current condi - 
 tions of exchange, particularly on the prices which the parties 
 get as equivalent for their goods. It is, therefore, a perfectly 
 natural thing that the motive which gives rise to exchange in 
 general, namely, the striving after economical advantage, should 
 maintain a commanding influence in the fixing of the exchange 
 prices. 
 
 In what follows I mean to inquire how prices are deter- ' 
 mined under the assumption that all who take part in the 
 exchange act ej-clusively from the motive of pursuing iheir T 
 immediate economical advantage in it . The law which we \ 
 shall arrive at in this way I have already,^ for very good 
 reasons, called the fundamental law of the formation of price. 
 
 I am perfectly aware that, in practical life, this law does not 
 exactly obtain. For, although the motive of self-advantage is 
 almost never absent, and is almost always the most prominent 
 motive, still, in price transactions, other motives do very often 
 get mixed up ; such motives as humanity, custom, friendship, 
 
 ^ Menger, Grundsdlze, p. 153. Of course now and tlien exchanges may be made 
 simply to show some person a kindness ; perhaps to conceal a present, or a charity 
 in the guise of an exchange. But such cases form only a quite insignificant 
 minority. ^ Orundzugc, part ii., in Conrad’s Jahrhucher, vol. xiii. p. 4&t). 
 
 O 
 
194 
 
 THE FUNDAMENTAL LA W 
 
 BOOK IV 
 
 vanity, or the influence of outside institutions, such as govern- 
 ment taxation, union regulations, boards for fixing wages, and 
 the like, give them another direction than that they would 
 have taken if exclusively dominpited hv self-n.d vantage . Such 
 motives, indeed, scarcely ever get the upper hand of the other 
 to the extent of making us conclude an exchange which would 
 cause us positive economic loss ; but they often make us decide 
 to be content with a less amount of advantage than we should 
 have got in steadily pursuing our interests. 
 
 I have on the same occasion ^ expressed myseK with all 
 clearness on the theoretical and practical importance of the 
 admixture of these other influences, and I shall only now briefly 
 sum up what I then said. In actual life this admixture of 
 motives causes certain modifications of the fundamental law of 
 the formation of price, and the statement of these modifications 
 cannot be neglected in any accurate and complete theory of it. 
 But if all that is wanted is to grasp the characteristic features 
 of the formation of price, it is enough to put forward the 
 " fundamental law ” above mentioned. For just as, among the 
 motives . that determine price, that of striving after self- 
 advantage in exchange has the lion’s share, s mdop.ci the lion’s 
 share in the theoretic explanation of the pbp.nnTn p.na of priee 
 fall t o the “fundamental law” here stated And it is suf- 
 ficient for us in our present task, as we have not to pursue 
 the theory of price as an end in itself, but only so far as is 
 necessary to establish the theoretical connection between tke 
 elementary phenomena o f su bjective value and the complicated 
 phenomena of interest . In this law we obtain a principle 
 which is not minutely accurate, but is amply sufficient for the 
 further development of the theory of capital. 
 
 Before going on to state the peculiar laws of price, it may 
 be desirable to preface them by some considerations that may, 
 more accurately, unfold the content of the fundamental motive 
 which forms the assumption and basis of the whole of the 
 following inquiry. 
 
 In exchange transactions the decisions made always turn 
 on two points : these are — (1) whether, in a given state of 
 things a man should exchange or not ; and (2) i f he decide to 
 ^ Grundziige, p. 480. 
 
CH. I MEANING OF EXCHANGE WITH ADVANTAGE 195 
 
 ft;cr,ha.ngp,. what form he should trv to crivp in thp. tf.rms of the 
 
 g^xchange . Now in making these decisions it is obvious that 
 the man who looks to his own immediate advantage and nothing 
 else, will act according to the following rules. First, he will 
 exchange only if the exchange brings him an advantage . 
 Second, he will rath er e xchange~ibr'a~ CTeater~lid^ntage than 
 forj^less. Thi rd, be widl^TatheTexdlangeloif a small ad^htage 
 than not^xchange_at_a,lI 
 
 It scarcely need be shown that these three rules are dictated 
 by our fundamental motive, and constitute the practical sub- 
 stance of it; what does require elucidation is an expression 
 that recurs in them aU, “ to exchange with advantage.” 
 
 The meaning of the expression obviously is — to exchange 
 in «np.h a way that ^ bp. p.YP.h anger gains more in wellbeing from 
 the goods, he gets than he loses in the goods-he-^es ; or, since 
 the importance that goods have for life and wellbeing is ex- 
 pressed in their subjective value, to exchange in such a way 
 that the goods received pn.ssp..ss a greater .suh|pptive value than 
 
 the goods parted with. If A owns a horse and is willing to 
 exchange it for fen casks of wine, it can only be because the 
 ten casks of wine have a greater value for him than his horse 
 has. But, naturally, the other party to the contract thinks 
 exactly in the same way. He, on his part, will not give up 
 the ten casks of wine if he does not get for them a good that 
 has a greater value for him. He will exchange his ten casks 
 for A’s horse only if the wine is worth less to him than the 
 horse is. 
 
 From this we get an important rule. An exchange is 
 economically possible only between person .s w ho pnt a different 
 value, even an opposite value, upon the commodity and upon 
 
 the price equivalents^ The buyer must put a higher, the seller 
 a lower, estimate on the commodity than he does on the 
 equivalent. Indeed the interest which the two parties have 
 in the exchange, and the gain they get from it, increases as the 
 difference between their estimates increases; if the difference 
 
 ^ It will be observed that our author does not confine the word Price to Money 
 
 price,. but applies it to the equivalePt good or goods obtained in exchange for 
 what is, pre-eminently, the good — the object of demand frqm buyers, and of supply 
 from sellers. The convenient word Prdsgut I render by “price equivalent,” or 
 simply “equivalent.” — W. S. 
 
196 
 
 THE FUNDAMENTAL LA W 
 
 BOOK IV 
 
 decreases their gain decreases ; and if the difference disappears, 
 and their estimates coincide, no exchange is, economically, 
 possible between them.^ 
 
 It is easy to see that, under the regime of the division of 
 labour, there must he inmimerahlp. chances of opposing estimates. 
 
 and therefore innumerable opportunities of exchange. That is 
 to say, as each producer makes only one or two kinds of articles, 
 and these far in excess of his own personal requirements, 
 he has at once a superfluity of his own products and an absence 
 of all others. He will, therefore, ascribe to his own product 
 a low subjective value, and to other products a relatively high 
 subjective value. But, conversely, the other producers will 
 ascribe a high value to all products which they have not, and 
 a low value to their own products of which they have too 
 many, and here we have in the fullest degree that relation of 
 opposite valuations which is most favourable to the effecting 
 of exchange. 
 
 Another idea that comes out in what has been ^aid we 
 may follow to its logical consequences. To one consulting his 
 own advantage an exchange, as we saw, is economically possible 
 only when he estimates the good to be acquired more highly 
 than tlie good possessed. How, obviously, this will more readily 
 occur the less value he puts on his own commodity, and tlie 
 more vahm hft pu ts nu the equivalent . A man who values his 
 horse, subjectively, at £50, and values a cask of wine at £10, 
 has, economically, a much greater possibility of exchange — or, as 
 we shall say in future for brevity’s sake, is much more “ capable 
 of exchange” — than another who values his horse at £100 and 
 a cask of wine at £5. The former, obviously; can proceed with 
 the exchange if six casks are oflered him for his horse, while 
 the latter must hold back unless something over twenty casks is 
 offered him. If a third party again values his horse at £40 
 only, and a cask of wine at £15, obviously he would be 
 economically capable of concluding an exchange if even thi’ee 
 
 ^ Say, e.g., that A values his horse at five casks of wine, while B values it at 
 fifteen, then, if the horse goes for ten casks, each gains an amount of value repre- 
 sented by five casks of wine. If A values the horse at eight and B values it at 
 twelve, each gains only a value of two casks. Finally, if both agree in valuing 
 the horse at twelve casks of wine, B, of course, would be glad to get the horse for 
 ten casks, or for any price under twelve casks, but A, naturally, would not give it 
 him at that price. See Meuger, Grundsdtze der Volkswirthschaftslehre, p. 155. 
 
CHAP. I 
 
 THE MOST CAPABLE EXCHANGER 
 
 casks were offered him Generally speaking, then, that ex- 
 changer is the most capab le ” wh^ pu^'The- least Tal tte on his 
 own comm odity in companso n with that offered him h r exchange, 
 or, what is the same thing, puts the highe st value on the other 
 commodity In. co mparison with the commo^y wl iich he offers 
 in exchange for it. 
 
 Now that we are sufficiently acquainted with the meaning 
 and content of our “ fundamental motive,” we may proceed with 
 our proper work, and consider what are the normal effects 
 which this fundamental motive exerts on the formation of 
 
 price . In this part of our work the method already piprsued 
 by several distinguished economists seems to me by far the 
 most convenient : first, by typical illustrations to show how . \ 
 under certain definite assumptions, jrice, is and m ust hp. I 
 determined , and then to separate the accidental surroundings | 
 of the illustration from what is universal and typical, and I 
 fo rmulate the latter into laws . I shall begin with the simplest 
 typical case, the determination of price in isolated exchange 
 between a single pair of exchangers. 
 
CHAPIEE II 
 
 ISOLATED EXCHANGE 
 
 A PEASANT, whom we shall call A. requires a horsg. His 
 individual circumstances are such that he attaches the same 
 value to the possession of the horse as he does to the possession 
 of £30. A neighbour, whom we shall call B, has a horse for 
 sale. If B’s circumstances also are such that he considers the 
 possession of the horse worth as much as, or worth more than 
 £30, there can, as we saw, be no exchange between them. 
 Suppose, however, that B values his horse at considerably less, 
 
 say at £10 . What will happen ? 
 
 First, it is certain that there will he an exchange ; in the 
 assumed circumstances each of the contracting parties can 
 make a considerable profit by the exchange. If, for instance, 
 the horse changes hands at £20, A, who considers it worth £30, 
 makes a profit of £10, and B, who gets £20 for an article 
 worth only £10 to him, gets the same amount of profit. 
 They will, therefore, in any case, according to the proposition 
 “ rather a small gain than no exchange,” agree on making 
 an exchange at a price advantageous to both of them. The 
 question now is : How high will this price goJ As to this it 
 may be said definitely : The price must at aU events be les^ 
 than £30 . otherwise A would have no economical advantage, 
 and would have no motive for going on with the exchange. 
 And it must at all events be highp. r than £10. or there would 
 be no use in the exchange to B, and perhaps even loss. But 
 the particular point between £10 and £30 at which the price 
 will be fixed cannot be determined beforehand with certainty. 
 Any price between the two is, economically, possible ; a price 
 of £10 : Is. or a price of £29 : 19s Here, then, is room for 
 
CHAP. 11 
 
 ITS UPPER AND LOWER LIMIT 
 
 199 
 
 : higgling^’ 
 
 According as in the conduct of the 
 
 any amount of 
 
 transaction the buyer or the seller shows the greater dexterity, 
 cunning, obstinacy, power of persuasion, or such-like, will the 
 price be forced either to its lower or to its upper limi t. If 
 both parties have equal skill in bargaining, the price will be 
 fixed approximately midway: that is to sav. about £20. 
 
 • There is no difficulty in putting this briefly in the form of j 
 a general proposition. In isolated exchang e — exchange between / 
 one buyer and one seller — the price is determined somewhere ^ 
 between the subjective valuation of the commodity by the J 
 buyer as npper limit , gnV»jQp.t,ivp vabi ation by the seller ' 
 
 as lower limit. 
 
CHAPTER III 
 
 ONE-SIDED COMPETITION 
 
 First : of o ne-sided competition of Buyers . Accommodating 
 the conations of our illustrationto the requirements of the new 
 typical case, let us assume that A^ finds a competitor, whom 
 we shall call A 2 , already in the field, and that he also has the 
 intention of purchasing the horse. The circumstances of this 
 competitor are such that he counts the possession of the horse 
 worth as much as £20. What will happen now ? Each of 
 the competitors wisRes to buy the horse, but only one, of 
 course^ can buy him. Each of them wishes to be that one. 
 Each, therefore, will try to persuade B to sell the horse to him, 
 and the means of persuasion will be to bid a higher price. 
 Thus ensues the familiar phenomenon of mutual overbidding. 
 How long will this last ? It will last till the rising bids have 
 reached th e-^^^^alna tion of t he least ^g^aR Ie^m p etitor. wlioT^ 
 this case, is A 2 . So long as the bids are imder £20, A 2 , act- 
 ing on the inbtto “ father a small gain than no exchange,” will 
 try to secure the purchase by raising his offer, which attempt, 
 naturally, A^, acting on the same principle, will counteract by 
 raising his ofiier. But A 2 cannot go beyond the limit of £20 
 without losing by the exchange. At this point his advantage 
 dictates “ better no exchange than a loss,” and he leaves the 
 field to his competitor. 
 
 This is not to say that the price A, pays must be just £20^ 
 
 It is possible that B, knowing A^ to be in urgent want of a 
 horse, will not be content with £20, and wiU try, by holding 
 back and by skilful bargaining, to extort a price of £25, £28, 
 or even £29 : 19s. The one thing certain is that the pr ice 
 cannot exceed £30 (the valuation of Aj who concludes the 
 
CHAP. Ill ONE SELLER AND SEVERAL BUYERS 
 
 201 
 
 purchase) and cannot be under £20 (the valuation of Ag, the 
 excluded competitor). 
 
 Assume n ow that, in addition to A^ and A^, three other 
 ^uvers T^^. A,. A., compete for the horse, and that their cir- 
 cumstances are such that they count the possession of the 
 horse equivalent to £22, £25, and £28 respectively. It is 
 easy to show, in the same way, that, in the ensuing com- 
 petition, A 3 will bid to the limit of £ 22 , A 4 to £25, and A 5 to 
 £28 ; that the most capable competitor, Aj, will always be the 
 successful one; and that the price will be fixed between £30 
 as higher limit, and £28 — the valuation of the most capable of 
 the excluded competitors — as lower limit. 
 
 The results of this investigation may therefore be expressed 
 in the following general proposition : — 
 
 In one-sided competition of buyer s — where there is one 
 seller and more than one buyer — -the most capable competitor 
 will be ( bp pnrcbagpj ; that is, the one who puts the highest 
 value on the commodity he wishes to buy in comparison with 
 the good he wishes to sell ; and the price will lie somewhere 
 between the valuation of the purchaser as higher limit, and 
 the valuation of the most capable among the unsuccessful com- 
 petitors as lower limit — always understood that the price can 
 in no case be lower than the subsidiary lower limit of the 
 seller’s own valuation. Comparing this proposition with the 
 result arrived at under the former typical case, we see that 
 competition of buyers has the effect of narrowing the sphere 
 
 within which price is determined, and narrowing it in the 
 upward direction . Between A and B the limits within which 
 price was determined were £10 and £30 ; by the added com- 
 petition the lower limit was moved up to £28. 
 
 Second : of one-sided competition of Sellers . This forms 
 the exact converse of the foregoing. Entirely analogous ten- 
 dencies lead to entirely analogous results — only in an opposite 
 direction. The statement of this need not detain us long. 
 
 Suppose that our friend A is the only buyer, and that five 
 jdealers, whom we sh a ll call B,, B„ B,, B^, and Br, are compet - 
 ing to sell him a horse . We assume that all the horses are 
 equally good, but Bj values his horse at £ 10 , B 2 values his at 
 £12, Bj at £15, B 4 at £20, and B 5 at £25. Each of the five 
 
202 
 
 ONE-SIDED COMPETITION 
 
 BOOK IV 
 
 rivals tries to utilise the present as the sole opportunity of sale, 
 and endeavours to secure a preference over his competitors by 
 underselling, as in the former case by overbidding. But as 
 no one will care to offer his commodity for Ip.s.s than what, it, 
 is worth to himself, will cease offering at £25. B, at £20, 
 B 3 at £15 ; then B^ and Bj will compete for a while till, 
 hnally, at £12 Bg finds himself “economically excluded,”^ and 
 Bi alone keeps the field. The price at which he remains a 
 seller must necessarily be higher than £ 10 — otherwise there 
 would be no use in the exchange, and therefore no motive for 
 it — but neither must it be higher than £ 12 , otherwise Bg will 
 continue his competition. 
 
 In general terms, then, we have the following proposition. 
 In one-si ded com pp.tition of sellers — where there is one buyer 
 and more than one seller — the most capable competitor will be 
 the actual seller ; that is, the one who puts the lowest value 
 on the good he wishes to sell in comparison with the com- 
 modity he wishes to buy ; and the price wdl lie somewhere 
 between the valuation of the seller as lower limit, and the valu- 
 ation of the most capable among the unsuccessful competitors 
 as higher limit.^ Compared, therefore, with the case of isolated 
 exchange, where, according to the first formula, the price had 
 to lie between £10 and £30, the sphere within which price is 
 determined will be narrowed by the competitions of sellers, 
 and narrowed in the downward direction. 
 
 ^ Menger, p, 183. 
 
 Always without prejudice to the second or subsidiary upper limit formed by 
 the valuation of the buyer, which the price can in no case go beyond. Where 
 there is anything like full competition of sellers, however, this is seldom of 
 practical importance. 
 
CHAPTER IV 
 
 TWO-SIDED COMPETITION 
 
 The p.aRp. of twn- sided competition is the most common in 
 
 p/^.nnormV, it is t,hp, mo sl. imp or tant in the development 
 
 of thp. Law of Price. It demands, therefore, our most careful 
 attention. 
 
 The t}^ical situation which the present case assumes may he 
 represented by the following scheme. It shows us ten buyers 
 and eight sellers, each of them wishing to buy or seU a horse, 
 and it tells us at the same time the degree of the subjective 
 valuation put upon the horse by each of the exchangers. It 
 will be seen that the figures which represent these valuations are 
 very different, and this exactly corresponds with facts. Indeed, 
 the individual relations of want and provision for want, which 
 regulate subjective value, are so very various that it would be 
 difficult to find two persons who had an entirely similar 
 opinion about the value of any one thing. 
 
 BtrvEKS. Sellers. 
 
 A, 
 
 values a horse at 
 
 £30 
 
 El 
 
 values a horse at 
 
 £10 
 
 (and win buy at any price under) 
 
 
 
 (and will sell at any price over) 
 
 -^2 
 
 35 
 
 £28 
 
 E2 
 
 33 
 
 „ £11 
 
 As 
 
 33 33 
 
 £26 
 
 E3 
 
 33 
 
 „ £15 
 
 ^4 
 
 33 33 
 
 £24 
 
 E4 
 
 33 
 
 ^17 
 
 As 
 
 
 £22. 
 
 Es 
 
 3J ^ 
 
 „ £20 ^ 
 
 Ae 
 
 * 53 
 
 £2r.ji 
 
 
 33 
 
 „ £21;l0s.;i3 
 
 Ar 
 
 33 33 
 
 £20'/ 
 
 ^ E, 
 
 33 
 
 „ £25 
 
 As 
 
 53 33 
 
 £18 
 
 Eg 
 
 33 
 
 „ £26 
 
 A9 
 
 33 33 
 
 £17. 
 
 
 
 
 Aio 
 
 33 33 
 
 £15 
 
 
 
 
 To complete the scheme, it must be added that all the. 
 
 competitors appear simultaneously in the one market : that all 
 
204 
 
 TWO-SIDED COMPETITION 
 
 BOOK IV 
 
 the horses offered for sale are of equal quality ; and, finally, that 
 the buyers and sellers make no mistake about the actual state 
 of the market, such as would prevent them from really pur- 
 suing their own egoistic interests.^ We ask now. What wil l 
 hap pe n in th is situation ? 
 
 The circumstances of Aj are such that he considers a 
 horse to be worth £3 0 to him ; it would therefore be to his 
 advantage to buy even at £29 ; and it is quite certain that any 
 of the eight sellers would be glad to sell him a horse at a 
 price so advantageous to them. But, evidently, Aj would be 
 a very poor business man if he rashly bought at such a high 
 price. For his self-interest demands from th e excha nge not 
 merely a profit, b ut the ^eatest possible profit. Instead, 
 then, of buying at the highest price — which, all the same, he 
 might do in the worst possible case — he will prefer to begin 
 by offering a price as low as his least capable rivals, and will 
 only raise his offer when, and in the degree that, it is neces- 
 sary to save himself from being shut out of the market. 
 
 In the same way Bj, who, economically, could quite well 
 sell at a price of £11, and at that price could very easily find 
 buyers, will carefully hold back from offering his horse at the 
 lowest figure which he would accept, and will not reduce his 
 price below what he must take if he is to keep his place in the 
 c om petition, jit mav he assumed, then, that the transac tion 
 w ill begin with th e buyers hold ing back and _ .offering _lp^y 
 prices, and with the s ellers hold ing bac k and asking hig h, 
 priceai. 
 
 ^ If, e.g., a buyer erroneously imagines the number of horses brought to 
 market to be much less than it really is, U mav very well happen that h e hastily 
 consents to pay a higher price than he would have found .necessary if he had 
 given better attention to his own interests. The influence of errors like this on 
 the formation of price must not, of course, be overlooked in a theory of price, but 
 where we are merely trying to bring out the simplest fundamental law it is not 
 necessary to go into such details. See Grundzuge, as before, part ii. p. 486. 
 
 2 T he more experien ced both parties arCj and the more familiar with the con- 
 dition of the market-t he shorter will be the time s pent in “ tr ying the m aakfit” 
 by preliminary offers. In an old and well-organised market competitors will 
 save themselves the trouble of making offers that are not meant to be taken, 
 and will make their first offers at least somewhere near that zone within which 
 the market price will finally be fixed. Th e extreme lim it of t his curtailment is . 
 given in th^'ijfixed prices ” of sellers. In this case, trying the market is entirely 
 dispensed with, and sellers undertake at one throw, as it were, to hit the very 
 zone into which the condition of the market will force the price. They m u st try 
 
CHAP. IV SEVERAL BUYERS AND SEVERAL SELLERS 205 
 
 Suppose the buver.s bpgin with an nFfer of £ 1 It is at 
 once clear that — putting aside the case of gross error as to 
 the condition of the market — the buying cannot be concluded 
 at this price. For at £13 all the ten buyers would be willing 
 to buy, since all of them put a greater value on the horse than 
 £13; Irut, at that price, only two horses, those of and E,j. 
 could reconomically) he offered for sale^ Now evidently Bj and. 
 
 B., would be very poor sellers if they did not make use of the 
 active competition of buyers to raise their price, and the others 
 would be as poor buyers if they let the best chances of pur- 
 chasing be snatched away by two of their members without 
 attempting to obtain the preference by bidding a price some- 
 what higher, but still advantageous to themselves. Exactly, 
 then, as in the case discussed in last chapter, the surplus buyers, 
 will be w^eeded out by means of mutual overbidding . How 
 long will this weeding process go on ? 
 
 At any price under XI 5 all ten buyers can compete. 
 
 From that point the least capable competitors must, one after _ 
 
 another, withdraw, from the cmnpe tvtioiL At £15 Aj,, is 
 
 knocked out, at £17 Ap, at £18 Ag, at £20 A-. But as the 
 bids rise on the one side, the number of those sellers who, eco- 
 nomically, become capable of selling increases on the other side. 
 
 At any price above £15 Bj may seriously think about selling, 
 above £17 B 4 , and above £20 B 5 Thus the marked dispro- 
 portion, which existed at first between the horses demanded 
 and the horses actually offered for sale, is graduallj^ reduced. 
 
 At £13 there was an effective demand for ten horses, and only 
 two could, economically be offered ; while, at any price over 
 £ 20 , only six horses are demanded and five offered, the majority t 
 of buyers over sellers being thus reduced to one. So long, 
 however, as the rival buyers are in the majority, and this fact 
 is accurately known in the market, there can be no final settle- 
 ment. For, on the one hand, the sellers have always the 
 chance, and the temptation, to take advantage of the excess of 
 buyers and stand out for higher prices ; and, on the other hand, 
 
 to hit this zone quite exactly ; for if they put the price lower they lose their 
 profit, while if they put it higher the buyers in the market get supplied by 
 other competitors, and the sellers are left with their commodities. Fixed prices , 
 however, are less common, in the open market than in shops , where selling is 
 never conducted under the full pressure of competition, and where, consequently, 
 any mistake in the price asked is not so hazardous. 
 
206 
 
 TWO-SIDED COMPETITION 
 
 BOOK IV 
 
 the miitiially opposed interests of the rival hiiyp.ra noTnpftl them 
 
 to Jaid still higher again st each ptbfx. Obviously, Ag would 
 scarcely consult his own interests if he were calmly to look on 
 while his five rivals went off with the five cheapest horses, and 
 left him no chance of an exchange, and, therefore, no chance of 
 a profit.^ But, at the same time, no oue of these rivals would 
 allow Ag to purchase one of the five horses most “ strongly ” 
 offered for sale. For, if so, the man who withdrew in favour 
 of Ag might indeed purchase a horse, but only under less 
 favourable conditions — the conditions, that is, offered by the 
 most conservative sellers Bg, By, and Bg, and at a price which, 
 at least, exceeds the subjective valuation of £2 1 : 1 Os. that 
 Bg puts on his horse. Thus if the buyers know their own 
 interests, the whole body of them wiU feel impelled to continue 
 their bidding against each above the level of £20. 
 
 Finally, the situation becomes essentially different when 
 the rising bids have reached the limit of £21 . At that price 
 Aa is compelled to ceas e biddin g, and t here are now only, 
 five sellers against five buyers. These buyers can all be satis- 
 fied simultaneously, and there is no occasion for further com- 
 petition among themselves : on the contrary, as against the 
 sellers, their common interest is to close at the lowest possible 
 price. The bidding of buyers against each other, which 
 hitherto has prevented the final settlement, now comes to an 
 end, and the bargains may be concluded a.t the p rice of £21^ 
 But, th ey need not be concludeff-aLAha t price. The sellers 
 may possibly be stiff and refuse £21, in hope of a still higher 
 offer. What will happen in this case ? First of all, the 
 buyers, rather than have a fruitless errand and go away without 
 making any exchange, will bid higher. But their limit is now 
 very near at hand. If the sellers stand out for a price abo ve 
 £ 22, A.; must give up all id e a of purchase, and there wiU be 
 five sellers against four b uyers.^ One of the sellers, then, will 
 have to fall out, and as no one would care to be that seller 
 there will — from motives quite analogous to those which before 
 prompted the surplus buyers to overbid each other — ens ue a, 
 
 ^ If the horses of Bj to Bj are sold, the most capable seller remaining is Bg, 
 ■who values his horse at £21 : 10s. — that is, higher than Ag. As we know, then, 
 an exchange between Ag and Bg is economically impossible, and the same is true 
 « fortiori of the. less capable sellers By and Bg. 
 
CHAP. IV RELylTION FAVOURABLE TO SETTLEMENT 207 
 
 mutual iiTH^ ftp. spiling a-mong the si^rplns sp.np.r.s, till sucb time 
 
 as the fifth seller meets a huve iL: this will be the case some- 
 where under the limit of £22.^ 
 
 Indeed, in the present case, the limit must go still lower. 
 So long as a price over £21 : 10s. was possible, there would be 
 a sixth possible seller in the person of Bg ; this would give the 
 sellers a majority of one over tlie five buyers, and compel them 
 to offer under each other, if they are not to be shut out from 
 the exchange. In this competition the weakest must first go to 
 the wall, and this fate will overtake Bg the moment that his 
 rivals are content to take a price below the level of £21 : 10s. 
 — at which figure the number of competitors on either side 
 will be equalised, and the level of price found at which the 
 competition may cease. Thus assuming, as we do in this 
 illustration, that each competitor knows what is the condition 
 of the market, and intelligently foUows his own interests, the 
 limits within which the price must necessarily be det^ermiuer ! 
 are narrowed to £2 1 and £21:1 Os. ; those being the only 
 limits within which there occurs the relation favourable to the 
 final settlement — that all who are able to take a share in the 
 business find it their advantage to do so^ while all who do not 
 find it their advantage, the unsuccessful competitors, have no 
 power to prevent the others from coming to terms.^ 
 
 Let us try now to apply the results of these lengthy 
 analyses to our theory of price. 
 
 We notice, first, that what decides succes s 
 ^mppiitinn is, as in the case of one-sided competition, 
 the degree of " capability ” for exchange, Dn either side 
 
 ^ It need scarc ely be sa id that the gradual bidding Up of buyers, and the. 
 gradual under-offering of sellers, do not usu ally take place i n two separate and 
 succeeding stages, but generally occu r simuItane niiHl y. 
 
 ^ In the nature of things the result shown in our abstract scheme will be the 
 more exactly realised in practice, the better known the total condition of the 
 market is to all interested ; that is to sav. the more organic the market, and tbe_ 
 more publicly the negotiations a re conducted. Where, on the other hand, as is 
 usually the case, transactions are conducted in groups that are, indeed, in com- 
 munication, but are yet somewhat separated from each other either in space or 
 time, the relations of competition that would prevail over an entire market will, 
 naturally, not be quite active in the single groups, and this ha.s for re.siilt that the 
 prices formed in the single groups are frequently only more or less app ro.x imate 
 to the ideal market price represented in our scheme, without necessarily exactly 
 coinciding with it. 
 
208 
 
 TWO-SIDED COMPETITION 
 
 BOOK IV 
 
 it is the most capable competitors wlio ooirifi to t.p.rms^ 
 namely, those biiyers who put the highest value on the 
 commodity (A^ to Aj), and those sellers who put the lowest 
 value (Bj to Bg), while all less capable competitors are ex- 
 cluded. And, indeed, if we look more closely, we shall find 
 that tlie series of snccessful competitors includes all competing 
 
 paii-s. arranged by c a pability, between whom there exists the 
 rplflti'nn iipppsigar y for exchange, viz, tb nt. th e IniypT considers 
 Ihe 0OT'P^^'>^'b'ly •v yortk more than the seller does. In our 
 illustration Ag considers Bg’s horse worth more than Bg 
 himself does, and, accordingly, they can exchange with each, 
 other.^ Ag, on the other hand, values the horse of By at 
 £21 only, while Bg values it at £21 : 10s., and therefore they 
 cannot come to terms — and still less can those competitors who 
 are less capable. 
 
 Very closely related to the grounds on which are decided 
 the successful competitors in the struggle of competition are, 
 secondly, the grounds on which is decided the market pric^ 
 that results from this struggle . This price — to recur to our 
 illustration — cannot, in any case, be higher than the valuation 
 of Ag, nor less than that of Bg ; otherwise the fifth buyer in 
 the one case and the fifth seller in the other would not have 
 come to terms. But, again, the price cannot in any case be 
 higher than the valuation of Bg, nor less than that of Ag ; 
 otherwise in the former case a sixth buyer would begin com- 
 peting with the other five buyers, and in the latter case a 
 sixth seller competing with the other five sellers ; the equi- 
 librium would thus be destroyed, and the overbidding and 
 under-offering would inevitably be continued till such time as 
 the price was forced within the limits already indicated. 
 
 To put these results in general form; — In two-sided com- 
 petition the market price is determined within a latitude of 
 which ttip npppv limit, i.s p. Qnstituted bv the va luation of the Iqpt 
 buyer who actually exchanges (the last buyer) a nd that of th , p, 
 moHf, fLa. pah I^ seller excluded^ /the first excluded seller), and the 
 laffifiX-limit by the valuation of the least capable seller who actu- 
 ally effects a sale (the last seller) and that of the most capable 
 buyer excluded (the first excluded buyer). The meaning of this 
 
 1 Or with one of the more capable c'ompetitors, but in no c^ase with a weaker 
 one. See more e.xactly on this point in my GrundziXge, p. 499. 
 
CHAP. IV ANALOGIES WITH SUBJECTIVE VALUE 
 
 209 
 
 double limitation is that, jn every onse. it is the .narro wop b'niiJ: 
 i.hat deeidesd If, finally, we substitute the short and signi- 
 ficant name of “ Marginal Pairs ” for the detailed description of 
 the four parties whose competition determines the price, we get 
 this very simple formula : yhgjnarbct price i s limifprl a-url rlatpr- 
 mimai by t.bc subjective vnlnnt.imis of t.bft two M n rgTrnTl~-P!riTs, 
 
 This suggests a number of refiectioli^ ' 
 
 Tlic tirsi, thing tbnt, .strikes ns is t h e, analogy between thg 
 formation of~price~~aTrdHihe--fermntd(yrr^^ -^lue. We 
 
 saw that the subject!^ value of miy~^od, unaffi:cted by the 
 more important uses to which s ingle mem bers of the same 
 stock might be put, was a “ marginal value^’^^^^^^aTvahie deter- 
 mine d by the good’s marginal ut ilitY. or that utility which 
 stands on the very limit of the economically^efmissible. 
 we see tlnrt-^wgcy i-rrarkt^ price is a “ marginTrh price, ” — a price 
 determined by the economical relations of those competing 
 pairs_:ivhicli, also, stand on~the very limrC~Df exchan^ability. 
 Ii is easy to see that the analogy here is no chance coincidence, 
 but one that results from closely-related and internal causes. 
 In the case of subjective valuation, the moti ve of economical 
 advantage demanded that the available stock of goods should 
 be employed in satisfying the wants that stood highest on 
 each man’s scale, the last of the wants thus supplied indicating 
 the “ marginal utility.” In the case of the formation of price, 
 the motive of the competitors’ economical advantage demands 
 that the pairs which are most capable on the scale of competi- 
 tors should come to terms, and one of these again is the last, 
 the “ marginal pair.” In the fo rmer case, the provision for all 
 satisfactions more important than the marginal utility was 
 assured without the particular good whose value was the 
 subject of discussion, and the only utility dependent on this 
 latter good was the last, the marginal utihty. In the latter 
 case, all the contracting pairs more capable than the inavgriTar 
 pairs may com e to terms at prices higher or lower, and here 
 again it is o nly the fate of the last, t he mar ginal _p aiiv-that 
 
 ^ In our illustration it is the valuation of the excluded parties A3 and 63. If, 
 however, the valuatio.n of Ab, instead of being £21, had been £19, and that of 
 Bg, instead of £21 :10s., had been £23, the limits would have been determined 
 by the Valuation of the last pair who actually Kime to terms : the price would 
 have been fixed between £20 and £22. 
 
210 
 
 TWO-SIDED COMPETITION 
 
 BOOK IV 
 
 [ 
 
 depends on the_ prirp, just rea ching a de finite hei£ht, neither 
 greater nor less. Ahd,_jda ally, _ as in the former case the 
 importance of the last dependent wantT^n virtue "of its 
 dependent relation, gave the good its value, so, in the latter 
 case, the economical circumstances of the last dependent pair — 
 here also in virtue of their dependent relation — confer on the 
 commodity its price. 
 
 But this analogy does not exhaust the connections between 
 price and subjective value. Of still greater consequence is the 
 fact that price, from beginning to end, is the product of sub - 
 je ctive valuations. Look back over what we have said. It is 
 the relation of the subjectfaa valuation of commodity and price- 
 equivalent which decides ItiB persons who may consider ifaw ofth 
 thei r, while to com pete., either as bujfaFs or sellerTjthat is to 
 say, clecidesAvhichparties are “ capable of exchange.’^^t is the 
 same relation which decides on the degree of each com peti ton’ s 
 capability, of exchange. With perfect exactness it decides for 
 each man the figure at ^vhich his advantage calls him to join 
 in the competition, and it decides, at~the same time, the limit 
 at which he is beatSTra^d— ehhged-to-wvrthdluw 'frbin:^ As 
 further result, it decides the parties -who. among the most capable 
 competitors, act u.a.11y come to terms, ; it decides to which pair 
 falls the role of being marginal pair ;^^d, finally, i t decides on. 
 tbe , pric e at which the bargains are concluded, in the market. 
 Thus, as a fact, in the whole course of the formation of price 
 — so far as it is conducted on purely egoistic principles — ^^there 
 is not a single phase nor feature which is not traceable, wholly 
 and entirely, to the position of subjective valuations as its 
 cause. And this is at bottom perfectly natural. For, as we 
 know, t^ftse .subj aative — va,lua,tions point out w hether any 
 
 ^ im portance, great nr little, attaches to a good as regards our 
 economic wellbeing, and how great the importance is ; and, 
 consequently, these valuations, wherever we acquire or part 
 with goods solely with regard to our economic wellbeing,- mark 
 out the natural, indeed the only poSsil^le compass of our trans- 
 actions. We are, therefore, fully justified in defining price as 
 the resulta,nt of subjective valuations put upon commodity 
 
 k and price-equivalent withi ii_a^ market. ^ s > 
 
 ^ Sax, who, in his theory of value and price, stands wholly and entirely on 
 the fousadation laid by Menger, repeatedly atid with emphasis characterises market 
 
 j 
 
CHAP. IV RESULTANT OF SUBJECTIVE VALUATIONS 211 
 
 Of course it is a resultant of a peculiar kind. The amoun t • 
 
 of price is not the resultant of the sum, or of the n ypraffe of-aJ-l ^ 
 t he valu a tions that come to the surfac e : io the forTmtioTi Ui J 
 price these take very different share& >>ip T^>ne~ class of them has 
 no effect on price at all : viz. thoskValu p^^^^Ti« mprio iw q 11 
 the unsuccessful competitors except 
 
 ■ valuations made by all^ 
 
 , SueJcoT 
 
 the most_ capaMe__paii> 
 
 
 It is aU the same whether there are no such valuations, or aa/c 
 whether there are scores of them in the market ; they make 
 not the slightest difference on the resultant price. In our 
 illustration, whether there are unsuccessful buyers A7 to A^q 
 or not, whether the category of the unsuccessful is composed 
 of them alone, or of a hundred others besides, — so long as 
 they cannot bid more than £20, it is easy to show that the 
 resultant price will always run between £21 and £21 : 10s. 
 
 The excluded competitors may increase the congestion of the 
 
 i narket, but they are not factors in th at conditio n iiLthe_. market 
 which determines the formation of price.^ 
 
 A second gi'oup plays a very peculiar part in this resultant, 
 
 VIZ. that consisting of the valuations of all the contract ing 
 parties who actually come to terms, excln.qi vp. of the la.9t. 
 What th^ do is simply to bind and neutralise each other. 
 Eecur again to our typical illustration. If we inquire what, 
 for instance, the presence of Aj contributes to the formation of 
 price, we find . that he takes up one member of the opposing 
 series, namely, Bj, with the result that now the formation of 
 price proceeds exactly as if neither Aj nor Bj were in the 
 market. Similarly it is not difficult to see that the efficiency ol; 
 
 A, , Aq, and A, simply consists in cancelling the efficiency of . 
 
 B. ,, Bgj and Bj_: if they are in tlie competition the resultant 
 
 I 
 
 price as an “ave rage o f in dividual valnes ” (Theoretische Ch-tnullegung der Staats- 
 wirthschajt, p. 276 and passim). This expression, if given without commentary, 
 is exceedingly unfortunate, indeed directly misleading. As may be seen from 
 what follows above (and more exactly from what I wrote in my Grimdziige, 
 pp. 505 and, particulars^ 522), the chara cteri stic thing, on the contrary, as 
 regards the resultant price, is that it is an “average” ip the, nsnal .seii.se of 
 the word . 
 
 ^ At least under the assumi)tjon distinctly made in our inquiry, that the com- 
 petitors who appear in the market have a correct knowledge of the condition of 
 the market. If we depart from this assumption, the appearance of more than a 
 hundred demanders might give rise to the erroneous opinion that there may be 
 among them a great many persons of higher “capability,” and this might mislead 
 Xhe few capable comhetitors who are present into rashly making higher offers. 
 
 I 
 
212 
 
 TWO-SIDED COMPETITION 
 
 BOOK IV 
 
 price falls between £21 and £21 : 10s.; if they were all absent 
 A- and Bj would still make their exchange at a price between 
 £21 and £21 : 10 s. And it is worth empha,aising that the 
 cltgrcc of the subjective vnliintions made in this group is q uite 
 ind ifferent to the result Aj, for instance, whose valuation, in 
 our scheme, is put down at £ 30 , would cancel Bj not less 
 thoroughly if his valuation amounted to only £25 or £22 ; and, 
 conversely, suppose that his estimate were £200 or £2000, of 
 this enormous amount absolutely nothing would affect the result- 
 ant price except the sum, in any case, absorbed in neutralising Bj. 
 
 If, however, the valuations of this group have no direct 
 influence on the formation of price, it cannot be said that they 
 are quite without effect When the valuations of Aj to A4 
 cancel those of B^ to B^ they have a twofold result. First, 
 they prevent any stronger seller than B^ getting into the 
 marginal pair which immediately determines the price. And 
 second, they prevent the strongest sellers from cancelling the 
 next strongest buyers— as they might do if not cancelled 
 ali'eady — and they thus prevent any weaker member of the 
 buying series than Ar, from getting into the marginal pair.^ 
 The part played by all those exchanging pairs who are stronger 
 or more capable than the last may therefore be accurately 
 characterised in the following words ; Their valuations coi u- 
 tribute-nothing directly to the formation of the resultant price. 
 
 but they do indirectly, in so far as they neu tralise each othe£. 
 and thus reserve tlie role of m argi nal pair for anoth er coup le. 
 
 Finally, the real decision of price lies exc] usLvelv__wiJ±L^ 
 
 * To show this, suppose we leave Ai to A4 out of our illustration. The position 
 of the parties, then, is as follows : — 
 
 Ag . 
 
 A7 • 
 
 A. . 
 
 A.J . 
 
 . £22 
 . £21 
 . £20 
 
 B., 
 
 B:, 
 
 £18 
 
 . £17 
 . £1.5 
 
 B5 
 
 Be 
 
 B7 
 
 Bs 
 
 £10 
 
 £11 
 
 £15 
 
 £17, 
 
 . £2a 
 
 . £21 :10s. 
 . £25 
 . £26 
 
 Here we see that the last pair within which the economical conditions of 
 exchange are pre.sent consists of As and B4. The buyers, therefore, are now 
 represented in the decisive marginal pair by _a„we,ake r member, the sellers by a 
 stidnger one. -Accordingly the limit of price, which in the last case stood between 
 £21 and £21 : 10s., moves down to between £17 and £18. 
 
CHAP. IV EFFECT OF THE VARIOUS VALUATIONS 
 
 213 
 
 roup, ana tnat a smalL-Oiie— the, valuiLtions of the two ^ 
 Tuarp ^inal paivs . All weaker competitors being, abs olutely, with - 
 out influence, and all stronger ones cancelling each other, they 
 and they alone are the directly effective components, and the 
 market price is their resultant. 
 
 At first sight it may appear strange that so fevy persons , 
 and those so little conspicuous, should decide the fate of the 
 whole market, but on closer examination this will be found 
 quite natural If aU are to exchange at one market price, thp 
 price must be such as to su it ah excha.Tifflrig partip.s ; and since, 
 naturally, the price which suits the least capable contracting 
 party suits, in a higher degree, all the more capable, it follows, 
 quite naturally, that the relations of the last pair whom the 
 price must suit, or, as the case may be, the first pair whom it 
 cannot suit, afford the standard for the height of price.3 
 
 ^ Students of economic literature will not fail to notice an interesting relation 
 in wliich. the above theory stands to certain doctrines that have for long obtained 
 full recognition. When Thiinen — and with him the whole body of economic 
 doctrine — said that the rate of interest was determined by the p roducti vity 
 o f the “portion of capital last applied.” a nd t he rate o f wage b y the_ rejtupa 
 of the “last worker em ployed in th e undertaking” ; or when, much earlier, the 
 question as to which, among several costs, regulates market price was decided in 
 favour of the “highest costs of production that were still necessary to provide for 
 the market,” i.e. in favour of the “last seller,” — we recognise in all these, with- 
 out difficulty, adaptations to special cases of the same principle on which we have 
 built the doctrine of marginal utility and the theory of the formation of price. 
 The only thing is that at that tim e economists were not ^et conscious jot thj6 
 univ ersal importance of these peculiar lines of thought. They meant simply to 
 state a couple of special rules of limited range, while in reality they had hit upon 
 the dominating Leitmotiv, which underlies the entire mechanism of industry 
 carried on under the guidance of self interest, and which, therefore, runs through 
 the entire formation of value and price. 
 
CHAPTEK y 
 
 THE LAW OF SUPPLY AND DEMAND 
 
 The zone within the limits of which the struggle of competi- 
 tion forces the formation of price is, as we have seen, character- 
 ised as lying between the subjective valuation s of the ma rginal 
 pairs, and on this characteristic feature we have formulated 
 our law of price. But this zone has a second characteristic 
 feature : it is that i n which exactly as ma ny commodities a re 
 ■off^rl fhr salft a s are wanted to "^urjp iase^^ Dr, to use the 
 common expressions, in which supply and demand are q uan- 
 tit atively in equilib rium. In our scheme, at a price which did 
 not rise to £21 more horses were demanded than were offered ; 
 at a price which rose above £21 : 10s. more horses were offered 
 than were demanded ; while in the zone indicated by our law 
 of marginal pairs — that between £21 and £21 : 10s. — the 
 position requisite to end the competition was reached, and at 
 p rice exactly as m any horses were asked as wer e offere d 
 
 How, if it should be thought preferable, the formulation of 
 the law of price may be based on this second characteristic 
 feature, and it will then take the following shape : Th e mark et 
 pri^is found in that zone in which supply and demand 
 quanti^iti’^y bSance each other. This formula is as correct 
 as the other. It indicated the same zone in another way. 
 But it is less expressive (1) in so far as it only points to 
 the level of the determining zone in ^a roundabout way. 
 
 ^ I need scarcely say in so many words that it is not the number of persons 
 wishing to buy and sell on which the formation of price depends, but the mass of 
 commodities desired and offered, and that in the typical scheme it is only for 
 simplicity’s sake that I have assumed each person to desire and offer for sale 
 only one commodity, whereby number of persons and mass of commodities go 
 •pari passu. 
 
CHAP. V ANOTHER FORMULATION OF OUR LAW 
 
 215 
 
 while, by our formula, the limits of this zone are directly and 
 positively indicated ; (2) as it has to contend t o soin e extent 
 with .the difRculty of hn.ving to use tlm .expressiona_Supp1y and 
 Pemand, — for the ptotean ambiguity of these terms is sure to 
 bring innumerable errors and misconceptions in their train, just 
 as it has brought the terms themselves into thoroughly bad 
 repute with many.^ Still, these drawbacks may very well be 
 overcome by critical attention ; a nd there is no nbjp.etinn in 
 my opinion, to treat the theory nf prir.e under the good old 
 catchwords Supply and Demand, if care is only taken to avoid 
 the errors and misunderstandings which so plentifully surround 
 them, and to inform the old forms and formulas with new and 
 clear knowledge.^ 
 
 In one special case this sep.nnd formulation of our law of 
 
 price is even the more exaet of the-twe r- In the vast majority 
 of cases, the zone 'within which supply and demand ju^balance 
 each other exactly -Coinnide..s --witlL...the zone whose limits are 
 marke d out by the valuations of the mai^naT pairs. But there 
 is one quite definite coincidence of circumstances in which it may 
 happen that the equilibrium between supply and demand does 
 not make its appearance within the whole of the last-mentioned 
 zone, but only within a distinctly narrower part of that zone ; 
 and, in such cases, the price is always fixed within these narrower 
 limits. The very peculiar coincidence of circumstances which 
 produces this result occurs very rarely indeed in economic life, 
 but, among the cases where it does occur, t here is one that is 
 very important for the theoretical explanation of interest , and 
 for that reason, in spite of its somewhat “ exotic ” character, I 
 must devote a few words to it. 
 
 The casuistical conditions of this case are the following. 
 Fi rst, there must be con siderable latitude between the valua- 
 tio ns of the margina l paira This^wndition is most thoroughly 
 fulfilled where all the competing exchangers come to terms 
 (there being, therefore, no excluded competitors), and when, at 
 the same time, the buyers, as a body, value the commodity 
 
 ^ See my Orundziigc, p. 525. 
 
 ■ On the relation of the above theory of price to the old doctrine of Supply 
 
 and Demand, as well as on the truth and error contained in that doctrine, I hare 
 
 already written at length in my Q-rundzuge, pp. 524-534 ; here it is sufficient to 
 refer to that work. 
 
216 
 
 THE LA W OF SUPPLY AND DEMAND 
 
 BOOK IV 
 
 considerably higher than the selleis do. If there are, for 
 instance, ten buyers who each value the commodity at £10, 
 and ten sellers wlio each value it, subjectively, at £1, obviously 
 all the ten pairs can come to terms, and the zone which lies 
 between the valuations of the last buyer and the last seller 
 represents the wide latitude between £1 and £10. Secondly, 
 that this latitude sh ould be narrowed do wn, the further circum- 
 stance must be present, that the desire of the buyers is directed 
 to an unlimited nu mber of goods, •whil e, at the same time, the 
 total amount of means of nurchase must be strictl-y limited , 
 and the buyers must be determined to spend the whole of this 
 sum in purchase of the commodities in question — in the pur- 
 chase of fewer goods if the price be high, in the purchase of a 
 proportionately larger number of goods if the price be low. To 
 put it in terms of our illustration. Say that each of the ten 
 buyers is resolved to spend the sum of £100 in buying cotton 
 goods; that is to say, at any price under £10 he will buy as 
 many pieces as he can obtain for £100. And suppose that 
 against this total competing demand of £1000 there is a supply 
 of 200 goods, which their owners are inclined to let go at any 
 price above £1. T t is easy to see that the price must be fixed 
 at £5 the piece. For if the price were to be less, say £4, the 
 200 pieces offered would be purchased for £800, and £200 of 
 the available means of purchase would remain unemployed. 
 Here the owners, acting on the motto “rather a small gain than 
 no exchange,” will continue bidding up against each other, and 
 so raise the price to £5, at which figure the whole capital of 
 £1000 finds employment If, on the other hand, the price 
 were to be put still higher, say £8, only 125 pieces of cotton 
 goods could be bought with the £1000 available, and 75 would 
 remain unsold. Now, obviously, no seller (considering that the 
 price remains profitable to him till it is brought down as low 
 as £1) would willingly forego taking part in the exchange, and 
 thus the sellers, in fear of being shut out, would offer below 
 each other, a. nd the price would be pressed down to the equi - 
 l ibrium point of £5. Inside the wider zone, then, of £1 to 
 £10 — that determined by the valuations of the marginal pairs 
 — t he necessity for equilibrium between supply and demand 
 determines the price with much more exactitude, and fixes it 
 at £5, that being the point at wln'cli, if the competitors follow 
 
CHAP. V IN SOME CASES A MORE EXACT LAW 
 
 217 
 
 their own interests without let or hindrance, the market price 
 must be fixed. 
 
 As we have already said, the extremely peculiar coincidence 
 of circumstances necessary to this result occurs very seldom, 
 but, as it happens, the cases where it does occur are very not,- 
 nhle. One of these is the formation of the price of Money — 
 which, however, does not concern us here.^ A second is. the. 
 tormatiou of price in the T,ahmir market , a nd this is the case 
 which we shall have to take up later on, on account of its close 
 connection with the origin and height of Interest. It should, 
 liowever, be carefully noted that, even in these two cases, the 
 conditions under which this special form of the law of price 
 appears are seldom met with in economic life in entire isola- 
 tion. Thus the practical importance of such cases is stiU 
 further diminished, and, if the recognition of them cannot well 
 be ignored in the course of any theoretical exposition, stUl, as 
 regards the infinite majority of cases, the first formulation of 
 the law of price — that which determines the height of priee Ly 
 the subjective valuations of the marginal pairs— mav be relied 
 on with perfect confidence. T1iis form nlatinri is always correct. 
 and, for the infinite nmioiity of cases, is sufficiently exact. 
 
 Moreover, without losing its practical usefulness in the majority 
 of cases, it permits of being still further simplified. Before 
 going on to this, however, some other explanations are 
 necessary. 
 
 1 Without being a blind adherent of the “ Quantit)’ theory.” I believe that , 
 along with other important circumstances, the quantity of money, the amount of 
 the supply of money, exerts a powerful influence on its p ur chasing pow er. But 
 the supply of money has. exactly the peculiarity described in the text, that, rather 
 than let money lie entirely unused, holders will be content with a comparatively 
 unremunerative employment, and that, at the same time, the entire given 
 quantity of money strives to realise itself in the purchase of an unlimited quantity 
 of commodities — the more the better. 
 
CHAPTER VI 
 
 THE INDIVIDUAL DETERMINANTS OF PRICE 
 
 In the chapter before last we saw that price is determined at 
 a level fixed by the valuations of the marginal pairs. We have 
 still to ask, W hat; are the circumstances w hich determine 
 whether jhis level itself is high_o^low^ ? 
 
 The first few steps in the answer are very easy. It is 
 clear at a glance that the two things which must have the 
 decisive intluence on the position of the marginal pairs are the 
 num h er and the intm.sitv of the desires or val nations oiiJ anth 
 s ides . In this way. The level of the valuation of the marginal 
 pairs will tend to be high when, on the side of the buyers, 
 there are very high valuations, and, relatively, a great many of 
 them, and when, on tlm side^ of the sellers, the low valuations 
 are relatively few. For, in this case, the few low valuations of 
 the sellers will be cancelled by a portion of the more numerous 
 high valuations of the buyers, and since, after this is done, there 
 are still buyers with a high valuation, while at the same time the 
 only remaining sellei’s also have a high valuation, the marginal 
 pairs on both sides are composed of persons with high valua- 
 tions. On quite analogous grounds the level of the valuation of 
 the marginal pairs will tend to be low when, on the aide of the 
 buyers, there are (relativelvl few high valuations, and on the 
 - ^de ofthe sellers thor p. a.rp._.(.rp.1fi.ti velvl many low valuations . 
 
 If we single out the individual factors from the combined 
 action of which, as we have shown, the vaktat ion level of the 
 marginal pairs results, we get the following individual deter- 
 minants of price : ^ — 
 
 ^ T .shmilil Vilcfi to .say that I Iiere bringr fonMi' d the theory of t lie d eterminants 
 aLpticS-OJilx-iiLthe biiefest af^e.pLtgines^ because the details of it have no imnie- 
 
CHAP. VI 
 
 FACTORS OF DEMAND 
 
 219 
 
 1. The number of desires directed towards the commodity 
 
 ( Extent of Demand .^ 
 
 2. The figures which the buyers put upon their valuations 
 
 ( Intensity of Demand) . 
 
 The latter, however, is not a simple matter. The figures 
 in which valuations are expressed are in no wise simple 
 expressions of the absolute amount of subjective value which 
 the commodity has for the valuer. They only express a 
 relation obtained by comparing two different valuations — ^that 
 of.thgj commo dit y and that of the equivalent price. When we 
 said in our scheme that A, values a horse at £30, that is not 
 to say or prove anything of the absolute importance of a hors e 
 to A’s wellbeing ; all that it expresses is the relation in which 
 the value of the horse to A stands to the value of the money 
 to A. It simply says that A values the horse thirty times 
 more highly than he values one pound sterling. If, therefore, we 
 wish — and this is the task in which we are at present engaged 
 — to lay down the elementary factors in the formation of price, 
 we must put down, instead of the combined amounts which 
 make up the figures of our valuation, the elements out of which 
 they are combined. ' These elements are two-^ first, the 
 absolute amount of subjective value which the commodity has 
 for the valuer ; 'aii3^“second, the absolute amount of the sub- 
 jective value which the unit of the equivalent price has for 
 the- valuer. And, indeed, they obviously work towards com- 
 bihatioh in this sense, that the figures are high in direct ratio 
 to the absolute value of the commodity, and in inverse ratio to 
 that of the equivalent, and vice versd. 
 
 Thus, in our scheme of the determinants of price, instead 
 of the valuation figures, we have to lay down as the deter- 
 minants of these figures — 
 
 [а) The subjective valuation of the commodity by the 
 
 buyers (which itself, again, according to the law of 
 marginal utility already laid down, depends on the 
 relation of wants and provision for want) ; and 
 
 (б) The subjective valuation of the equivalent fricc hY the 
 
 buyers." Since, undeFpresehl conditions, it is money 
 
 diate interest for the theory of capital. Any one interested in the theory of 
 price as such, I would refer to the full statement in Conrad’s Jahrhucher, vol. xiii. 
 pp. 508-524. 
 
220 INDIVIDUAL DETERMINANTS OF PRICE book iv 
 
 that mostly serves as equivalent, and since, as we 
 saw in a former chapter, the unit of money has a 
 smaller subjective, value for the rich than for the 
 l^oor, it is, in the last instance, the standard of comfort 
 of the buyers which has the preponderating influence 
 on the formation of this determinant.^ 
 
 Continuing our enumeration we 'have — 
 
 3. The number in which goods are offered for sale ( Extent 
 
 of Supply ). 
 
 4. The figures which the sellers put upon their valuations 
 
 ( Intensity of Supply !. 
 
 As in the former case, this latter determinant may be split 
 up into two simpler factors — 
 
 (a) The subjective valuations of the commodity by the 
 sellers. 
 
 (J) The subjective valuations of the equivalent pric e ly 
 the sellers. 
 
 These two find their own further determination according to 
 the law of marginal utility. But frequently this leads to a very 
 noteworthy peculiar ity. In the present condition of industry 
 most sales are made by men who are producers and merchants 
 by profession, and who hold an amount . o f their commoditie s 
 entirely beyond any needs of their own . Consequently, for 
 them the subjective use- value ^ of their own wa,re.s is. for the 
 most part, very nearly nil ; and the figure which they put on 
 their valuation (in which the subjective use -value is the 
 standard element) also sinks almost to zero. Finally comes 
 the result that, in such sales, the limiting effec t which, accord- 
 ing to our theoretical formula, would Vip PVPrfpH V>y^tb p, val na- 
 tion of the last seller, practically does not come into play, and 
 price is actually limited and determined by the valuations of 
 th^^ buyers alone. In other words : when goods are once 
 ' 4>roduced, and the owner can do nothing with them for ...hia 
 own per sonal want.c;, t.fifi y must. all' the" same, seek a market. 
 To find-4his market the seller must, in the usual way, put his 
 
 1 The older theory Tvas misl ed by t his into substituting, for the de terminant 
 “ subjective valuation of the equivalent price.” the “ability to pay ” of the 
 buyers, which is not exactly false, but is very one-sided. See the more exact 
 statement in Conrad’s Jahrhiicher, pp. 520, 527. 
 
 * This, and not subjective exchange value, is the important thing for the 
 formation of price. See the Grundzuge, p. 516. 
 
CHAP. ■- I 
 
 FACTORS OF SUPPLY 
 
 221 
 
 goods at a price low enough to find hny(H\s for the whole stock 
 he olfCT^f5r~ sale. In the case of a stock of 1000 pieces, for 
 instance, he will find his market at a price which is somewhat 
 less than the valuation of the thousandth buyer, and somewhat 
 higher than the ^'aluation of the thousand and first If, now, 
 the relations of production and ^ale are normal, the whole stock 
 offered will, almost invariably, be taken off by the demand at a 
 price which is far above the minimum use-value nf tbp. com- 
 moditv to the sellers, and which, beyond the full amount of 
 costs, brings them a business profit . If the circumstances, how- 
 ever, are unfavourable, it may well happen that the seller must 
 seek for his market at considerably lower levels of demand, 
 and b e content to take prices which show a loss w hen compared 
 with costs of production. But, as^a_rule,_evem those forced 
 prices are still above the subjective use- value of the commodity 
 to the seller, and the funcdqn of this icjnbjp cti ivp. u a&r.value,_aa 
 lower limit of price, does not come into operation . It is only 
 if the price should sink almost to zero that it would be checked 
 in its descent by this latter limit, the valuation of the seller, 
 finally coming into play. But it can scarcely ever come to 
 this : in almost all cases the competition of buyers is suffi- 
 cient of itself to stop the downward movement at a higher 
 point on the scale. Thus, in regard to the prices actually 
 established within a large and organised market, the law of 
 price undergoes a great simplification . Of the four valuations 
 which, as “ valuations of the two marginal pairs,” limit the 
 zone within which price is determined, th e valuatio ns of the 
 seller, for the reasons mentioned above, fall out altogether. 
 
 But, if the buyers' are very numerous, the interval between 
 the figures which two successive buyers put on their valua- 
 tion is so small, that the zone limited by the figure of the 
 last buyer and that of the first unsuccessful competitor, is 
 narrowed almost to a point. And so far as this is the case it 
 may be asserted, with sufficient exactness, of the economic 
 exchange which goes on in large markets, that the market price 
 is determ iripd bv the. V.a1n ation of the Last Buven^ 
 
 1 This may be a suitable place to finish the analysis of Scharling’s argument, 
 which I began on p. 160. Scliarling explains (Conrad’s Jahrbiicher, vol. xvi. 
 p. 542) that in all essen tial respects he can agree with my theory of prire ; only , 
 he says, it does not go far enonghiT Mv “determinants." and even the deter- 
 
INDIVIDUAL DETERMINANTS OF PRICE book iv 
 
 222 
 
 miiiaiits of these determinants, do not go to the very root of the explanation ; 
 tliere is still something wanting ; and this something, this Schlussstein or “ element 
 which, in the last resort, determines the conditions for an exchange,” Scharling 
 thinks that he has found in the “ exertion ( Anstre.naunn') which is spa r ed the ttia n 
 who wishes ... to obtain possession o f a good by the fact that the good is 
 transferred to him, in the case in question, by the other party in the exchange” 
 (p. 551). If Scharling here were to mean by Anstrcngwig the toil of production 
 which must otherwise be expended, directly or indirectly, for the acquisition of the 
 good, his proposition would be positively false (see above, p. 160 in note), and 
 this, indeed, Scharling himself seems to see and, indirectly at least, to admit 
 (pp. 531, 554). But he goes on to give this expression a wider meaning. Under 
 it he now embraces, among other things, the exertion which it c ost s to induce ag 
 owner to part with his commodity (p. 554), or “ to meet competitors ” (p. 556), or 
 “to meet other suitors by overbidding” (p. 558), or “ to overcome the indisposition 
 of the owner to part with the good ” (p. 558), and so on. “The right of the owner 
 to possess the good,” explains Scharling in the most significant passage of this 
 kind, “ is the last hindrance which stands in the way of the buyer’s acquisition of 
 the same, and this is now the thing to remove. The exertion which is required for 
 t his determines the va lue, the conditions for the exchange ” (p. 658). Now, what 
 kind of “ exertion ” is t his ? ■ Scharling himself speaks of it more than once with 
 all desirable plainness (e.g. p. 555, line 15 ; p. 558, lines 5, 16, etc.) It consists 
 .simply in the offering of a sufficiently high or higher price , in a bidding up or 
 bidding higher. And now I ask : First, is there any justification, material or 
 linguistic, for calling the offering of a price an “ exertion,” and, specially, for 
 calling the offering of a price of £20 twice as great an exertion as offering a price 
 of £10 ? Second; is- the “exertion ” which consists in offering the purchase price, 
 e.g. at an auction, snared the purchaser, or must he not rather take the exertion 
 on himself if he is to obtain the good ? And, third and principally, is it explain- 
 ing the formation of price, or going round about the explanation in a manifest 
 circle, to account for the height of price by the amount of the exertion which the 
 meeting of competition and the inducing of the owner cost, and then explain 
 this exertion again as the offering of a sufficiently high or higher price ? Is this 
 not rather to say directly ; — the price is high when and because much must ho 
 paid to get the good, and it is low in another case when and because but little 
 
 n eed be paid. ? Who will be inclined to accept this as “ der Weisheit letzten 
 Schliiss,” as the long -sought -for coping-stone of the theory of price? — And 
 now one more remark in case of misunderstanding. I am very far from deny- 
 ing that “difficulty of attainment” or “amount of toil of production” may, and 
 very often actually does, afford one single important secondary determinant for 
 the relation of want and provision for want, thereby for the height of marginal 
 utility, and so, finally, for the amount of value. But this determinant only 
 works in the way, and within the limits, which I have indicated in my theory 
 (see in particular the statement of the “ exceptional case,” where the amount of 
 a pain or strain averted determines the value of a good, Grundziige, p. 42, and 
 especially the statement of the influence of costs of production on value and 
 price, p. 61 ; then pp. 521, 532, 534). On the other hand, the more extensive 
 claim that Scharling puts forward with so much emphasis (vol. xvi. pp. 551, 652), 
 that diffi culty of attainment by itself alone is the last universal determinant and 
 measure of value. I can only most emphatically reject. 
 
CHAPTEE Vll 
 
 THE LAW OF COSTS 
 
 In the sphere of price, as in the theory of subjective value, 
 we find a law firmly rooted in economic literature and 
 accredited by conimon experience. It tells us that the 
 market price of goods reproducible^ at will tends. .±o. e qjmlise 
 itself, i n the loj ig-T-nn, v^n' th Costs of rroduction . Tlie following 
 perfectly valid line of argument is usually adduced in proof of 
 this. The market price of goods reproducible at will cannot, 
 in the long-run, be maintained either much above or much 
 below their cost. If at any time the price of an article rises 
 appreciably above the cost, its production will be particularly 
 profitable to the undertakers. This will not only induce the 
 latter to extend their already flourishing businesses, but will 
 encourage new undertakers to enter the same remunerative 
 branch of industry. Thus the amount of product brought to 
 market will be increased, and finally — according to the law of 
 supply and demand — a fall in price will ensue . If, conversely, 
 at any time the market price falls below costs, continued pro- 
 duction will show a loss ; many undertakers will reduce their 
 output ; the supply of the commodities will be reduced ; and 
 this, finally, in virtue of the law of supply and demand, naust 
 lead to a raising of the market prica 
 
 Eound this law of costs has gathered a great mass of theo- 
 retical detail,^ which may, for our purposes, be left entirely on 
 
 ^ Thus the question as to costs of production or costs of reproduction ; whether, 
 in the case of a variety of costs, it is the hi e ;hest, the low est, or an average cost 
 t hat is to h e taken_M standard ; what elements are to be reckoned among costs, 
 and so on. 
 
224 
 
 THE LA W OF COSTS 
 
 BOOK IV 
 
 one side. Our whole interest is-eeatrBfLd n the question as to 
 the position wh inh the law^.sn wp.11 Rop.rp.dited by exp erience, 
 takes in the s-v^tem atic theo ry . of price. Does it run counter 
 to our law of mai^ginal-pairs or not ? 
 
 Onr nnsw pr is tha t it does no t. It is as little of a con- 
 tradiction as we before found to exist between the proposition 
 that the marginal utility determines the height of subjective 
 value, and the other proposition that the costs determine it. 
 The line of thought which, in both cases, leads to the solution 
 of the apparent contradiction is the same, feature for feature ; 
 except that, in the present case, in virtue of the intervention 
 of exchange, — in virtue, that is, of the translation of the 
 phenomena out of individual economy into social economy, — 
 there appear richer developments at every station on the line 
 of thought. 
 
 In what follows I shall try, as briefly and clearly as 
 possible, to describe the concatenation between Value. Price, 
 and Costs,: and I think I am not exaggerating when I say that, 
 to understand clearly this connection, is to understand clearly 
 the bett er part of Political EconomY- 
 
 The formation of value and price takes its start from the 
 subjective valuations nut upon finished products by their con- 
 sumers. Tliese valuations determine the demand for those 
 products. As supply, over against this demand, stand, in the 
 first instance, the stocks ol hnished commodities held hv^ rb- 
 ducers. The point of intersection of the two-sided valuations, 
 t he valuation of tl^ie marginal pairs, det e rmines, as w e know. 
 t lie jiricR . and, of course, determines the price of each kind of 
 product separately. Thus, for instance, the price of iron rails 
 is determined by the relation of supply and demand for rails ; 
 the price of nails, by the relation of supply and demand for 
 nails ; and, similarly, the price of every other product made 
 out of the productive good iron — such as spades, ploughshares, 
 hammers, sheet-iron, boilers, machines, etc. — is determined by 
 tlie relation between tl m supply and demand which obtains for 
 these special kinds of products. To make this perfectly clear, 
 let us assume tliab tlie relations between reqiiirements and 
 .<;tncks of the various iron products — and, accordingly, their 
 prices to begin with— a re very various ; that the price of a 
 quantum of commodity which can be made out of one and the 
 
CH. VII CONCATENATION OF VALUE, PRICE, COSTS 225 
 
 same unit of productive material^ — for instance, from a cwt. of 
 iron — varies from 2 s. for the cheapest to 20 s. for the, dearest 
 class of products. These prices are the result of the position 
 of the market at the moment, and we have first assumed that 
 the stocks of products (the supply! are a q'iven quantity . But 
 they are only for the moment a given quantity. As time goes 
 
 on, they are always getting supplemented from production, and 
 this makes them a variable quantity. Let us follow the circum- 
 stances of this production. For the manufacture of iron fabrics 
 producers, of course, require iron.^ Under the system of division 
 of labour they must buy this in the iron market. The manu- 
 facturers represent this demand for iron. As jegards the e xtent 
 of the demand, it is clear tha,t every producer will buy as much 
 iron as he reqiiires to produce that amount of the commodity 
 which he may expect to sell among his customers. But how 
 wil l it be as regards th e intensity of the demand ? Obviously 
 no producer will give more for the cwt. of iron than he can get 
 for it^ from his own customers in the shape of price; but, up 
 to this point, even in the worst case, he can and will compete 
 rather than let his production come to a standstill for want of 
 raw material. The manufacturer, therefore, who can profitably 
 employ the cwt. of iron if he gets 20 s. from his customers will 
 be a buyer in the iron market up to the price of 20 s. as 
 maximum ; he who can profitably employ the cwt. of iron at 
 16s. will, naturally, not buy at a price over 16s., and so on. 
 In this way the market price which each producer of iron 
 wares gets for his particular wares (or the share of the market 
 price which falls to iron according to the law of complementary 
 goods) furnishes hiin with the p o nfrptp yalnat.inn whipy 1-LP. ling 
 in his mind when joining in the demand fo rjron. 
 
 ^ To simplify the matter, we shall omit for the moment the co-operation of 
 any other complementary means of production. 
 
 ^ Again, for simplicity’s sake, I leave out the other requisites of production. 
 
 ® It must be remembered that here we are making abstraction of the co-opera- 
 tion of other complementary means of production, as Labour, Tools, Coal, etc. 
 If otherwise, of course, according to the principles laid down above (p. 170) on 
 the value of complementary goods, we should have to put a portion of the value 
 of the product to the account of the other co-operating goods, and assign only a 
 quota of the product’s value to the iron. But, in that case, exactly the same 
 relations, as are shown in the text to exist between the value of iron and the full 
 value of the product, would hold between the value of the iron and that quota of 
 the product’s value. 
 
 Q 
 
226 
 
 THE LA W OF COSTS 
 
 BOOK IV 
 
 The s upply, which stands over against thi s demand, consists 
 of the stocks of iron held by the mine-owneri~ahd ironmasters. 
 These stocks will pass, in methods familiar to us, into the 
 possession of the most capable buyers, and at a price which, 
 approximately, corresponds to the valuation of the last buyer.^ 
 Suppose the stocks of iron are sufficient to meet the demand 
 of all those buyers who value iron from 20 s. down to 6 s. 
 per cwt., tll£. ^al na tion _of th e last buyer, and thus the marke t 
 pH ^of the iron, will sta.nd at 6s. 
 
 And now we have to consider the causal connectiou which 
 has ended in this price. It runs, in the clearest pos.sible way 
 in an unbroken cha i n f r om value a nd pxricp. of products to vpl ne 
 and price of costs — from iron wares to raw iron, and not con- 
 
 j ^"ersely^ The links in TEe~chain are these. The, valuation 
 which consumers subjectively put upon iron products forms the 
 first link. This helps, next, to determine the figures of the 
 I valuation — the money price at which consumers can take part 
 in the demand for iron products. These prices, then, deter- 
 mine, in methods with which we are now familiar, the 
 resultant price of iron products in the marke^t for such pro- 
 ducts. This resultant price, again, indicates to the producers 
 ' the (exchange) valuation which they in turn may attach to the 
 productive material iron, and thus the figure at which they may 
 enter the market as buyers of iroj i. From their figures, finally, 
 results the market price of iron. 
 
 But still another and very important connection may be 
 gathered from all this. It is that, here, we have simply the 
 great law of marginal, ^ utility fu lfilling itsel f. Ac cording to 
 that law the ava il able stock of goods is, successively, conducted 
 into ^ the most remunerative em^ym ents — put to the mo st 
 advan tageous uses, — and the last use to which the goods are 
 put "^termines their v alue. In any individual ^onomy the 
 most remunerative uses are seen to be those which express the 
 most urgent subjective wants, and the value which emerges, as 
 result of these individual relations, is purely personal subjective 
 value. In the mor e extended_sp]iere__ of a market, on the 
 other h and, everything is referred, no longer directly to^s ub- 
 jective wants, but to those wa nts as Tnp.di>.t,p.fl b y mone y — 
 money being, as it were, the ne utral commoTi de un miuntion - f o r * 
 ^ See above, p. 221. 
 
CHAP. VII 
 
 FROM PRODUCT TO COSTS 
 
 227 
 
 wan ts and feelings of various subjects which are not im medi- 
 at ely commensurable . Here emerge, as the most remun- 
 erative employments, not tho se which express t he wants 
 absolutely most urgent, bu t those which are represented 
 by the hi ghest money vnluatlo n"; that is. the ^st paying 
 employments;^ and the value which results is objective 
 exchange value. Thus it is, first of all, with iron products. 
 In their respective markets they pass to the best paying 
 buyers, and the price which expresses the valuation of the last 
 buyer determines their market value and price. But so it is 
 also, in the second nlace, in a slightly roundabout way, with 
 
 the “ cost good,” iron, itself. In the iron market it goes to the 
 
 best paying producers, and the valuation of the last of these 
 determines its price. But here the producers are simply 
 mediators. In their conducting of the iron to the best paying 
 consumers, the stock of iron really passes successively to the 
 most remunerative forms of consumption, and the last of these 
 forms pro vided for determines — through the valuation n amed 
 by the last producer who enters the market as buyer— the 
 mark et price of the cost good, ir on It is not this cost good , 
 then, that dictates its fixed price to the products that proceed 
 from it ; on the contrary, it receives its own price hv the, 
 medium of the price of its products, in conformity with the 
 great law of marginal utility, according to which the available 
 stock is forced into the most remunerative employments, and 
 receives its price from the money valuations of the last of these. 
 
 But connected with this is a series of subsequent pheno- 
 mena, which, obviously, have given rise to the opinion that 
 costs exert a causal influence on the price of products. So 
 
 long as the price of various products made from iron varies 
 between 20s. and 2s., while the price of the unit of iron stands 
 at 6s., it is an evidence that the economical principle which 
 should guide the stocks of iron into the most remunerative 
 employments is not fully carried out. Iron is being used in 
 employments where the products fetch only 2s. or 3s., where, 
 accordingly, the use is less than the “ last ” economically per- 
 missible ; and, on the other hand, there are still numerous 
 
 ^ That tt Rse two, unfortunately, are not usually the same I have shown at 
 length in Conrad’s Jahrbiicher, pp. 510-513, when discussing the causes and effects 
 of this fact. 
 
228 
 
 THE LA W OF COSTS 
 
 BOOK IV 
 
 employments unprovided for, where the products would obtain 
 a greater value than 6 s. If, for instance, the market price of 
 an iron product stands at 20 s., it is a proof that only those 
 consumers of that product who value it at 20 s. and upwards 
 are actually purchasing, while other consumers, whose valua^ 
 tions range from 18 s. down to 6 s.. are not supplie d in the 
 mari^ t. Similarly with products whose market price stands 
 at 163. ; there will be an unsatisfied layer of demand, with a 
 use for the product corresponding to the prices 14 s. down to 
 6 s., and so on. Now this must be corrected — ^^and the e nterpris e 
 of Iinrlertakftr.q will nsnally r»r.t hp long in . supplying the needed 
 correction. The production of those iron wares, the price of 
 which still stands above 6 s., will, under the inducement of the 
 premium offered by the difference between price and cost, be 
 increased till all those employments where the utility is greater 
 than the amount of 6 s. are supplied. Of course this increase 
 of supply has the effect of always reducing the level in which 
 the “last” buyer is found, and thus the market pri^p ginVg^ 
 till such time as the money valuation of the last buyer, 
 and with it the market price, comes to the normal level of . 6 s. 
 Conversely, where iron has been put to employments whose 
 products fetch less than 6 s., the loss that ensues will prevent 
 more iron being thus employed. This will be brought about by 
 a temporary suspension or limitation of the production of those 
 iron wares, the market price of which is under 6 s. T his limita - 
 jjoTi n£ supply will soon have the effect of raising the price to 
 
 6 s... and now, as the state of the case demands, the commodity, 
 iron, will only be attainable by those buyers who can use it to 
 make products that will fetch at least 6 s. Thus, from above 
 and from below, all iron products come together at the price of 
 6 s., the amount of their costs ; but, qu ite evidently, the cau se 
 of this is ne t that the cost good, iron, can force i ts own 
 arbitrary fixed price on its products, but that al l the produ cts 
 involved, including the cos t good, iron, conform to the law of 
 m arginal utility, find their way successively into th e most 
 remunerat ive employments, and togethex -xece ive their price a s 
 regu late by the last of. these.^ 
 
 1 It is possible that- the amount of costs may itself be shifted — raised, for 
 instance — by the process of correction just described. It may happen, that is to 
 say, that in order to satisfy the demand, hitherto unsatisfied, which is desirous 
 
CHAP. VII 
 
 FROM PRODUCT TO COSTS 
 
 229 
 
 Empirical proofs of this may be had ia abundance. It is 
 a very well known fact that active building of railways raises 
 the price of rails, and, through this, the price of iron; that the 
 present strong demand for copper wire in electric lighting^uts 
 up the price of coppe E In these cases iTis evident that the 
 upward movement of price takes its start from the finah 
 products, and is transferred from these to the cost goods. 
 But the objection will probably suggest itself to many readers, 
 that there are also cases where the movement of price is 
 from costs to nroducts . The stocks of iron, for instance, of 
 which we have been speaking in our illustration, are not a 
 fixed amount, but are smaller or greater according to the 
 circumstances of iron production. Now if there is an exten- 
 sion of this production, and the supply of iron increases, its 
 price will certainly fall, and that from causes peculiar to the 
 iron ; and this fall in prices will drag down the price of iron 
 wares. Does the causal connection here not run from co.sts to 
 price of products ? 
 
 To answer this objection we have only to carry the con- 
 catenation, of which we have hitherto examined only a few 
 links, back to its beginning. It is quite correct to say that 
 stocks of iron are not a fixed amount, but the varying result of 
 a production which is cap able of being extended or limite d at 
 will. For the productionof iron two things are necessary, — 
 mines, and (to put it shortly) direct and indirect labour. 
 The mines are a given quantity, and cannot be devoted to 
 the production of anything but iron. On the other hand, 
 the quantity of labour available as a whole for economical 
 emplojnnent, is an amount given and limited by the current 
 state of population, but this is not the case with that particu- 
 lar labour which is employed in the production of iron. Labour 
 is a productive power capable of being employed in any number 
 of ways, and all the branches of production carried on in the 
 community compete for it. Who or what, now, is it that 
 decides what exact proportion of the original productive powers 
 
 of buying iron products at a higher price than 6s., so much iron is taken out of 
 the iron market that the stock is uo longer sufficient for the demand that is 
 willing to pay just 6s. This latter, then, will, of course, be shut out by the 
 stronger competitors, and the market price settles at a higher figure than 6s. — 
 another proof that costs are not the fixed point to which the price of products 
 adapts itself, but vice versd. 
 
230 
 
 THE LA W OF COSTS 
 
 BOOK IV 
 
 at the disposal of industry, namely labour aorl osp r of lanrl^ jg 
 employed in the production of iron, and who and what is it that 
 decides on the value and price of the unit of those productive 
 powers ? 
 
 Here, then, for the last time, is repeated, in the elements 
 of all economy, the movement which we saw in the case of 
 final products and intermediate products. The original pro - 
 dji ptdve powers of the nation force themsplvas into the most 
 
 smunerative employments one, alta r another., and receive their 
 
 value and price from tho last of these. As little as, perhaps 
 even less than, any other good have they any a priori fixed 
 value : they receive it only from the opportunities of employ- 
 ment. Whether the day’s work is worth 2 s. or 6 s. depends 
 on the worth of the product which can be turned out in the 
 day’s work, and, indeed, on the “ last ” product — the one worst 
 paid — for the production of which there is still enough labour 
 of the necessary quality left, after all the better paid employ- 
 n^ts have been supplied. 
 
 ' Production mav be compared to a giair t_ pump. Every 
 branch of want has its separate pipe sunk down to the great 
 reservoir of the original productive powers, and competes with 
 all the other branches of want in trying to draw its supply 
 by suction from that reservoir. Every branch has a different 
 power of suction, the power increasing with the number and 
 the remunerativeness (that is to say, in the case of organised 
 exchange, the money value) of the employments it embraces. 
 In the nature of the suction pipes, too, there is a difference. 
 Many are quite simple : others have independent intermediate 
 lengths, that convey the pressure that comes from the want, 
 as it were, by stages ; and, in correspondence with that, the 
 productive powers which supply the want are raised by stages. 
 
 The sumle extends still furtlier. Such wants as demand 
 personal services for their satisfaction, attract labour quite 
 directly, according to the payment which they can and will 
 give for them. Such wants, again, as demand material goods 
 for their satisfaction, get these supplied, first, by payment of a 
 market price which is remunerative in itself, and then the 
 remunerative price of the products must attract the productive 
 
 p owers to their manufacture. Sometimes this is done through 
 one or two, sometimes through twenty or thirty, members. In 
 
CHAP. VII PRODUCTION A KIND OF GIANT PUMP 
 
 231 
 
 our illustration, human demand asked and paid for iron wares : 
 the market price of iron wares attracted people to the purchase 
 of iron : the price of iron, finally, attracted the original prp - 
 ductive powers to the production of iron. In the case of 
 other consumption goods, the number of intermediate members, 
 or, to keep to the terms of our comparison, the number of 
 intermediate lengths in the suction pipe, may be double or 
 twenty times as great. But the principle of the movement, 
 and what chiefly interests us, the result, is always the 
 same. - Whether there are many or few intermediate mem- 
 bers may hasten or hinder the result, hut it cannot weaken__or 
 strengthen it : in the end every want, according to the power 
 expressed by its money valuation, draws to itself, mediately or 
 immediately, the productive powers required for its supply. 
 To supply the wants of the rich innumerable productive powers 
 are always active, even if, simultaneously, at other points of 
 the economy, there is want both of men and goods. The 
 reason of this is that the high figures, which the rich are able 
 to offer for the satisfaction of their wants, never fail to exert 
 and continue their attractive force through all the stages of 
 production, right down to the reservoir of the original productive 
 powers. 
 
 Th us all human wants exert, as it were, a suction p ower 
 indicated b y the fig ures of their valuation . Now, that layer of 
 wants whiclTTs willing and able to pay, say, 20s. and upwards, 
 for the day’s work devoted (mediately or immediately) to its 
 satisfaction, is soon entirely provided for. After it those layers, 
 in succession, draw supply to themselves which can and will 
 pay the day’s labmir with 18s., 16s., 14s., and 12s., even down 
 to 10s., 8s., 6s., and 4s. If, at the limit of 4s., the entire stock 
 of original powers is required and is taken, this decides two 
 things : — All wants which will not, or cannot, pay the day’s 
 labour devoted to their service at 4s., remain unsupplied ; and 
 the market price of the day’s labour will stand at the fi gure of 
 the last buyer, namely, 4s. But if, as we may rather assume, 
 theavailable quantity oF labour is greater than this, the wants 
 of still lower levels may be supplied. The last needs — mediate 
 or immediate — which are supplied may be those that pay the 
 day’s labour at 2s. only ; and, in conformity, the market price 
 of labour also will be fixed at this lower figure of 2i i. And, 
 
232 
 
 THE LA IV OF COSTS 
 
 BOOK IV 
 
 indeed, this market price wUl be a general one : the uppermost 
 layer will not be paid 20s., and the lowest layer 2s. for the 
 same work or the same commodity : the market price will he 
 the same for all buyers. 
 
 And now we come in sight of the answer to th e doubt 
 suggested by ouTformer i llustration. Suppose that the price 
 of the day’s labour is 2 s., an3~the price of a cwt. of iron, which 
 takes three days to produce, is 6 s. Suppose now that, all of a 
 sudden, new and productive mines are opened? or some great 
 improvement in process discovered, which makes it possible to 
 produce the cwt. of iron in two days’ labour. What is the 
 consequence ? So long as the iron and its products maintain 
 the old price of 6 s., only those wants in the department of 
 iron wares are supplied which are able and willing to pay 6 s. 
 for two days’ work ; that is, to pay the day’s labour at the rate 
 of 3s., while all round, in all other departments of want and 
 branches of production, that layer of want is supplied which 
 pays only 2s. for the day’s labour. On economic principles — 
 which are willingly carried out by undertakers of industry, who 
 ^ are always ready to seize the chance of a profit when offered 
 opportunities of employment which pay the day’s 
 re than 2s., and have hitherto been unsupplied, 
 supplied : more original productive powers will, 
 be invested in the production of iron ; apd tha - 
 supplv of iron and iron products will be inr.rpasp.d till such 
 time as, here as elsewhere, that level of wants which is willing 
 A to pay the day’s labour at 2 s. is satisfied, and therefore the cwt. 
 of iron, which costs two days’ labour, fetches 4s. Parallel with 
 this, of course, the price of iron and iron products ^ goes down 
 to the level of 4s. And all this is not in opposition to. but in 
 real fulfilment of our law of Marginal Utility, of which the law 
 of costs, rightly understood, is only a special expression suitable 
 to a special group of phenomena. 
 
 1 It must not be forgotten that we are simphfyiiig the matter by leaving out 
 of account the co-operation of other complementary goods in the production of 
 iron products. If we were to take these into consideration, and assume, for 
 instance, that, to change the iron into the iron product, the expenditure of other 
 two days of immediate or mediate labour was necessary, then 8s. , as the price of 
 iron product, would correspond to 4s. as the price of iron, and of this, according 
 to the law of complementary goods, 4s. would be reckoned to the productive good, 
 iron, as its share. 
 
 them — those 
 work at moi 
 will now be 
 accordingly. 
 
CHAP. VII 
 
 DISTURBING CAUSES 
 
 233 
 
 If- — what is practically inconceivable — production were 
 carried on in ideal circumstances, unfettered by limitations 
 of place and time, with no friction, with the most perfect 
 knowledge of the position of human wants . requiring satis- 
 faction, and without any disturbing changes of wants, stocks, 
 or technique, then the original productive powers would, 
 with ideal and mathematical exactitude, be invested in the 
 most remunerative employments, and the law of costa, so far aa 
 we can speak of such a law, would hold in ideal completeness. 
 The complementary groups of goods from which, in the long- 
 run, the finished good proceeds, would maintain exactly the 
 same value and price at all stages of the process ; the com- 
 modity would be exactly equal to its costs ; these costs to their 
 costs, and so on, hack to the last original productive powers 
 from which ultimately all goods come. But this ideal svm^ 
 metry is traversed by two disturbing j;auses. 
 
 The^'''fii^r~of these I may call by^j^he general name of 
 Fr iction. A lmost invariably there is some hindrance, great 
 or small, permanent or temporary, to the due investment of 
 the original productive powers in the employments and forms 
 of consumption which are the most remunerative at the time. 
 In consequence the provision for wants, and likewise the prices, 
 are somewhat unsymmetrical. Sometimes it is that individual 
 branches of want are, relatively, more amply supplied than 
 others ; so that, for instance, in woollens, those wants are supplied 
 which pay the day’s labour indirectly at Is. 8d. only, while it 
 may be that, in copper goods, no wants are satisfied which can- 
 not pay 3s. for a similar day’s labour. But sometimes it may 
 be that groups of productive materials, successively transformed 
 till they are changed at last into the finished commodity, are not 
 equally valued at all stages of the process. If we compare th e 
 means of production to a, Rtrea.-m . we might say th at the .strearu.is. 
 not, as it should he, of equal breadth at all stages of its course: 
 
 from some disturbing cause or other there may be dams at 
 certain particular points, and leakages at others; and these cause 
 an unsymmetrical divergence of price compared with the priees 
 obtained at stages before and after, or, as it is usually con- 
 ceived and expressed, a divergence of the price of a product (or 
 intermediate product) from its costs. Thus it is, in our illustra- 
 tion of the iron, when production is suddenly cheapened from 
 
234 
 
 THE LA VV OF COSTS 
 
 BOOK IV 
 
 6s. to 4s. As a consequence the production of iron is at first 
 increased, and presses down the price of raw material, wliile 
 the products of iron may still for some time maintain a price 
 greater than their costs. But gradually the increase of supply 
 presses forward to the later stages of production, — passes from 
 the production of raw materials to the manufacture of final 
 products, — and by reducing the price here also to 4s. restores 
 the disturbed symmetry between pidce and costs. 
 
 In practical life such frictional disturbances are innumer- 
 able. At no moment and in no branch of production are 
 the^ entirely absent. And thus it is that the T.aw of Costs 
 is recognised as a law that is only approximately valid.: a 
 law riddled through and through with exceptions. These in- 
 numerable exceptions, small and great, are the inexhaustible 
 source of the undertakers’ profits, but also of the undertakers 
 
 ’ es. 
 
 The second disturb ing c^use is the Lapse of Tim e — the 
 weeks, months, years which must stretch between the inception 
 of the original productive powers, and the presentation of their 
 finished and final product. The difference of time, in exerting 
 a far-reaching influence on our valuation of goods, makes a 
 normal difference between the value of the productive groups 
 standing at different points of the production process through 
 which they must all pass ; and is, therefore, a difference to be 
 kept quite distinct from the unsymmetrical divergences caused 
 by frictional disturbances. It is this second disturbing cause 
 which gives rise to Interest. Our further task will be to 
 intercalate the theory of interest in its place within the value 
 and price theory already outlined. 
 
BOOK V 
 
 PEESENT AND 
 
 FUTUEE 
 
CHAPTER I 
 
 PRESENT AND FUTURE IN ECONOMIC LIFE 
 
 Present goods are, as a rule, worth more than fattire goods 
 of like kind and number. This proposition is the kernel and 
 centre of the interest theory which I have to present. All 
 the lines of explanation, by which I hope to elucidate the 
 phenomena of interest, run through this fact ; and round it, 
 both essentially and superficially, is grouped the whole of the 
 theoretical work we have to do. The first part of mir 
 planation will trv to prove the truth of the propn.sit.iou : the 
 
 second will then show that, out of the fact, spring, naturally 
 and necessarily, all the manifold forms which the phenomena 
 of interest take. In the present book we have to take up the 
 first part, and I shall try to go into it with that minuteness 
 which is due to the cardinal importance of such a proposi- 
 tion. To this end we sViall firgl. all , -maVp .g p rpnorgl anr- 
 vev of the relations between present and future in human 
 economy — a subject, obviously, of the highest importance, but 
 one which, strangely enough, has up till now attracted but 
 scanty scientific attention.^ 
 
 1 A history of the theory of this subject — which I have no intention of 
 writing here — would probably start with Adam Smith’s emphatic opposition of 
 “ present enjoyme nt” to “futu r e profit” (ii. 1). In more recent times there 
 are some good observations on the subject in Senior {Political Economy, third 
 edition, p. 58) under the headings of “ Abstinence ” and “ Capital ” ; in Rae {New 
 Principles of Political Economy, quoted in Mill’s Principles, book i. chap. xi. ) ; 
 and in Menger {Grundsdtze der Vollcswirthschaftslehre, p. 127). The first, so 
 far as I know, to treatjt as a subje ct by its elfLwas-Jeyons {Theory of Political 
 Economy, 1871, second edition, 1879). Jevons’s work is exceedingly interesting 
 and suggestive, but, on the whole, it is rather imperfect — as could scarcely be 
 otherwise in a first attempt, and on a field of speculation hitherto all but un- 
 touched. It shows a good deal of incorrectness, a good many contradictions, 
 and, in particular, many obvious gaps. Jevons may be said rather to have 
 
238 PRESENT AND FUTURE IN ECONOMIC LIFE book v 
 
 In the present we live and move, but our future is not a 
 matter of indiffe rence to ns^ and our desires are, with reason, 
 directed towards a wellbeing not limited by the present. It is 
 only as the logical carrying out of this general principle that 
 we set before us, in our economical arrangements, the larger 
 object of providing for our future as weU as for our present 
 weUbeing. As a fact, the f uture has a great place m opj - 
 economical provision : a greater, indeed, than people usually 
 think. It is, of course, a commonplace, but, all the same, it 
 is a truth seldom seen in all its bearings, that our economical 
 conduct has exceedingly little reference to the present, but is, 
 almost entirely, taken up with the future. 
 
 ( 
 
 shown, by a bold stroke of genius, that here was a new circle of ideas waitinfr 
 to be taken up , than shown what was to be done with them. Closely following 
 Jevons, without going beyond their master, are, quite recently, Launhardt 
 {Mathemalische Begriindung der Volkswirthschaftslehre, 1885) and Emil Sax 
 {Grundlegung der theoretisehen Stoats wirthschaft, 1887, pp. 178, 313). A little 
 before these G. Gross {Die Zeit in der Volkswirthschaft, in the Zeitschrift fur die 
 ges. Staatswissenscha/t, 1883, p. 126) had made a well-meant suggestion, — which, 
 however, was by that time carried out by Jevons and then by myself, — that the 
 element of time in economical theory was worthy of a fuller consideration. 
 Finally, as concerns mv own work, I owe it to myself to say that I arrived at 
 
 my views on this subject in comnlete-indeiLejidence. and altogether uninfluenced 
 by Jevons — and, naturally, still less by later writers. I first became acquainted 
 with Jevons’s writings in 1883, — shortly before the printing of my Capital and 
 Interest , — when completing the historical material already collected in that work 
 by a review of the latest English literature on the subject. Th e principles of 
 i ny own theory of capital, on the o ther h and, were laid down by me as early 
 as 1876 . In that year I first suggested them in a youthful work never published. 
 In later writings I gave many plain, if still cautious, hints of my leading ideas 
 {e.g. in Rechte und Verhdltnisse, p. 68 in note bn the phenomenon of Abniitzung, 
 pp. 76 and particularly 109, 115 in note, on the computation of the future use, 
 and p. 152 ; in Capital and Interest, pp. 257, 276, 343, 424, and particularly 
 on p. 428 where I formulated the programme of my positive theory in saying 
 that the explanation of interest was to be deduced from the influence of Time 
 on human valuations of goods). The cautious tone which I still deliberately 
 adopted in giving these hints was due to my desire not to compromise my new 
 ideas by any premature or incomplete formulation of them. I meant that they 
 s hould not go before the public till I was in a position„tQ produce them-a.S-a, 
 finished whole, all harmoniously fitted in to a system of carefully planned 
 economic doctrine. That is why I preferred to work for ten years at laying 
 the foundation of the present theory by completing the theory of goods ( 18811. the 
 criticism of the theories of cap ital (1884), and the t heory of vf^m (1886), rather 
 than snatch, as I might easily have done, at the glory of priority by publishing 
 original but still immature ideas a decade earlier. Moreover my theory, if it 
 t ouches that o f Jevo ns at several points , by no' means agrees with it in essence ; 
 and in the most important points, such as the explanation of interest, it is in 
 
 distinct opposition to h is. 
 
CHAP. I 
 
 JEVONS 
 
 239 
 
 Let us clearly understand what this latter statement 
 means. It means that our anxiety in the present is to have / 
 pt nnr di.^pn.cial, in the future, means for the satisfaction of / 
 
 wants that will not emerge till the future. In other words, 
 
 it means that pleasures or pains, which we will only experience 
 in the future, determine las now to provide goods or services, 
 which, again, will only assert their use in the future. But 
 how is it possible that feelings which are not yet felt, and 
 therefore feelings which, essentially, do not exist, can be 
 motives to will and deed ? 
 
 Xow, as a suggestive \vriter has said, we do rint - ijide ed 
 possess the gift of feeling future sensations, but we possess the 
 
 other gift of anticipating them in imagination.^ Either it is 
 
 1 When Jevons calls that intellectual phenomenon which impels us to provide 
 for future wants and to value future goods, a “ present anticipated feeling ” 
 {Political Economy, second edition, p. 37), the expression is very apt to be mis-^ 
 leading. We must distinguish between two fundamental ly distinct—things. 
 which Jevons seems to me not to have sufficiently kept apart. It is one thing 
 to represent to ourselves, or imagine, a future pleasure or future pain, and to 
 estimate its presumable intensity on the ground of this imagination. It is quite 
 another thing to experience, in this imagination itself, a pleasure, an actual 
 present pleasure of anticipation. To give an example. I think of taking a 
 pleasure trip to Italy. From personal experiences, or from travellers’ tales heard 
 or read, T represent to myself the pleasures of the journeY, and I put the intensity 
 of these plea sures so high , that it seems to me worth the sacrifice of £50 to 
 realise them’ But, beyond this, in picturing to myself the future pleasure of 
 the journey, a real present pleasure of anticipation is kindled. Thinking on 
 the journey affords me an actual pleasure, but, in any case, it is an entirely 
 different pleasure and, in all probability, its intensity is ever so much less than 
 the pleasure of the journey itself. If I value the latter at £50, the pleasure of 
 anticipation is, perhaps, not worth more than lOs. — of which it may be sufficient 
 proof that I am willing to lay out so much money, and no more, in buying a 
 book of travels that lifts me into the pleasant world of thought. The concrete 
 figures here are of no moment. Ho constant or normal quantitative relation can ■ 
 be established between unanticipated pleasure and a pleasure of anticipation : t^ 
 relation will vary in the wildest way according to persons, motives, and circum- 
 stances. With dreamy imaginative men, for instance, who are apt to be strongly 
 excited by their own imaginings, the pleasures of anticipation may be relatively 
 strong ; with hard-headed unimpassioned men, on the other hand, they will be 
 disproportionately weak. For our nurpose it is sufficient to establish two things 
 first, that the intensity of the represented future pleasure and that of the actually 
 felt pleasure of anticipation, are two different quantities and second, in the vast j 
 majority of cases, the intensity of. the pleasure of anticipation is less than the \ 
 anticipated pleasure, not by a few per cent, but infinitely. ' 
 
 The question now is : When we value future goods, and when in conformity 
 with that valuation we are making these economical determinations on which we 
 provide for future wants, with which of these two intensities have we to do ? On 
 
240 PRESENT AND FUTURE IN ECONOMIC LIFE book v 
 
 that wft hn,vp! alrofidv in the past, once or many ± imes_£x perienced 
 \Xtlip, samo want a s we expect in the future, and retain a picture 
 
 tliis, at any rate, there can be no doubt : we shall all agree that it ia the intensity 
 of tlie future pleasure (or of the averted future pain) valued on the representation 
 
 or imagination of it. A good which 1 have every reason to expect will bring me 
 
 an intensity of satisfaction indicated by 100, I shall value at 100 and not at 1, 
 even if, in anticipating the same, I experience only an actual pleasure of anticipa- 
 tion of the intensity 1. And, in the same way, in choosing whether I shall 
 provide for any definite future want, in general, or to which of several I should 
 give the preference, I shall try to decide, as impartially as possible, according to 
 my reasonable valuation of the future pleasure, and not according to the degree 
 
 of my momentary feeling of pleasure. (That we not seldom have our clear judg- 
 
 ment clouded by the latter, and that it thus obtains an indirect influence on our 
 determinations, is a phenomenon which belongs to quite another sphere.) If, 
 after what has been said, there should still be any doubt on the subject — which 
 I do not anticipate — it may be removed by pointing to the well-known fact, that 
 enthusiastic dreamers, in whom the anticipation of future events excite very 
 lively present emotions, are not at all the sort of people who are given to provide 
 economically for their future needs in the most efficient way. On the contrary, 
 it is the cold calculating men who do so ; men whose sober intellectual judgment 
 of future situations is little or not at all affected by accompanying excitement. 
 
 Now Jevons has fundamentally confused these things. He makes out that 
 our economical transactions have for their motive present feelings, which, accord- 
 ing to the distance of time, remain a few per cent behind the intensity of future 
 pleasures and pains — standing to the latter, perhaps, in the ratio of 95 to 100. 
 But nothing is more certain than that, while we represent to ourselves feelings of 
 that i ntensity and anticipat e them, we do not experience them as present feelings. 
 Sax, again, who, in this respect, has obviously followed Jevons without proving 
 the facts of the case for himself, has made the same blunder in a ruder way. 
 He speaks of a Tm'empjindung of future wants — to be distinguished from a 
 simple prescience {Grundlcgung, p. 178), and out of these “previous feelings” 
 ho even construes actual “present wants” and “feelings of want,” which should 
 be only a little weaker, according to the distance of time, than the corresponding 
 immediate want of the present itself (p. 314). Surely Sax has scarcely considered 
 what tortures we must constantly endure if all the future pleasures and pains, 
 against which we protect ourselves by forethought, are really to be experienced 
 by us in anticipation, and only a few per cent less vividly than in reality ! — Let 
 me add the following remark. I am quite aware that the psychologists attach 
 two distinct conceptions to the words “feeling” and “sensation” {GefiXhl and 
 Empfiiidung). The speech of economics, however, has not yet carried out this 
 distinction and it is usual to speak either of sensations or feelings of want, pain, 
 and so on. I retain these common expressions because, by giving them up, I 
 should probably lose more, among economic readers, in plainness, than I could 
 gain in exactness. 
 
 Note by Translator. — I may su ggest here that, so far as concerns Jevons. the 
 above criticism scarcely anulies . It is based on a literal reading of two unfortunate 
 expressions, “ present anticipated feeling ” and “ vague though powerful feeling of 
 the future.” The whole passage, however, shows that Jevons did not mean the 
 present feeling, but the represented future feeling — what he himself calls the “ actual 
 amount of feeling anticipated.” The criticism, however, probably finds its mark in 
 those German writers who have too faithfully followed the letter of Jevons. — W. S. 
 
CHAP. I 
 
 ANTICIPA TION 
 
 241 
 
 of it in o»p THFiTnnry ; or, at least, W8 have already experienced 
 wants or feelings that bear a certain resemblance to the feelings 
 we are expecting, and can, from such analogous reminiscences, 
 construct for ourselves an imaginative picture which is more 
 or less true. On such pictnre.s of mem n-ry and in-iapiii,q- 
 Ijon we ba.<^e niiv p.eonomicn.l calculations and our economical 
 
 decisions ,. Certainly, as many a one wHi be apt to object, it 
 is an unsafe and deceptive foundation, but, all the same, it is 
 almost the only one that we have. It is the rarest possible 
 thing for us to base a valuation of goods, or an economical 
 decision, on a pain that we are feeling at the very moment. 
 It is, indeed, one of the characteristic.^ of n. civilised community 
 rhat it anticipates want by providing for it, and does not 
 allow the pain of emptiness, which the unsatisfied want would 
 involve, to get to its full height. We do not begin to prepare 
 our meals when hunger has reached its highest point of 
 torment : we do not wait till the flood has overwhelmed house 
 and home before we think of putting up the dam : we do not 
 delay building the fire-engine till the flames have broken over 
 us. At the moment when we decide on an economical action . 
 the wants which cause us to make the decision are, abrio.st 
 always, in the future, and so, however near that future may 
 be, they are acting on us, not as actual feelings, but as simple 
 anticipations. How many a man has never, even in the past, 
 fully felt the want which makes him value the goods he daily 
 uses ! How many rich people know only from hearsay what 
 real hunger is ! 
 
 Hence it is obvious that, however deceitful and unsafe this 
 ■gift of an tir.ipation mpy bo and however far astray it may lead 
 us in individual cases, we still have every cause to be heartily 
 thankfi il thet we hRve it Otherwise, neither actually feeling 
 the future wants, nor yet forewarned of them by anticipation, 
 we could not, of course, provide for them in advance ; once 
 want had made itself felt, any measures we could take would 
 be miserably inadequate to provide for it; and, poorer than the 
 poorest savages, we should drag but a hazardous hand-to-mouth 
 existence. 
 
 But economical action means something more than thinking 
 generally about the wants which are to be provided for. As, 
 indeed, all economising arises from the quantitative insufficiency 
 
■242 PRESENT AND FUTURE IN ECONOMIC LIFE book v 
 
 of the means of satisfaction as compared with the wants requir- 
 ing satisfaction, so it demands a constant selection, a constant 
 I / choosing between those wants which can and shoidrl bo pro - 
 ^ v ided for, and those others which cannot be provided for . The 
 selection naturally proceeds on a comparison of the importance 
 and urgency — or, as we may say, the intensity — of the feelings 
 of pleasure and pain which are associated with individual wants 
 and their satisfaction. Now, if it is seldom that, in the moment 
 of an economical decision, we actually feel that one want to 
 which it refers, it is much more seldom that, on the moment of 
 our choice, we experience, as actual feelings, all those sensations 
 
 of pleasure and pain between which we have to choos_e . Our 
 comparisons must, almost invariably, be, partially and very 
 (_^'Often completely, made on imaginative anticipations which we 
 make of future feelings. And this leads us to a fact which 
 I should like to emphasise: The future feelings we imagine 
 
 i a re commensurable.^ They are "commensurable with present^ 
 actually-felt sensations, and they are commensurable with one 
 another, and that too without reference to whether they belon g 
 to the same or to different levels of time. It is as easy for 
 me to choose between a pleasure which seems desirable at the 
 moment and another pleasure which I can obtain in eight 
 days, as between two different pleasures which are both 
 obtainable in eight days, or, again, as between two pleasures 
 of which the one is obtainable in eight days, the other in eight 
 montlis, or eight years. 
 
 The fact that ve borrow from future sensations the motive 
 for our” present actions,~is biie side of our connection with the 
 future. Another side is that, by our present actions, we prepare 
 goods or material services ^ for the benefit of the fu ture. If 
 we analyse the totality of goods which constitutes our wealth 
 we shall find that by far the greater part has the character of 
 '^what, for want of a better name, we may call “ future goods ” 
 {Znkunfisguter). AU productive goods, without exception, are 
 destined altogether to the service of the future. Durable con- 
 sumption goods give off only a fraction of their material 
 services in the present, and all the remainder in the future. 
 If a dwelli n g - house, for instance, remains occupied for a 
 hundred years, and affords shelter and comfort all that time, 
 
 1 Oil the conception of Mateiial Services see Capital emd Interest, p. 223. 
 
CHAP. I FUTURE FEELINGS AND FUTURE GOODS 
 
 24.3 
 
 only an infinitesimal fraction of these services is rendered to- 
 day; a still very small fraction is rendered in the present year ; 
 the great hnlk of the service is spread over remote future periods. 
 Even in the case of those perishable goods, such as meat and 
 drink, wood and candles, which we keep ready for immediate 
 consumption in our domestic economy, only one portion of their 
 nsp. is strictly speaking, devoted to the service of the moment ; 
 the greater part is carried over into the future, although it may 
 be the immediate future. As, among our motives, future feel- 
 ings are the dominant ones, so, among the goods we possess and 
 use, “ future goods ” occupy the larger place. 
 
 And there is yet another important analogy. As future\ 
 feelings, whether they belong to the near or to the far future, 
 are commensurable, alike with one another and with present 
 feelings, so are future goods commensurable, alike with one j 
 another and with present goods. We can compare the value 
 of a camellia which fades in an hour, with that of a ticket 
 for a next week’s concert, or with that of a bunch of next 
 year’s roses ; or we can give one of these goods for the other. 
 It makes no difference to the matter whether the “ future 
 good,” which we compare or barter, is at hand and ready for 
 delivery now, or whether it is represented in bodily shape by 
 nothing more than the means of production out of which it 
 will come, or whether, at the moment, it is neither itself ready 
 nor is capable of being palpably represented — is, that is to say, a 
 “ future good,” in the narrowest and strictest sense of that word* 
 Thus we give present money in exchange, not only for the 
 present consumption good Bread, but also for the present 
 productive good Meal, in which the future good, bread, lies 
 concealed. But just as easily can we buy from a farmer, for 
 money down, his next year’s harvest. Tn reserved seats ” we, 
 buv the future services of actors and singers. In buying 
 Consols we give our present money for a series of future pay- 
 ments. fufure goods and services are to us — I have cause to 
 emphasise this — entirely familiar objects of economic dealing. 
 just as future feelings are entirely familiar economic motives. 
 Both have their ultimate ground in the continuity of our 
 personal life. What we shall experience in a week or a year 
 hence afiects us not less than what we experience to-day, and 
 has, therefore, equal claims to be considered in our economic 
 
244 PRESENT AND FUTURE IN ECONOMIC LIFE book v 
 
 arrangements. Both 
 
 arrangements 
 
 have for their end om- 
 
 wellbeing. 
 
 hether this tjTforptiVplly similar claim of fntnre and 
 
 Present is always f nlly rp.pngm'sp.rl i n prar.tiea.l lifs, is another 
 question which will require much consideration. 
 
 Provision for the future mates no inconsiderable demands 
 on our intellectual strength; makes some demands, even, on 
 y/ our moral strength ; and these demands are not equally met 
 by men at all stages of civilisation. The present, alwavs gets 
 its rights. It forces itself upon us through our senses. To 
 
 cry for food ^en hungry, occurs even to . a baby. But the 
 future we must anticipate and picture. Indeed, to have any 
 in the future, we must form a double series of antici-_ 
 nations. We must he able to form a mental picture of what 
 will be the state of our wants, needs , feehngs, at any particular 
 ■ point of time. And we must be able to form another set of 
 amticipations as to the fatp. of those measure s which we take at 
 ^the moment with a view to the future. Our knowledge of 
 causal processes must enable us beforehand to form an -adequate 
 picture of the forms which goods will take, of the quantity of 
 them, and of the time when they will come to maturity as result 
 of those productive or commercial activities which we are now 
 commencing. To make this double work of anticipating a 
 comparatively remote future clear and true to fact, is not 
 pq s.sible to the infant , and not much more than possible to the 
 child and the savage. Civihsation of course teaches us this 
 difficult art gradually. But, even among the most advanced 
 peoples, the art is still very far from being perfect, and the 
 practical economic provision for the future is correspondingly 
 inadequate. But, be the degree of anticipation and provision 
 for the future what it may, wherever it exists in the most 
 general way — and that is even among the most barbarous tribes 
 — future goods and future ser-vices are as much actual objects 
 
 of economical dealing as present goods . We strive to get them; 
 we produce them ; we valu e them ; we buy and sell them. 
 
 I say, we value them; and this is a point that must be 
 looked more closely into. On what nrincinles do we estimate 
 t he value of future goods ? The answer is : On the same 
 princ iples as we estima te the value of goods in general : that 
 is, according to the marginal utilitv which fEeT will brilig us 
 
CHAP. I 
 
 THE ELEMENT OF UNCERTAINTY 
 
 245 
 
 in the circumstances, of Want and Provision for want. But 
 here, 'naturally, we have not to deal with the relations of want 
 and provision that ohtain at thp. but with the want 
 
 and provision of that future pe riod when the goods in 
 question will be at aur disposal. To the inhabitants of a 
 besieged town, threatened with starvation, grain that was 
 promised for delivery a year after the raising of the siege would 
 certainly not be valued and paid according to the standard of 
 tlie moments need ; while, on the contrary, a brewer who, in 
 January, concludes a purchase for a hundred cubic feet of ice 
 to be delivered in July of the coming summer, will, just as 
 certainly, not measure the value of the ice according to the 
 over-supply that obtains at the moment when the bargain is 
 concluded, but according to the scarcity which is likely to come 
 with the summer.^ 
 
 Very frequently, however, there enters into the valuation of 
 future goods an element which causes us to value them a little 
 — or even a great deal — under their future marginal utility. 
 but which — as I shall show presently — has no connection with 
 the phenomenon of interest. This is the element of Uncertainty. 
 To us nothing future is absolutely certain. However closely 
 we may have bound present and future together in economical 
 connection, and however much reason we may have to expect 
 the future to bring certain goods into existence, or put them 
 at our disposal, still the actual fulfilment of our expectations 
 is never, in the strict sense of the word, certain,: it is always 
 more or less probable. Of course, the probability is often so 
 great that, practically, it amounts to certainty : as, for instance, 
 the expectation that pajonent will follow an acceptance by the 
 EothschUds. In such cases we do neglect the infinitely small 
 amount that is wanting of full certainty, and deduct nothing 
 from the valuation we put upon the acceptance on the 
 ground of uncertainty. But, frequently, the probability falls 
 considerably short of full certainty. The farmer, for i astajice. 
 may have done everything in his power to obtain a harvest by 
 ploughing, manuring, sowing, and so on : but the harvest may 
 be destroyed, wholly or in part, by hail, frost, flooding, or 
 insect ravages. Sometimes, indeed, the probability sinks to 
 the level of a very faint possibility, as, for example, when a 
 ' Menger. Grundsdtze.. p. 124. 
 
246 PRESENT AND EUTURE IN ECONOMIC LIFE book v 
 
 man holds one of a hundred tickets in a lottery where there is 
 only a single prize. 
 
 Cases like these cause a certain amount of hesitation to 
 economic men. Are they to value uncertain future sums of 
 goods exactly as if they were certain ? Impossible ! For then 
 V/6very lottery ticket that carried the chance of winning £100 
 would be valued at £100, and every claim, even the most 
 doubtful, at its full nominal amount ; — a course which, 
 obviously, would land the men who tried to do business on 
 these lines in the bankruptcy court in the shortest possible 
 time. Or are the uncertain future sums of goods not to have 
 an y value put upon them ? is no importance whatever to be 
 attached to them with respect to our wellbeing ? As impos - 
 sible. and as ruinous. ! For then no man would give the smallest 
 price for a chance in a lottery, or even for nine hundi’ed and 
 ninety-nine chances out of a thousand ; no one would dare to 
 make the slightest sacrifice to sow when harvest was uncertain. 
 From this dilemma there is only one escape : we must ascribe 
 to uncertain future sums of goods an importance as regards 
 our wellbeing, but, at the same time, wp . rrmst takp. ap.pminf-, 
 of the uncertainty of thei r acquisition according to tbp dpgrpp 
 of that uncertainty- But, practically, this cannot be done 
 otherwise than by transferring the gradation from where the 
 gradation exists, but cannot be expressed — that is, from the 
 degree of probabihty, — to where the gradation is not, but 
 where alone it can be expressed — that is. the deg re e of the 
 expected utihty^: thus equalising a greater, but less probable 
 nf.ility, t o a less, but more probable utihtv . and this again to a 
 still less but absolutely certain utility. In a word, we reduce 
 all possibihties of utility to oertainty, and restore the balance 
 by deducting from this utility or value the amount we must 
 add to the probability of the expected utility to raise it to 
 certainty. Thus we reckon a claim on the Eothschilds at its 
 full nominal value (disregarding for the moment the discount, 
 as belonging to an entirely different sphere of phenomena), 
 vEile one lottery ticket of a thousand, where the chance is a 
 prize of £100, we value perhaps at 2s., one of a hundred at 
 20s., and one of ten, perhaps, at £10. 
 
 Strictly looked at. this k ind, of valuation — except where 
 the certainty of the anticipated future utility is practically 
 
CHAP. I 
 
 UNCERTAINTY NO ELEMENT IN INTEREST 247 
 
 
 assured — is always iiieorrect., For, to recur to our illustration . 
 the ticket will either draw the prize or it will draw a blank . In 
 the former case it will have been, as the events show, worth a 
 hundred pounds ; in the latter, worth nothing at all. In no 
 case will it have been worth 2s., or 20s., or £10. But, how- 
 ever false this method of valuation is in the indiAudual case, 
 it comes at least approximately right, according to the law of / 
 averages, over a great many cases ; and, in the absence of anyt/ 
 better method of valuation — which is denied us by the dulness 
 of our imaginative forethought — it is well justified as a 
 practical make-shift.^ 
 
 I repeat that, the element of uncertainty , which is the 
 cause of a lesser value being put upon particular classes of 
 future goods, has no causal connection with the phenomenon , 
 qfintergsL The lesser valuation which is its effect is a special ^ 
 one, and extends to one class of future goods only,® and there 
 it bears the character of a deduction as premium for risk. 
 
 With the exception of this peculiarity, the valuation of 
 present and future goods is made on identical principles. But, 
 to conclude from this that the amnu7U of value of present and 
 future goods must he identical, wou ld he ton hasty. On the 
 contrary, since present goods are available at a different time 
 from future ones, and therefore come under different actual 
 circumstances, and are intended for the service of a different 
 set of wants, it is to be argued, from all we know about value, 
 that the value of such goods must, as a rule, be diff'erent .J 
 And so it is in fact. We arrive thus at a proposition which 
 is a fundamental one in our inquiry : As a^^^e present goods 
 
 ^ This proposition has lately been disputed by Mataja {Das EecJil des Schadcner- 
 satzes vom SfandpuTikte der NcUiorialdkoTumie, Leipsic, 1888, p. 149, note 1) 
 on the ground that, in the selling of such goods, one might actually obtain their 
 average return as price, and therefore, quite correctly, value them according 
 to this. But Mataja forgets that the market price is not the cause, but is itself 
 the result of the fact that the individuals, who appear as buyers and sellers of 
 such goods, value them in tlie Arst instance — that is, in the individual case, object- 
 ively falsely — according to the average return . 
 
 ^ See my former tract on Rechte wnd Verhdltnisse, p. 85, where I brought 
 out the same idea in a somewhat different connection : also Mataja, ihid. p. 
 139. 
 
 ^ It embraces also goods which, materially, are present, but are intended for 
 future consumption ; for instance, productive goods, the technical transfor- 
 mation of which into consumption goods is accompanied by a danger of not 
 succeeding. 
 
248 PRESENT AND FUTURE IN ECONOMIC LIFE book v 
 
 have a higher subjective value than future goods of like kind 
 
 and numbe r. And since the resultant of subjective valuations 
 determines objective exchange value, present goods, as a rule, 
 have a higher exchange value and price than future goods of 
 like kind and number. 
 
 Tl iis phenomenon is the result of the co-operation of a. 
 number of causgs ; — causes which, individually, are of very 
 different natures, but which, as it happens, work in the same 
 direction. These causes we shall consider in order. 
 
CHAPTER II 
 
 DIFFERENCES IN _WANT AND PRQY ISIQN FOR WANT 
 
 The first great cause of diffftrftncfi in vain ft between present 
 and future goods consists in the different circumstances of 
 want and provision {Bednrf v.vd fiprkvm.^) in present and 
 future . Present goods, as we knovr, receive their value from^ 
 the circumstances of want and provision in the present : future 
 goods from the same circumstances in those future periods of 
 time when they will come into our disposal. If a person is 
 badly in want of certain goods, or of goods in general, while 
 he has reason to hope that, at a future period, he will be 
 better off, he will always value a given quantity of immediately 
 available goods at a higher figure than the same quantity of 
 future goods In economic life this occui’s very frequently, 
 and may be considered as typical in the two following cases. 
 Fir.g.t. in all pagpg nf immediate distress and nep.e.s.qity. A 
 
 peasant who has had a bad harvest, or sustained loss by fire, 
 an artisan who has had heavy expenses through illness or 
 death in his family, a labourer who is starving; all these 
 agree in valuing the present shilling, which lifts them out of 
 direst need, ever so much more than the future shilling, — 
 the proof b eing, th e usuripjas conditions to which such people 
 often submit in order to raise money at the moment.^ 
 Seoond, in the case of persons who hnve reason to look 
 
 forward to economical circumstances of increasing comfort. 
 
 Thus all kinds of beginners who have no means, such as young 
 artists, lawyers, officials, budding doctors, men going into busi- 
 ness, are only too ready, in return for a sum of present goods 
 
 ^ The proverb his dai qui cito dot has therefore a quite sound economical 
 basis. 
 
250 
 
 DIFFERENCES IN WANT AND PROVISION book v 
 
 which assists them to start in the vocation they have chosen, and 
 acts as foundation of their economical existence, to promise a 
 considerably larger sum on the condition that they do not 
 require to pay it until they are in receipt of a decent income.^ 
 Of course the contrary also occurs not unfreouently in 
 
 economical life. There are persons who are compai-atively 
 weU off at the moment, and who are likely to be worse off in 
 the future. To this category belongs, among others, that very 
 considerable number of people whose income is obtained, mostly 
 or altogether, by personal exertions, and will, presumably, fall 
 away at a later period of life when they become unfit for 
 work. A merchant’s clerk, for instance, who is in his fiftieth 
 year, and has an income of £100, cannot expect to have any- 
 thing better ten years later than, perhaps, a small retiring 
 allowance of £30, or an annuity which he may secure by 
 purchase at an assurance office. It is evident that to such 
 people the marginal utility that depends oir a shilling spent 
 now is smaller than that depending on a shilling available 
 in the more badly secured future. It would seem that, in 
 such cases, a present shilling should be less valued than 
 a future one. And so it would be if present goods were 
 necessarily spent in the present, but that is not the case. 
 Most goods, and among them, particularly, m oney, which 
 represents all kinds of goods indifferently, are durable.. an(j . 
 can, therefore, be reserved for the service of the futu re. The 
 case, then, between present and future goods stands thus. 
 
 ^ The only possible uses of future goods are, naturally, future, 
 \ while present goods have the same possibility , of future „use, 
 \ and have besides — according to choice — either the present useg , 
 or those future ones which may turn up in the time that 
 intervenes between tlie present moment and -the future point 
 of time with which the comparison is being made. 
 
 Heiy the n are two possibilities . Ei^er it is the case 
 that all those uses of the present and near future , which are 
 generally taken into consideration as regards the good in 
 
 ' For this reason the well-known postponement of university fees in the 
 case of poor students in Germany (Stuiidung) is found to be a relief not much 
 inferior to the total exemption of the same class in Austria {Befrnung). Or 
 we may think of the conditions of the contract which the impresario makes 
 with the singers he educates and brings out. 
 
CHAP. II SUPERIORITY OF THE PRESENT SHILLING 251 
 
 question, are less important than the future uses ; and in this 
 case the present good will he reserved for these future uses, 
 will derive its valrrhTfom them,^ and wull be just equal in 
 value to a future good similarly available. Or it is the case 
 that one of the earlier uses is more important : and then the 
 present good gets its value from this use, and has, therefore, 
 the advantage over the future good, wliich can only obtain its 
 value from a less important future employment. But, usually, 
 one never knows that some unforeseen occurrence in the near 
 future may not give rise to some more urgent want . At any 
 rate such a thing is possible, and it gives a chance of profit-, /' 
 able employment to a good already on hand, such as, naturally,!/ 
 a good that will only come into our possession in the future has 
 not got : — a chance which, as we have seen, is calculated in 
 the amount of the value, and assessed, according to practical 
 although incorrect methods, as an increment graduated according 
 to its probability. To put it in figures. With £100 which 
 will come info my hands at the end of five years, I can only 
 aim at a marginal utility determined by the situation of things 
 in the year 1896 ; we shall put this utility down at 1000 
 ideal units. With £100 at my disposal now, I can, at the 
 h ast, realise the same marginal utility of 1000 units, b ut if an 
 urgent want, arising m the meantime, gives me an opportunity 
 of obtaining a marginal utility of 1200,1 may, possibly, realise 
 it. Say, now, that the probability of such an opportunity 
 occurring equals one-tenth, I shall estimate the value of the 
 present £100 at 1000 units certain and, beyond that, at one- 
 tenth of the possible surplus of 200 : that is, in aU, at 
 1020 units.‘‘‘ Present goods are, therefore, in the worst case. \ 
 equal in value to future goods, and, as a rule, they have the \ 
 
 advantfl gp nv^r them in being employed as a reserve. The 
 only exception occurs in those comparatively rare cases where 
 it is difficult or impracticable to keep the present goods till 
 the time of worse provision comes. This happens, for instance, 
 in the case of goods subject to ra^jid deterioration or decay. 
 
 ^ According to the law laid do^ni above on p. 162, for the case of alternative. 
 
 employments witii different marginal utilities. 
 
 - I need scarcely say that, in practical life, we seldom or never make out our 
 valuations with such minute exactitude as in the above Dlustration. But it 
 does give a faithful picture of the hind of considerations of which we a vail 
 ourselves in such cases. 
 
252 
 
 DIFFERENCES IN WANT AND PROVISION book v 
 
 such as ice, fruit, and the like. Any fruit merchant in harvest 
 time will put a considerably higher value on a bushel of grapes 
 to be delivered in April than on a bushel of grapes in his 
 store at the time. Or say that a rich man is anticipating a 
 long period of arrest, during which his hving will be conformed 
 to the hard fare of prison regime, how willingly would he give 
 the price of a hundred present luxurious meals if he could 
 ensure ten such meals during liis captivity ! 
 
 We may, then, draw up the balance-sheet which shows 
 the influence of the different circumstances of Want and its 
 Provision in present and future as follows. A great many 
 persons w ho are- not so well provided for in the present as 
 they expect to be in the future, set a considerably Tn'gbp.r vainp. 
 
 V' on pre se nt goods than on future . A great many persons who 
 are better provided for in the present than they expect to be 
 ^ in the future, but who have the chance of preserving present 
 goods for the service of the future, and, moreover, of using 
 them as a reserve fund for anything that may turn up in the 
 meantime, vahie-pr esent goods either at the same figure as 
 fatnrp nr q, littl e higher . It is only in a fractional minority 
 of cases, where communication between present and future is 
 hindered or threatened by peculiar circumstances, that present 
 V goods have, for their owners, a lower subjective use value 
 than future. This being the state of things, even if there was 
 nothing else co-operating with this difference of want and 
 provision in present and future, the resultant of the subjective 
 valuations, which determines the objective exchange value, 
 would obviously be such that present goods must maintain a 
 ]woportionate advantage, a proportionate agio over future. 
 But, besides this, there are other co-operating circumstances 
 which work, even more distinctly, in the same direction. 
 
CHAPTER III 
 
 TJNDERESTIMATE OE THE FUTURE 
 
 It is one of the most pregnant facts of experience that we attach 
 a less importance to fntnre pleasures and pains sim ply lipp.ansp. 
 they are future, and in the measure that they are future. Thus 
 it is that, to goods which are destined to meet the wants of the 
 future, we ascribe a value which is really less than the true in- 
 tensity of their future marginal utility. We systematically under- 
 estimate future wants, and the goods which are to satisfy them. 
 
 Of the fact itsetf there can he no doubt ; hut, of course, in 
 particular nations, at various stages of life, in different in- 
 dividuals, the phenomenon makes its appearance in very vary- 
 ing degree. We find it most frankly expressed in children 
 and savages.. With them the slightest enjoyment, if only it 
 can be seized at the moment, outweighs the greatest and most 
 lasting advantage. How many an Indian tribe, with careless 
 greed, has sold the land of its fathers, the source of its main- 
 tenance, to the pale faces for a couple of casks of “ firewater ” ! 
 Unfortunately very, much the same may be seen in our own 
 highly civilised countries. The working man who drinks on 
 Sunday the week’s wage he gets on Saturday, and starves along 
 with wife and child the next six days, is not far removed from 
 the Indian. But, to a smaller extent, and in more refined 
 form, the same phenomenon is, I venture to assert, not quite 
 unknown to any of us, however prudent, or cultured, or highly 
 principled. Which of us has not been surprised to find that, 
 under the pressure of momentary appetite, he was not able to 
 refuse some favourite dish or cigar which the doctor had 
 forbidden — knowing perfectly that he was doing an injury 
 to his health, which, calm consideration would tell him, was 
 
254 
 
 UNDERESTIMATE OF THE FUTURE 
 
 BOOK V 
 
 much more considerable than the pleasure of that trifling 
 indulgence ? Or, which of us has not, to avoid a little 
 momentary embarrassment or annoyance, plunged headlong into 
 a much greater ? Who is there that has never postponed some 
 troublesome hut unavoidable call, or business, or work wluch 
 
 had to be done within a certain time. tiU the day was past 
 when it could be done with Little trouble, and has had to do it 
 in more difficult circumstances, in haste and hurry, with over- 
 exertion and ill-humour, to the displeasure of those who were 
 injured or wounded by the delay ? Any one who knows himself, 
 and keeps his eyes open to what is going on around him, will 
 And this fact of the underestimate of future pleasures and 
 pains exhibited under a thousand forms in the midst of our 
 civilised society. 
 
 Of the fact, then, there is no doubt. ' VYhy it should be so 
 is more difficult to say. The entire psychological relations, 
 indeed, through which future feehngs in general act on our 
 judgments and our actions, are still very obscure, and it will 
 be understood that the same obscurity covers the reasons why 
 future feelings act with greater weakness on our judgments 
 and actions than present feelings. Without meaning to fore- 
 stall the pronouncement of the psychologists, who seem to me 
 more competent to decide on both questions than the economists, 
 I venture to think that this phenomenon rests, not on one ground, 
 but on the joint action of no less than three different grounds. 
 
 The first ground seems to me to he the incompleteness of 
 the imaginations we form to ourselves of our future wants, 
 Whether it be that our power of representation and abstraction 
 is not strong enough, or whether it be that we will not take 
 the necessary trouble, the consideration we give our future and, 
 particularly, our far-away future wants, is more or less im- 
 perfect. Naturally, then, all those wants which we have not 
 considered remain without influence on the valuation of such 
 goods as are destined to serve those future wants, and, conse- 
 quently, the marginal utility of such goods is put too low. 
 
 While this first ground is very much a peculiar defect in 
 estimate, the second seems to me to rest on a defect in 
 will. I believe it frequently occurs that a man, called on to 
 make choice between a present and a future pleasure or pain, 
 decides for the present pleasure altliougli he knows perfectly. 
 
CHAP. HI 
 
 THREE GROUNDS EOR THIS 
 
 255 
 
 and is even conscious while choosing, that his-fature loss will 
 outweioh his present ^aiiu and that, taking his welfare as a 
 whole, the choice is unprofitable. How well many a “good 
 fellow ” knows the painful embarrassments and privations he is 
 bringing on himself, by running through his salary on the day 
 he gets it, and yet has not the strength to resist the temptation 
 of the moment ! Or, how often does a man, “ from weakness,” 
 let himself be hurried into taking some step, or making some 
 promise, which he knows at the moment he will rue before 
 twenty -four hoiirs are over ! The cause of such defects in 
 conduct, I say, appears to me, in distinction from the former 
 case, to rest, not on want of knowledge, but on defect of will. 
 
 I should not be surprised, however, if the psychologists were 
 to explain this case also as only a variation of the former : it 
 may be that the weaker feeling of the moment prevails over 
 the stronger feeling of the future only because the latter, while 
 present in consciousness in a general way, is not lively enough 
 and strong enough to take possession of the mind. Tor our 
 purpose, however, it is a matter of no consequence. 
 
 Finally, as third groimd, I am inclined to name tlie consider - 
 ation of tlie shortness and uncertainty of life. In the case 
 of future goods, their ohjective acquisition may be practically 
 certain,^ and yet it is possible that we may not live to acquire 
 them. This makes their utility a matter of uncertainty for us. 
 and causes us — in perfect analogy with the case of objectively 
 uncertain goods — to make a deduction from their value corre- 
 sponding to the degree of uncertainty.^ A utility of 100, as 
 to which there is 50% of probability that we shall not live to 
 see it, we certainly do not value so highly as a present utility 
 of 100; probably we value it as we do a present utility of 5 0 ; 
 and I am convinced that any of us who was promised, to-day, 
 a cheque for £10,000 on his hundredth birthday, would be 
 glad to exchange this large, but somewhat uncertain gift, for a, 
 very small sum in present money ! To determine correctly the 
 practical inflnence of this factor, howeyer, we must make a 
 
 ^ See above, p. 245. 
 
 - If there is objective uncertainty as well as subjective there will, paturally, 
 
 be t^vo deductions. Of these the one made on account of objective uncertainty, 
 
 as a particular phenomenon of certain kinds of goods, has nothing to do with 
 interest ; we have only to deal with the deduction on account of .subjective 
 unr.PTt.aint,y. 
 
256 
 
 UNDERESTIMATE OF THE FUTURE 
 
 BOOK V 
 
 somewhat more accurate calculation, both of the extent to 
 which it prevails, and the way in which it works. 
 
 As regards this I think we shall be able to establish what 
 follows. The factor in question is directly active only in a 
 minority of cases : in most cases its action is indirect. It 
 
 works in the most direct and powerful way in those not very 
 numerous cases where men have the thought of death forced 
 on them by peculiar circumstances ; for example, among very 
 old men, people sufiering from fatal diseases, those placed in 
 ^ dangerous situations or engaged in very perilous callings, such as 
 people in times of plague or soldiers before an engagement, and 
 so on. The disregard of a future so uncertain not seldom find s 
 drastic expression in the mad extravagance which seizes people 
 in such circumstances : a fact in the history of civilisation 
 which has often been noted — by Adam Smith among others. 
 On the other hand, the thought of the uncertainty of life seems 
 to me to exert no direct influence at all in that vast maiorit v 
 o f cases where we are dealing with men in normal circum- 
 stances, and dealing, at the same time, with the valuation of 
 goods belonging to a time not very far in the future ; say, 
 goods that would come into their possession in a couple of days, 
 or months, or even years. I am convinced that a healthy 
 middle-aged man, to whom a payment of £100 next year was 
 due for certain, would not value it a single penny less on the 
 ground that he might not live to see next year. Tt is only 
 where very long periods of time are concerned thfiit 
 among normally situated men, oj2taina__fiilly — and — directly. 
 Payments which faU due in a hundred, fifty, or even twenty 
 years, lose in value from the consideration of the uncertainty 
 of life as regards all payees ; payments which fall due in ten 
 years lose in value as regards a great many. 
 
 Anri hftTP finq lly wft have the point from which this third 
 motive may rjse to universal indirp H efficiency — although, at 
 j the same time, a very much weakened efficiency. If certain differ- 
 
 ences of valuation have once become established as regards long 
 intervals of time, they must , through the agency of exchange 
 transactions, to some degree affect shorter intervals. For the 
 mechanism which determines objective value abhors any sudden 
 leap in value. It is not possible, for example, that a payment 
 of £100 which will be made on 1st January 1900 certain, 
 
CHAP. HI 
 
 ARBITRAGE 
 
 257 
 
 should be worth only £80 till 31st December 1889, and 
 should jump up to the full value of £100 at twelve o’clock 
 that night, because the due date is now only ten years off. 
 Equalising tendencies, and transactions which I can best com - 
 pare with stock exchange arbitrage, spread the differences of 
 yajne, wliich obtain as regards long periods, uniformly over the 
 entire intermediate period. — Putting all these peculiar circum- 
 stances together, I should be inclined to consider the practical 
 efficiency of this factor not altogether trifling. Still I should 
 not place it very high, especially as it is weakened, to a not 
 inconsiderable extent, by the consideration of closely related 
 heirs. In any case, the two motives fimt mentioned have con- 
 siderably more to do with the undervaluation of the future 
 utility than the third.^ All three causes of our underestimate 
 of future utility — errors of valuation through faulty represent- 
 ation of coming needs, defects of will, and consideration of 
 the uncertainty of life — manifest themselves in extremely i 
 different degree-ci in diffprpnt inrlivirlnfllq, and even in the same ' 
 individual at different times, according to differences of temper- j 
 ament and mood. For the same interval of time they may 
 cause one to make an undervaluation of 100^, another of 
 50^, a third of 1% or 2^ ; while they may sena fanatics 
 in the matter of foresight and precaution to the opposite 
 extreme of overvaluing future utility. I should like to call 
 special attention, further, to the fact, that the undervaluation 
 which results from these causes is not at all graduated bar- / 
 moniously.. in the subjective valuation of the individuals, ^ 
 according fo thp length of the time that intervenes. I mean, 
 it is not graduated in this way, for example, that the man who 
 discounts a utility which he expects to get in one year by 
 5%, must discount a utility due in two years by 10%, or one 
 due in three months by 1^%. On the contrary, the original ^ 
 subjective undervaluati nria are, in the highest degree, unequal 
 and irregular . In particular, so far as the undervaluation is 
 caused by defects of will, there may be a strong difference 
 between an enjoyment which offers itself at the very moment, 
 and one which does not ; while, on the other hand, there may be 
 
 ^ An effect analogous to that of the uncertainty of life might be exerted by 
 the uncertainty of the duration of our capacity of enjoyment ; but in any case 
 the limits of the efficiency of this motive are much mor closely drawn. 
 
 S 
 
258 
 
 UNDERESTIMATE OF THE FUTURE 
 
 BOOK V 
 
 a very small aifference, or no difference at all, between an 
 enjoyment which is pretty far away, and one which is farther 
 away. Uniformity is practically introduced into the various 
 undervaluations^ as w e_shall- see , later, only through the media - 
 tion of exchange business.. At any rate — and this is sufficient 
 for us here — all three causes have one common result ; that, 
 under their influence, we estimate the utility of future goods 
 at a lower figure than expresses their true value : we look at 
 the mai^iual utility of future goods diminished, as it were, in 
 perspective.^ 
 
 Now it is easy to show that this phenomenon must sub- 
 stantially contribute to strengthen the effinienr.y nf the first 
 factor in the undervaluation of future goods, the difference in 
 
 the provision of goods for present and future. All persons who 
 are worse off in the present than they expect to be in the future, 
 — persons to whom, therefore, the true marginal utility of a 
 future good is already less than the marginal utility of a similar 
 present good, — are led by this second firctor to put the future 
 marginal utility still lower than it really is, and this increases 
 the difference in value to the further prejudice of future goods. 
 If, for example, the marginal utility of a definite present good 
 is 100, and the true marginal utility of a similar good 
 in a better -provided future is 80, the future good will be 
 rated, perhaps, at 70 only, thanks to this second factor, and 
 thus the difference of valuation rises from 20 to 30. In the 
 same way those persons who may be supposed to be in 
 approximately similar circumstances in present and future, and 
 would, other things being equal, value present and future goods 
 at approximately the same figure, will fall under the category 
 of those who value present goods more highly than future. 
 This second factor, then, increases both the number and the 
 
 ^ Jevons, like his I'ollower Sax, as we saw in the note to p. 239, fell into a 
 misunderstanding as to the entire nature of the phenomenon mentioned in the 
 text, in confusing the representations and valuations which we make as regards 
 future feelings with actuall}' present feelings. We need not wonder, then, at 
 not finding in these writers any sound thorough -going explanation of the 
 phenomena, or even an attempt at such. They accept the supposed “weakened 
 anticipated feelings” of future needs simply as fact, as a “well-known psycho- 
 logical fact,” and the^ pass over much of its detail — which really very much 
 requires explanation — without comment as “self-evident” (see, e.g., Sax as 
 before, p. 178). 
 
CHAP. Ill HOW IT AFFECTS THE FIRST FACTOR 
 
 259 
 
 intensity of the differences in valuation to the prejudice of 
 future goods, and, naturally, in the market where present goods 
 are exchanged against future, this must make the resultant 
 exchange value more unfavourable to the latter. The agio on 
 present goods moves upwards.^ 
 
 1 Indirectly this effect will be strengthened by the fact that, through the under- 
 valuation of the future utility, men will refrain from providing for the future so 
 amply as they would otherwise have donp.. In other words, this under estimate 
 acts to the prejudice of saving and accumulation of wealth , and still further 
 reduces the number of persons who have to throw an accumulated surplus of 
 present goods on the market. 
 
CHAPTEE IV 
 
 THE TECHNICAL SUPERIORITY OF PRESENT GOODS 
 
 There is still a third reason why present goods are, as a rule, 
 
 worth more than futur e. The fact on which it is based has 
 long been known in a general way, but its essential nature 
 has been thoroughly misunderstood. Hidden in a perfect 
 wilderness of mistakes, economists ever since Say and Lauder- 
 dale have been in the habit of going to it, under the name 
 “‘productivity of capital,” for their explanation and justifica- 
 tion of Interest.^ This name, which has already been the 
 cause of so many errors, and which, besides, does not altogether 
 correspond with what it is intended to convey, I shall lay on 
 one side, and shall confine myself to the facts of the case pure 
 yand simple. These facts are as follows: — J<hat. as a rule . 
 present goods are, on tech nical grounds, prefe rable i nstrum ents 
 for the satisfaction of human want, and assure us, therefore, a 
 Ingher marg inal utility than future goods. 
 
 ^ It is an elementary fact of experience that methods of 
 production which take time are more productive. That is to 
 say, given the same quantity of productive instruments, the 
 lengthier the productive method employed the srreater the, 
 quantity of products that can be obtained . In previous 
 chapters we went very thoroughly into this, showed the reasons 
 of it, and illustrated and confirmed it by many examples.^ I 
 venture to think we may now assume it as proved. If, 
 then, we take an amount of productive instruments avail- 
 able at a certain point of time as given, we have to repre- 
 sent the produ ct , whic h rnay be turned oi<f. by ■■in creasingly 
 lengthy processes, under the picture of a series increasing in a 
 
 ^ See Capital and Interest, p. 111. 
 
 ^ See above, pp. 18, 84. 
 
CHAP. IV LENGTHY PROCESSES MORE PRODUCTIVE 261 
 
 certain rat, in rfif^nlriT or irregular . Suppose that, in the year 
 1888, we have command of a definite quantity of productive 
 instruments, say, thirty days of labour, we may, ir terms of the 
 above proposition, assume something like the following. The 
 month’s labour, employed in methods that give a return 
 immediately, and are, therefore, very unremunerative, will 
 yield only 100 units of product: employed in a one year’s 
 process, it yields 200 units,^ but, of course, yields them only 
 for the year 1889: employed in a two years’ process it yields 
 280 units — for the year 1890 — and so on in increasing pro- 
 gression ; say, 350 units for 1891, 400 for 1892, 440 for 
 1893, 470 for 1894, and 500 for 1895. 
 
 Compare with this what we may get from a similar 
 quantity of productive instruments, namely, a month’s labour, 
 imder the condition that we do not get possession of the 
 labour till a year later A month’s labour wltich falls fine in 
 the year 1889 evidently ^fields nothing for the economic year 
 
 1888. If any result is to be got fi’om it in the year 1889 it 
 can only be by employing it in the most unremunerative 
 (because immediate) production, and that result will be, as 
 above, 100 units. In 1890 it is possible to have a return of 
 200 units by employing it in a one year’s method of produc- 
 tion ; in 1891 to have 280 units by employing it in a two 
 years’ process, and so on. In exactly the same way, with 
 a month’s labour falling due two years later, in 1890, nothing 
 can be had to satisfy the wants of the economic years 1888 
 and 1889, while 100 units may be got for 1890 by an 
 unremunerative immediate process, 200 for 1891, 280 for 
 1892, and so on; If we group together in one table^ the 
 result obtainable for the satisfaction of our wants from a 
 
 similar amount of present, next year’s, and succeeding years’. 
 
 productive instruments, we get the following scheme : — 
 
 ^ Naturally, in the case of lengthier processes, the labour first eyppnrlefl rsqnirp;^ 
 
 that the prodn c tion sh ould be c ontinued by the addition of nsw lalim ir. By the 
 figures giyen in the text is always meant that share in the product which, of the 
 total product, falls to the productive unit — in this case the thirty days’ labour. 
 If, e.g., in the case of a one year’s process, other eleyen months of labour follow 
 the one first expended, this would inyolve, in terms of our illustration, that a 
 total product of 2400 units was obtained in the twelve months taken together, 
 and thus, to the one month, would be ascribed a product of 200 units. 
 
262 TECHNICAL SUPERIORITY OF PRESENT GOODS I3k. v 
 
 A MONTH’S LABOUR OF THE YEAR 
 
 .2 
 
 f 
 
 1888. 
 
 1889. 
 
 1890. 
 
 1891. 
 
 \ 
 
 c 
 
 
 
 
 
 
 
 S 
 
 1888 
 
 100 
 
 — 
 
 — 
 
 — 
 
 
 o 
 
 p 
 
 1 1889 
 
 200 
 
 100 
 
 — 
 
 — 
 
 
 o / 
 
 s 
 
 ^ 1890 
 
 280 
 
 200 
 
 100 
 
 — 
 
 
 o 
 
 1891 
 
 350 
 
 280 
 
 200 
 
 100 
 
 
 
 1892 
 
 400 
 
 350 
 
 280 
 
 200 
 
 
 
 1893 
 
 440 
 
 400 
 
 350 
 
 280 
 
 
 cc 
 
 1894 
 
 470 
 
 440 
 
 400 
 
 350 
 
 
 
 1895 
 
 500 
 
 470 
 
 440 
 
 400 
 
 ] 
 
 s 
 
 o 
 
 CL, 
 
 & 
 
 Putting these figures into words, the table shows that, what- 
 ever economic period we may fix upon, our eenununV. intpT-pgt.<; 
 for that period are more advanced b y a lab'^ur 1888 
 
 than by a month’s labour oU JL8-A9^by one of 1889 than by 
 one of 1890, and so on. To meet the wants of 1888, for 
 example, a month’s labour expended in the year 1889 or 1890 
 gives us nothing, while a month’s labour expended in 1888 
 places at our command at least 100 units of product. To 
 meet the wants of 1893 a month of 1890 gives us 350 units, a 
 month of 1889 400 imits, a month of 1888 440 units. What- 
 ever period of time we take as our standpoint of comparison, 
 t he earlier (present) amount of productive instruments is seen 
 to be superior, technically, to the equ al ly great later (future ) 
 amoimt? 
 
 ^ On the same analogy, as a present month of labour is technically superior to 
 a future, so is a past month to a_ pr esent. According to our scheme a month of 
 the period 1883, e.g., would give for 1888, in a 5 years’ process, 440 units, while 
 a month of the year 1888 would give only 100 units. But, naturally, the past 
 years would realise their technical superiority, as against the present, only under 
 the condition that they also w ere actual ly in ves ted in correspon din gly lengthy 
 ani L roundabout processes, But this is seldom the case as regards long past 
 years. And, therefore, one need not be frightened at the consequences which, 
 of course, the above theory involves ; that, for instance, a month’s labour of 
 the fifteenth century is, perhaps, a hundred times, and a month’s labour of the 
 year of our Lord, perhaps, a thousand times more fruitful than a month’s labo;^ 
 of the present ; that, accordingly, to a certain extent, the product!'^ 
 powers of the past were gigantic beside those of to-day, and to-day’s pro- 
 ductive powers gigantic compared to those of future centuries — a view which 
 would seem to give us but a dreary outlook to a continuous degeneracy of 
 our productive powers. Certainly, if any one in the year 1 had expended 
 a month of labour with a view to the marginal utility of the year 1888, 
 
CHAP. IV BOTH AS REGARDS AMOUNT AND VALUE 263 
 
 But is it superior also in the of itis 
 
 and value ? Certainly it is. For if, in every conceivable 
 department of wants for the supply of which we may or shall 
 employ it, it puts more means of satisfaction at our disposal, 
 it must have a gi’eater importance for our wellbeing. Of 
 course I am aware that the greater amount need not always 
 have the greater value : — a bushel of corn in a year of famine 
 may be worth more than two bushels after a rich harvest ; a 
 silver shilling before the discovery of America was worth more 
 than five shillings are now. But for one and the same person, 
 at one and the same point of time, the greater amount has 
 always the greater value ; whatever may be the absolute 
 value of the bushel or the shilling, this much is certain, that, 
 for me, two shillings or two bushels which I have to-day are 
 worth more than one shilling or one bushel which I have 
 
 to-day . And in our comparison of the value of a present 
 and a future amount of productive instruments the case 
 is exactly similar. Possibly the 470 units of product 
 which may be made from a month’s labour in 1889 for the 
 year 1895, are worth less than the 350 units which may be 
 got from the same for the year 1892, and the latter, notwith- 
 standing their numbers, may be the most valuable product 
 which can be made out of a month of 1889 in general In 
 any case the 400 units which a man can gain by a month’s 
 labour of the year 1888 for the year 1892 are still more 
 valuable anrl tliP refnrp. the superiority of the earlier (presenti 
 
 and had arranged for the systematic continuation of the work during all the 1888 
 years intervening, in that case, thanks to the natural powers impressed into the 
 service in the course of such a roundabout journey, the nrodnct of th.at long pa.st 
 month would be mountains high beside the product of a month of the present 
 
 year. But, as things are, trees do not grow up till they meet the sky. The 
 productive powers are too necessary for the wants of the living, to let us employ 
 them in advance for the hehoof of future centuries or future thousands of years. 
 And thus the year of those future wants to which we look forv’ard and work, 
 and by which we get the measure of the productiveness of the powers, moves 
 forward very much parallel with the year when the productive powers are exerted. 
 It is quite certain that our productive powers of 1888 do for the wants, say, of 
 the year 1898, as much as and more than the productive powers of the year 
 1 A.D. did for the wants of the year 11 a.p. And thus the productive powers of 
 giants do not degenerate into those of pigmies, as a sophistical dialectic might 
 easily delude us into believing : in all ages, the productive powers, aeciivdino - rn 
 the advance of technique, do as much or. rather. increasinKlv mnr^. fnr Hip 
 
 of their orvn circle of provision. 
 
264 TECHNICAL SUPERIORITY OF PRESENT GOODS bk. v 
 
 amon rit nf prorli ictive instrumeijts — here and everywhere, 
 however the illustration may be varied — -remains confirmed. 
 
 The truth of the proposition, that the technical superiority 
 of present to future means of production must also be associated 
 with a superiority in value, may be made ahsohitely cnnvinc.ino; 
 by math ematica l evidence if the tabular comparison, which we 
 have drawn out to show the technical productiveness of 
 different years of productive instruments, be extended to the 
 marginal utility and value of the same. And since we have 
 to deal here with a, proposition which will form the chief pilla r 
 in my interest theory, I prefer to err on the side of making it 
 too plain rather than risk not making it plain enough, and I 
 shall spare no pains to prove it in the most complete way. 
 In other respects, too, the trouble it costs us will not be 
 altogether lost : as we proceed we shall get an occasional 
 glimpse into certain relations which are seldom or never taken 
 thought of, and yet, none the less, have some importance 
 towards giving us a complete and thorough grasp of the whole. 
 
 The marginal utility and value of means of production 
 depend, as we knowd on the anticipated margin al utilit y and 
 value of their product . But the means of production of which 
 we have been speaking, the month’s labour, may be invested in a 
 production that yields an immediate return, or in a one, two, 
 three, or ten years’ period of production, and, according as it 
 is so invested, we m ay ob tai n the very: _difffiieiit_pxad-Ujct--Qff_ 
 1 00. 200. 28 0. 3 50 units, and so on. Which of these 
 products is to be our standard ? The foregoing chapters have 
 already given us the answer. In the case of goods which may 
 be employed in different ways yielding different marginal 
 utilities, i t is the highest marginal util ity tha,t is„ the, .standard. 
 Therefore, in our present case, it is that product which pro- 
 duces the greatest amount of value.^ But this need not 
 
 ^ See above, p. 179. 
 
 - See above, p. 163. To prevent a mistake which is very apt to arise 
 through the similarity of the words, I again emphasise here that the proposi- 
 tion in the text is not in contradiction with the fundamental proposition on 
 p. 186, that, for productive yoods. the valu e o f the least valuabl e o f their 
 P^rofWtg, tbo ^liie nf the “marginal prod u ct.” is t he sta ndard. The marginal 
 product, that is to say, is the last of several products which may all be made 
 from the available means of production ; but, in the case we are now considering. 
 
CHAP. IV 
 
 INVESTED IN VARIOUS PERIODS 
 
 265 
 
 coincide with the largest product, the product which contains 
 t he greatest nnmi-icr of iTnit.s ; on the contrary, it seldom or 
 never coincides with that. We should obtain the greatest 
 number of units by an infinitely long production process, or a 
 process lasting a hundred or two hundred years. But goods 
 which first come into possession in the lifetime of our grand- 
 children or great-grandchildren, have, in our valuation of to-day, 
 little or no value. 
 
 In determining which, of various possible products, has the 
 highest value for us, we are guided by the two con .si derations 
 of which we have just spoken. First, we are guided by the 
 anticipated position of our provision at the various periods of 
 
 time . If, for instance, a man is ill provided for in the present, 
 or not provided for at all, the unit of product in the present 
 may, on that very account, have so high a marginal utility and 
 value, that the sum of value of 1 0 0 present units of product is 
 greater to him than that of 500 units which he might have at 
 his command in 1895. To another man, again, whose present 
 is as well provided for, or nearly as well provided for, as his 
 future, the advantage in numbers may give an advantage in 
 value to the 500 units. The second consideration by which 
 we are guided is, that our present valuation of a future good 
 or product does not depend on its true marginal utility, but'’ 
 on our suhiective estimation of the marginal utility . But, in 
 forming this subjective estimate, there takes place, as we have 
 already seen, a kmd of perspective diminution ; a diminution 
 which is in direct ratio with the futurity of the time to which 
 the good in question belongs. The amount of which we are 
 in search, therefore, the greatest sum of value, will evidentl y 
 belong to that one, among the various possible products th e 
 number of whose items, multiplip^ >^y value of tbe unit of 
 
 product (as that value shows itself with regard to the relation 
 of want and provision for want in the particular economic period, 
 and with regard to the diminution which future goods undergo 
 from perspective), gives the greatest amount of value. 
 
 We shall put our illustration in figures chosen at random. 
 I wish to emphasise that the figures can be chosen quite at 
 
 it is not a matter of employing a month’s labour in one aTid more years’ pro- 
 
 dnctioD, but in one or more years’ prodnction. And of these alternative emplov- 
 
 ments, naturally, the most important has the preference. 
 
266 TECHNICAL SUPERIORITY OF PRESENT GOODS bk. v 
 
 random and varied by the reader at will, for our proposition 
 maintains its validity in every conceivable position of subjective 
 valuations. Moreover I intentionally take figures varying 
 very greatly and irregularly, it being obvious enough, without 
 any special demonstration, that, if the value of the unit of 
 goods were not to vary for the different periods, or not to vary 
 much, the present means of production, as giving a greater 
 quantity of products, would inevitably give us also a greater 
 sum of value. Assume, then, quite at random, that, for a 
 certain individual, the true marginal utility and value of the 
 
 unit of product — ^taking into account his special circumstances 
 of provision, which we shall suppose are, on the whole, gradu- 
 ally improving — are as follows : in 1888, 5 units, of value 
 (pounds, shillings, or units of any ideal standard); in 1889, 4 ; 
 in 1890, 3'3 ; in 1891, 2‘5 ; in 1892, 2'2 ; in 18^3, 2'1 ; in 
 1894, 2 ; and in 1895, 1’5. This true marginal utility, then, 
 by reason of perspective, experiences, for the later periods, 
 an irregularly progressive reduction of this kind: for 1888 
 it is, subjectively estimated, 5 (without reduction) ; for 1889, 
 instead of 4, it is 3'8 ; for 1890, instead of 3‘3, it is only 3 ; 
 for 1891, 2-2; for 1892, 2; for 1893, 1-8; for 1894, 1-5; 
 and for 1895, 1. If, now, on t he basis of these figures^ we 
 calculate the sums of value represente d by the difierent possible- 
 products of a month’s labour falling due in the various years, 
 from 1888 to 1891. we get the following tables : — 
 
 A MONTH’S LABOUR AVAILABLE IN 1888 YIELDS 
 
 For the Economic 
 Period. 
 
 Units of 
 Product. 
 
 True Marginal 
 Utility of Unit. 
 
 Marginal 
 Utility reduced 
 in Perspective. 
 
 Amount of 
 Value of Entire 
 Product. 
 
 1888 
 
 100 
 
 5 
 
 5 
 
 500 
 
 1889 
 
 200 
 
 4 
 
 3-8 
 
 760 
 
 1890 
 
 280 
 
 3-3 
 
 3 
 
 840 
 
 1891 
 
 350 
 
 2-5 . 
 
 2-2 
 
 770 
 
 1892 
 
 400 
 
 2-2 
 
 2 
 
 800 
 
 1893 
 
 440 
 
 2-1 
 
 1-8 
 
 792 
 
 1894 
 
 470 
 
 2 
 
 1-5 
 
 705 
 
 1895 
 
 500 
 
 1-5 
 
 1 
 
 500 
 
CHAP. IV 
 
 INVESTED IN VARIOUS PERIODS 
 
 267 
 
 A MONTH’S LABOUR AVAILABLE IN 18S9 YIELDS 
 
 For Economic 
 PerioA 
 
 Units. 
 
 True Marginal 
 Utility. 
 
 Reduced Mar- 
 ginal Utility. 
 
 Value. 
 
 1888 
 
 
 5 
 
 5 
 
 
 1889 
 
 100 
 
 4 
 
 3-8 
 
 380 
 
 1890 
 
 200 
 
 3-3 
 
 3 
 
 COO 
 
 1891 
 
 280 
 
 2-5 
 
 2-2 
 
 616 
 
 1892 
 
 350 
 
 2-2 
 
 2 
 
 700 
 
 1893 
 
 400 
 
 2-1 
 
 1-8 
 
 720 
 
 1894 
 
 440 
 
 2 
 
 1-5 
 
 660 
 
 1895 
 
 470 
 
 1-5 
 
 1 
 
 470 
 
 A MONTH’S LABOUR AVAILABLE IN 1890 
 
 YIELDS 
 
 For Economic 
 Period. 
 
 Units. 
 
 True Marginal 
 Utility. 
 
 Reduced Mar- 
 ginal Utility. 
 
 Value. 
 
 1888 
 
 
 5 
 
 5 
 
 
 1889 
 
 — 
 
 4 
 
 3-8 
 
 — 
 
 1890 
 
 100 
 
 3-3 
 
 3 
 
 300 
 
 1891 
 
 200 
 
 2-5 
 
 2-2 
 
 440 
 
 1892 
 
 280 
 
 2-2 
 
 2 
 
 560 
 
 1893 
 
 350 
 
 2-1 
 
 1-8 
 
 630 
 
 1894 
 
 400 
 
 2 
 
 1-5 
 
 600 
 
 1895 
 
 440 
 
 1-5 
 
 
 440 
 
 A MONTH’S LABOUR AVAILABLE IN 1891 YIELDS 
 
 For Economic 
 Period. 
 
 Units. 
 
 True Marginal 
 Utility. 
 
 Reduced Mar- 
 ginal Utilit)'. 
 
 Value. 
 
 1888 
 
 
 5 
 
 5 
 
 
 1889 
 
 — 
 
 4 
 
 3-8 
 
 — 
 
 1890 
 
 — 
 
 3-3 
 
 3 
 
 — 
 
 1891 
 
 100 
 
 2-5 
 
 2'2 
 
 220 
 
 1892 
 
 200 
 
 2-2 
 
 2 
 
 400 
 
 1893 
 
 280 
 
 2T 
 
 1-8 
 
 504 
 
 1894 
 
 350 
 
 2 
 
 1-5 
 
 525 
 
 1895 
 
 400 
 
 1-5 
 
 1 
 
 400 
 
268 TECHNICAL SUPERIORITY OF PRESENT GOODS bk. v 
 
 The conclusion we draw from these tables is the follow- 
 ing. The highest value of product obtainable by the morith’s 
 labour awa.i Table in — — that, whipVi d^ti^ rTniries its own 
 valuation — is 840 ; the highest value obtainable by a month’s 
 labour available in 1889 is only 720; while the highest value 
 obtainable by a month’s labour available in 1890 and 1891 
 is 630 and 525 respectively. A-& a. bip. t. therefore the present 
 month’s labmir is superior to all future onea. not - only in- 
 t,p.ebmV.a.1 prodnet iyeness, but also in marginal utility a.ud value . 
 
 I repeat emphatically that this result is not an accidental 
 one, such as might have made its appearance in consequeKce 
 of the particular figures used in our hypothesis. On the single 
 assiunption that longer methods of production lead generally 
 to a greater product, it is a necessary result ; a result which 
 must have occurred, in an exactly similar way, whatever might 
 have been the figures of quantity of product and value of unit 
 in the different years. 
 
 I must, further, lay particular weight on the fact, that this 
 result does not make its appearance simply because, in our 
 hypothesis, we have introduced, as already active, those other 
 two circumstances which are fitted to account for a surplus 
 value of present as against future goods — namely, a difierence 
 in the circumstances of provision at the various periods of 
 time, and a diminution of the future utility by way of perspec- 
 tive. The superiority in value of present means of production. 
 which is based on their technical superiority, is not one 
 
 borrowed from these circiimstanCes : it would emerge of its 
 own strength even if these were not active at all. I have 
 introduced the two circumstances into the hypothesis only to 
 make it a little more true to life, or, rather, to keep it from 
 bemg quite absurd. Take, for instance, the influence of the 
 reduction due to perspective entirely nnt, nf the illustration. 
 
 and- we get the foll owing fignre.s .• — 
 
CHAP. IV INDEPENDENT CAUSE OF SURPLUS VALUE 269 
 
 A ^ilONTH'S LABOUR OF THE YEAR 
 
 U 
 
 .o 
 
 ao 
 
 3 
 
 3 
 
 ! 
 
 1888. 
 
 1889. 
 
 1890. 
 
 1891. 
 
 1888 
 
 500 
 
 
 _ 
 
 
 
 1889 
 
 800 
 
 400 
 
 — 
 
 — 
 
 / 1890 
 
 924 
 
 660 
 
 330 
 
 — 
 
 1891 
 
 875 
 
 700 
 
 500 
 
 250 
 
 1892 
 
 880 
 
 770 
 
 616 
 
 440 
 
 1893 
 
 924 
 
 840 
 
 735 
 
 588 
 
 1894 
 
 940 
 
 880 
 
 800 
 
 700 
 
 1895 
 
 \ 
 
 750 
 
 705 
 
 660 
 
 600 
 
 We see that now the absolute figures of the sums of value 
 are increased throughout, and also that the economic centre 
 of gravity is transferred to another year but the thing which 
 concerns us is that the result remains imchanged ; — -the 
 month’s labour of 1888 shows the hi ghest figure of va.lnp. , and 
 aU the others a decreasingly smaller one . 
 
 But if we were also to abstract the difference in the 
 circumstances of provision in different periods of time, the 
 mtuation would receive the sta.mp of evtreme imprnha.hility ^ 
 even of self-contradiction . If the value of the unit of product 
 were to be the same in all periods of time, however remote, 
 the most abundant product woidd, naturally, at the same 
 time be the most valuable. But since the most abimdant 
 product is obtained by the most lengthy and roundabout 
 methods of production, — perhaps extending over decades of 
 years, — the economic centre of gravity, for aU. present means 
 of production, would^ on this assumption, be found at exv 
 
 t remelv remote periods of time ^ — which is entirely contrary 
 to all experience. And, besides, if such a state of things were 
 to emerge at any particular point of time, i t would im m^tlU 
 ately bring its own correctio n- For if every employment of 
 
 ^ e.g. the economic centi’e of gravity for the month’s labour of 1888 in the 
 former case lay in the product attainable for the year 1890 ; it now lies in that 
 attainable for 1894. 
 
 ^ But here, all the same, the month’s labour of 1888 remains superior to that 
 of 1889. For, as regards any one remote period, say, the year 1988, the former, 
 as employed in a process longer by one year, could produce a somewhat greater 
 product than the latter. 
 
270 TECHNICAL SUPERIORITY OF PRESENT GOODS bk. v 
 
 goods for future periods is, not only technically, but economic- 
 ally, more remunerative than the employment of them for the 
 present or near future, of course men would withdraw their 
 stocks of goods, to a great extent, from the service of the 
 
 prpfipnf, and dirp.p±.. them to the more remunerative service of 
 the future . But this would immediately cause an ebb-tide in 
 the provision for the present, and a Hood in the provision for 
 the future, for the future would then have the double advan- 
 tage of having a greater amount of productive instruments 
 directed to its service, and those instruments employed in 
 more fruitful methods of production. Thus the difference in 
 the circumstances of provision, which might hav e disappear^ 
 for the moment, would recur of its own accord . 
 
 But it is just at this point that we get the best proof that 
 the superiority in question is independent of differences in the 
 circumstances of provision : so far from being obliged to borrow 
 its strength and activity from any such difference, it is, on 
 the contrary, able, if need be, to call forth this very difference. — 
 Thus we get, as result of our digression, the assured con^dction 
 of two things ; — first, that the productive superiority of pre- 
 sent goods assures them, not only a surplus in product, but 
 a surplus in value, and, second, that, in this suppriority, 
 we have to deal with a third cause of the surplus vabm^ anr] 
 oiqe which is independent of any of the two already mentioned,^ 
 
 We have now to ask : To what extent is this third cause 
 Of this our former analyses give a poor and inade- 
 quate picture. Wliat has been said is only sufficient to 
 explain how present Means of Production are worth more than 
 future means of production. But, from the same cause, as we 
 b ^^e now to show, present cous ninptinn aon ds also oihain q 
 
 ^ Those who prefer somewhat more venturous generalisations might, perhaps, 
 be inclined to put the first and the tl'.ir d. caus e , together under or e enniman 
 eateornry. that of the “technical superior ity” of present goods. For the prefer- 
 ence given to present goods in virtue of the different relations of provision 
 also rests peculiarly on a technical circumstance ; namely, that they allow of a 
 “greater choice of employments, both as regards present and future wants, while 
 future goods, naturally, are adapted to serve future wants only. At all events, 
 this teclinioal superiority is so essentially distinct from the other of the greater 
 technical prud/acUAty, that the two elements would require again to be kept 
 separate frorn each other. It appears to me, therefore, in the interests of clear- 
 ness tliat they should he kept entirely distinct from the first. 
 
CHAP. IV 
 
 EVEN AS CONSUMPTION GOODS 
 
 271 
 
 preference over future consumption goods, so that, in this 
 third cause, we have a quite universally valid reason for present 
 goods having a greater value than future. 
 
 The connection is as follows. Command over a sum of. 
 prese nt s consumption goods provides us with th ^ Tnefli"^ '^■f 
 snVifiist.pnr-p dippi ng the Current economic period. This leaves 
 the means of production, which we may have at our disposal 
 during this period (Labour, Uses of Land, Capital), free for t he 
 technically more productive service of the future, and gives us 
 the more abundant product attainable by them in longer. . 
 methods of production. On the other hand, command over m' 
 sum of future consumption goods leaves, of course, the present 
 unprovided for, and, consequently, leaves us under the necessity 
 of directing the means of production that are at our command 
 in the present, wholly or partially, to the service of the present . 
 But this involves curtailment of the production process, and 
 as consequence, a diminished product. The difference of the 
 two products is the advantage connected with the possession 
 of present consumption goods. 
 
 To illustrate this by an example as simple as it is well- 
 worn. Imagine, witli Ensr-.hp.rd a, trilie of hsher-folk without 
 capital, subsi stin g on fish left in pools on the shore by tlie*^ 
 ebb-tide and caught with the bare hand. Here a labourer may 
 catch and eat three fish a day. If he had a boat and net he 
 could catch thirty fish a day, instead of three. But he cannot 
 have these tools, for their making would cost him a month’s 
 time and labour, and, in the meantime, he would have nothing 
 to live upon. To save himself from starvation he must con- 
 tinue his wretched and costly fishing by hand. But now some 
 one cleverer than the rest borrows ninety fish, promising, 
 against the loan, to give back a hundred and eighty fisii after 
 one month. With the borrowed fish he supports liimself 
 during a month, makes a 1)oat and net, and, during the next 
 month, catches nine hundred fish instead of ninety. From tins 
 take, not only can he make the stipulated payment of a hundred 
 and eighty fish, but he retains a considerable net gain to 
 himself, and thereby affords a striking piuof that the ninetv 
 (present) fish he borrowed were worth to him- not only nmch 
 more^than the ninety, but even more than the hundred and 
 eighty (future) fish he paid for them. 
 
 1 Grundlagcn, § 189. 
 
272 TECHNICAL SUPERIORITY OF PRESENT GOODS bk. v 
 
 Now, of course, the differences in value are not always so 
 great as in this example. They are greatest among people 
 who live from hand to mouth, For them to get command 
 over present consumption goods means the transition to 
 capitahst production. Less striking, but always present, is the 
 difference where people already possess a certain stock of goods. 
 If for cyamplR^ their stock of goods is sufScient for three years, 
 
 they may realise their means of production in an average three 
 
 y ears’ pr oduc tion process. If, now, by some means or other, 
 they obtain another year’s supply of present means of sub- 
 sistence, they may extend their average production period from 
 three to four years, and obtain thereby an increment of product 
 which, absolutely, is always important, but, relatively, will be 
 much less than in the first case. 
 
 We can see that here, again, the matter of fact, on which I 
 base my conclusions, is an old and well-known one ; e ven in 
 the time of. ^AdaiB-gnait h and Turgot, it was notorious tha|. 
 the possession of present consumption goods confers certain 
 advantages. But as the older theory of capital was, generally 
 speaking, a nest of warped conceptions and incorrect explana- 
 tions, this fact also was put down in a form as singular as it 
 was inappropriate. Consumption goods- — goods for immediate 
 consumption — were looked on as productive goods, or means of 
 production ; as such they were counted capital ; and then all 
 the advantages inherent in them were explained by the pro- 
 ductivity of capital. Indeed, a writer of the standing of Jevons , 
 simply through dwelling on the great importance which attaches 
 to the command over present goods, was misled into ascribing 
 to consumption goods the high pogit iorL-mf-h eing the only: 
 ca pital ! In face of such misinterpretations our business now 
 is to get at the truth of facts. And the. facts are very simple. 
 Consumption goods are not means of production : they are, 
 
 therefore, not capital ; and the advantages which they confer 
 do not proceed from any productive power they possess.. 
 Everything turns on the simple fact that, according to the 
 quite familiar laws of value, present goods, in virtue of the 
 above stated casuistical connection of circumstances, are, norm- 
 ally, the means of obtaining a higher marginal utility, and 
 receive thereby a higher value, than future goods. 
 
CHAPTEE V 
 
 CO-OPERATION OF THE THREE FACTORS 
 
 To put together the results at which we have arrived thus far. 
 We have seen that there are three fa ctoig . each of which, in - 
 dependently of the other, is adequate to account for a difffirp.ucp. 
 in value between present and future goods in favour of the 
 former. These three factors are : The difference in the “N 
 circumstances of provision, between present and future ; the / 
 nnrlp.rpst,iTna.tp. , due to perspective, of future advantages and \ 
 future goods; and, finally, the greater fruitfulness of lengthy j 
 methods of production. The question now is ; — how do these / 
 factors, working simultaneously, affect each othnr ? 
 
 About the two first factors we know already : their effects 
 are cumulative. In the case of a man badly provided for in 
 the present, if the marginal utility of a present good were 100, 
 and its true marginal utility in a future period only 80, the 
 present good would be valued, relatively to the future, in the 
 ratio of 100 to 80, if no other influence intervened. Put if 
 there is, besides, a, persnective diniinution of the true future 
 
 marginal utility , say by one-eighth, the marginal utility would 
 be put at 70 instead of 80, and the superiority of the present 
 good to the future would be in the ratio of 100 to 70. 
 
 It is essentially different with the co-operation of the third 
 factor. Trun. it also tends to str pngthp.n the ant-m" r>f 
 other factors, hut it does so alternatively, not cumulatively ; 
 that is to say, that factor which confers the greater advantage 
 on present goods always stands out from the other as the 
 active agent. Say, for example, that the first factor (the cir- 
 cumstances of provision), together with the second factor (that 
 of perspective), taken cumulatively, would give present goods 
 
 T 
 
274 CO-OPERATION OF THE THREE FACTORS book v 
 
 an advantage of 30^, while the factor of productivity would 
 give an advantage of 25^, we should not get a total advantage 
 of 55*^, but of 30^, the advantage being based ou the atrongp.v 
 factors^ 
 
 yy The matter stands thus. The , superiority of present goods , 
 as making roundabout and more fruitful ways of production 
 possible, Qannot be increased by the perspective undervaluation 
 of future goods, because the utihtv got from lengthy processes 
 is itself a future utility , to which the perspective undervaluation 
 applies as mu(A as it applies to the future goods with which 
 the present goods are compared. Say that, by employing a 
 month’s labour now, in 1888, in a one year’s process, I can 
 make, for 1889, a product of 200 units, and, by employing a 
 month’s labour of 1889, I can make for that same year — on 
 account of the short and unproductive method — a product of 
 100 units only, it will he a reason for my valuing the present 
 month of labour at double the next year’s month. If, now, 
 there comes in a ten per cent imdervaluation of next year’s 
 utility, I shall, of course, value the next year’s 100 units 
 at 9 0 present units only ; but, for exactly the same reason, I 
 shall value the 200 units at 180 present units only; and the 
 ratio of valuation, two to one, remains exactly as if the perspec- 
 
 tive undervaluation had never come iuto play at all. 
 
 / As little c ap the third factor he strengthened by the first 
 factor, namely, the consideration of a greater present want. 
 For, evidently, employing a good to a great future productive 
 utility, and employing it to satisfy an immediate pressing want, 
 are mutually exclusive employments ; and it is clear tha t-a 
 good, which can ouly he employed in the one wav or the other., 
 cannot obtain a cumulative advantage from the two togethe r. 
 
 But these two factors do work into each other’s hands in 
 the following way. Present goods may he used to meet present 
 wants, or they may be invested in production for the future. 
 These are the two possible employments to which each indi- 
 vidual may put his present goods. According to principles 
 with which we are familiar, the stock of goods wiU be guided 
 into these employments in such a way, that the most important 
 c hances of using the goods are utilise d first, the next important 
 second, and so on down the scale. Here, however, it is to be 
 noted that the employments in prodiicing for the future, as 
 
CHAP. V 
 
 CUMULATIVE AND ALTERNATIVE 
 
 275 
 
 Standing over against the employments in the satisfaction of 
 immediate wants, must submit to the perspective diminution 
 ^Yith which we are familiar . Say, for instance, that a man’s 
 particular circumstances are such that he estimates a utility, 
 falling due in the following year, at 10^ less than an equally 
 great present utility ; then a future utility of 110 becomes 
 equal to a present utility of 100, and, on that account, when 
 there comes to be a choice between employments, the future 
 utility of 110 may be postponed to a present utility of 102. 
 The last employment, then, which, on these principles, is still 
 supphed from the stock of goods, indicates, as we know, the 
 marginal utnity, and, at the same time, the value of the unit 
 of goods. 
 
 Now the following cases may occur. JFirst. the indi^ddual 
 may be badly off in the present In that case the pressing 
 wants of the moment will, by themselves, absorb the small 
 stock of present goods, and, on the ground of this bad provision' 
 in the present, these goods will obtain a high value and a prefer- 
 ence over future goods. The needy man prefers present goods 
 because he w/iist consume them in the present. The opportuni- 
 ties of employing the goods for productive purposes in the 
 future remain in this case — since the poverty-stricken present, 
 naturally, cannot afford any goods for purposes beyond itself — 
 out of court as economically impossible, and, of course, without 
 any influence on the A^alue, or preferable value, of present goods. 
 
 Or, second, the nidividual may be equally well provided as 
 regards both present and future, but mav have less forethought 
 This case leads to a similar result. Before, it was urgent want 
 that prevented portions of the stock of goods from being with- 
 drawn from the service and enjoyment of the present, and 
 invested in future production : now, it is want of thought for the 
 future : and this want of thought confers, at the same time, on 
 the present enjoyment, and on the present goods which minister 
 to it, a preference over future. The spendthrift, greedy of 
 pleasure, values present goods more highly than future, because 
 he wishes to enjoy them in the present. — If bad provision goes 
 along with small foresight, the two effects, as we have seen, are 
 cumulative. 
 
 Ox. third, the individual is well provided, and takes due 
 thought for the future . In this case, of course, the two former 
 
276 CO-OPERATION OF THE THREE FACTORS book v 
 
 sanctions of the preference do not come into play at all, or 
 scarcely at all. Tn this case, beyond the satisfying of the 
 immediate wants, the-othp.^ ennrse is ppoTim nieHlIy open, — of 
 investing a portion of his present goods in production for 
 the future : thereby their economic centre of gravity, their 
 marginal utility, and the formation of their value, are shifted 
 to a sphere in which present goods enjoy a preference in value 
 under the third sanction, that of their greater productiveness. 
 A moderately rich and prudent man who has £10,000, must 
 not, and will not Consume his £10,000 in the present, but will, 
 in any case, save for the service of the future. But if any one 
 were to make him the proposal, to exchange his £10,000 
 of present money for £10,000 of future money, he would be 
 fully justified in declining the transaction ; as, with £10.000 
 faowl he can provide more effectually and richly for the future 
 
 than with £10.000 at a future period. 
 
 But, finally, there is still a fourtb_ -case— co nceivable : an 
 individual may be so badly off in the present, or have so little 
 thought for the future, that, on those two accounts, he values 
 present goods more highly than future. At the same time, 
 however, he is tempted by business which promises him so 
 good a return in the future that he stints himself Still further 
 in his present provision, and engages in the business. Here, 
 after the analogy of the case worked out on p. 165, the avail- 
 able sums of goods are directed, successively, into the most 
 important employments of the two spheres taken together, and 
 the competition of these future employments has for result^ 
 ^hat the satisfaction of present wants is broke n off 
 point or level than it would otherwise be.. This must, in the 
 end, xaise the value of present goods, and indirectly increase 
 their superiority over future.^ 
 
 Thus the various sanctions come alternatively into play. 
 
 1 Suppose, e.;/., that a man has 6 units of goods, say 6 five-pound notes, at 
 his disposal. There are present groups of wants, whicli these nt)tes could sujjply, 
 and their importance ia indicated by the figures 10, 9, 8, 7, 6, 5. Now there 
 appear opportunities of employing these in business transactions which will not 
 yield any result for a year, but are so profitable that, even after deducting 
 the necessary dis-agio on account of the year’s delay, they are equal to a present 
 utility of 7. The following will evidently be the disposition of the notes. Four 
 of them will go to the present wants which bear the utility 10, 9, 8, 7, the 
 remaining two to the future employments which, likewise, show the (reduced) 
 
CHAP. V 
 
 IN FA VO UR OF PRESENT GOODS 
 
 277 
 
 Where the lirst two are active the third is suspended : but where 
 ^e first two are riot active, or not sufficiently active, there 
 
 comes in the actiou of the thirfl . One can easily understand 
 how very directly this circumstance is calculated to give the 
 phenomenon of the higher valuations of present gnod.q a.n almost 
 universal vahditv. The needy and the careless value present 
 goods more highly because they urgently require them in the 
 present, or only think about the present : the w ell-nff ami, 
 the saving value them because they can accomphsh more 
 
 ^ ^'tb them in the future : and thus, in the long-run, every one, 
 whatever his economical position, and whatever his economical 
 temperament, has some ground for valuing present goods more 
 highly than future. And, further, it is easy to understand how 
 much the universal emergence of subjective differences in valua- 
 tion must favour the extension of this phenomenon to the spheru 
 of objective exchange value and pric e. If the third factor were 
 to act cumulatively with the two first there would, indeed, be 
 many who would value present goods at an extravagant rate, 
 but it is not certain that there would not be as many; perhaps 
 an overwhelming majority, who would have no preference 
 for present goods, and it is doubtful how, in this case, the 
 resultant of exchange value would turn out. "Rut as tbp, tbirrl 
 factor is alternative in ite ant, inn, it levels up. as it were, the 
 
 f|pprp.c;sinug iustpafl nf PYag gprating individual heights ; thus it 
 brings about a general raising of subjective valuations; and this 
 is necessarily connected with a raising of the average line, the 
 resultant exchange value.^ 
 
 figure 7. The marginal ut ility which attaches to the present five-pound note is . 
 therefore, 7, while, without the competitiou of the profitable future e niployTnp.Tira, 
 it would have been only 5. 
 
 ^ The statement of how the productivity of capital works into and together 
 
 with the other tWo grounds of the higher valuation of present goods. I consider 
 
 one of the most diflScuIt points in the theory of interest, and, at the same time, 
 the one which must decide the fate of that theory. It is just at this point that we 
 discover the chief weakness in Jevons’s otherwise suggestive work. None of the 
 groups of phenomena concerned escaped his keen observation ; what did escape 
 him was the way in which they work into one another. Consequently his work 
 remains an eclectic piece of patchwork instead of being welded into an organic 
 theory. He gathers together quite correctly all the primary phenomena required 
 for the explanation. But he does not find the common channel through which they 
 qll work together to the one common end, and so he explains it differently from each 
 diflferent point of view, with a result that is eclectic and self-contradictory. After a 
 most promising beginning he quite loses sight of the element of the different valua- 
 
278 CO-OPERATION OF THE THREE FACTORS 
 
 BOOK V 
 
 Here we come to our last duty in this book : to show how 
 the ratio that obtains between p re sent and future goods in 
 subjective valuations is transferred to their objective p.vchange 
 value. 
 
 In the case of the single individual, extremely various sub- 
 jective valuations will be formed, according as the one or the other 
 of the above-mentioned factors is stronger or weaker. These 
 encounter each other on the market where present goods are 
 
 exchanged against future . There are many such markets and 
 they take many different forms. In the next book we shall 
 more exactly examine their constitution. In the meantime 
 we must be content to examine the method in which prices are 
 formed in its most general and typical outlines. Indeed the 
 formation of price here takes the same course as it does else- 
 z^here. The divergence of the subjective valuations which 
 encounter each oth er o n the market makes possible, economically . 
 the exchange of property between the twn^arties.^ Those 
 who, on any subjective grounds, put a relatively high value 
 on present goods, appear as buyers of present against future 
 commodities ; those who put a relatively low value,^ as sellers : 
 a nd the mark e t price will be se tied betweeiL t h e snbjectiyg 
 va luations of the last competitors who actually exchange , and 
 the first competitors who are shut out, or, as we have put it. 
 
 tions put upon present and future wants, and for the rest gives a double explanation, 
 full of contradictions, and scarcely rising much above the level of the old classical 
 economy, — part of it taken from the Abstinence, part from the Productivity theory. 
 (See my Capital and Interest, p. 400. ) The not very independent treatment which 
 the subject has received from^Sa^ is in one respect better, while in another it is 
 even more incomplete than that of Jevons. I t shows an advance to find the 
 element of the undervaluation of future wants generally interwoven into 
 the explanation of interest. (See also on this point Launhardt, Mathematisclie 
 Begriindung dcr Volkswirthschaftslehre, Leipsic, 1885, § 2, and again my Capital 
 and Interest, pp. 344, 427. ) But, on the other hand, it is a sensible omission that the 
 difference between the values of present and future goods is traced exclusively to 
 this factor, and t hat the much more important factor that co-operates with it, 
 that of the greater nroductivenes ^does not get e vrp scanty c onsiHeratirm 
 it gets from Jevons. (Sax, Orandlegung, p. 314.) 
 
 ^ See above, p. 195. 
 
 - For reasons with which we are now familiar almost all t he com petitors. 
 whether buyers or sellers, will value present goods, absolutely, above fu tuie. But 
 the valuation will be higher on the part of the buyers, as a class, than on the 
 part of the sellers. 
 
CHAP. \' 
 
 IN OBJECTIVE EXCHANGE VALUE 
 
 279 
 
 between the valuations of the two marginal pairs. We may 
 represent the position of the market by the following scheme : — 
 
 Intending 
 
 Buyers. 
 
 Present 
 goods 
 in units. 
 
 Next year’s 
 goods in 
 units. 
 
 Intending 
 
 Sellers. 
 
 Present 
 goods 
 in units. 
 
 Next year’s 
 goods in 
 units. 
 
 A, values 100 
 
 = 300 
 
 B, values 100 
 
 = 99 
 
 Ao 
 
 J) 
 
 200 
 
 
 Jf 
 
 100 
 
 ^3 
 
 
 150 
 
 
 91 
 
 101 
 
 
 
 120 
 
 B4 
 
 ft 
 
 102 
 
 
 jy 
 
 110 
 
 B5 
 
 ft 
 
 103 
 
 
 >> 
 
 103 
 
 Be 
 
 It 
 
 105 
 
 
 
 107 
 
 B. 
 
 19 
 
 106 
 
 -^8 
 
 
 106 
 
 Bg 
 
 t1 
 
 107 
 
 ^9 
 
 
 104 
 
 B9 
 
 t1 
 
 108 
 
 Aio 
 
 
 102 
 
 Bio 
 
 ft 
 
 110 
 
 In the circumstances of tlie market which this scheme 
 
 represents. A, and B.,. form the upper marginal pair, Ag and 
 
 the lower. The market price for 100 present units of goods 
 will be fixed between 106 and 107, say at 106^ next year’s 
 units, and this determines an agio of in favour of 
 
 present goods. 
 
 Once a market price of this kind for present goods has 
 been established, it exerts a reflex levelling influence on the 
 subjective valuations which were originally so strongly divergent. 
 Even those who, from personal circumstances, would value 
 future goods only a little under, or perhaps at equal terms 
 with, present goods, now value present goods according to the 
 higher e: ^<-^h^^g^ valnp wi nch the position of the market 1end.s_ 
 to them . This is the reason, and the only reason, why, in 
 practical hfe, scarcely any one would be willing to exchange 
 present goods against an exactly equal sum of future ones. 
 There are plenty of people whose circumstances of want and 
 provision for want are of such a kind, that the subjective use 
 value of present and future goods to them stands almost equal. 
 But the general nosition of the market is. almost invariably. 
 
 so strongly in favour of present goods, that it assure.s th £>iri_a. 
 preference in exchange value, of which, naturally, every one 
 takes advantage. 
 
 Developed market exchange, however, brings with it a 
 
 l evelLing effect from another side ; that is to say, it brings the 
 
280 CO-OPERATION OF THE THREE FACTORS book v 
 
 amount of agio in favour of present goods, as against future 
 goods which fall due at variously remote points of time, into 
 one normal ratio with the length of the elapsing time. It 
 
 might easily he the case that the causes which tend to the 
 xindervaluation of future goods might chance to he quite dis - 
 proportionately effective on goods belonging to different periods 
 of time. Indeed, in the very nature of several of those causes 
 (for instance, the consideration of the shortness of human life) 
 they would scarcely obtain at all as against goods of the near 
 future, while, as against goods of remote periods, they would 
 obtain strongly and irregularly. In itself, therefore, it might 
 be quite possible that, while 100 present units of goods, as 
 against 100 units of next year’s goods, obtained, in the market, 
 an agio of 5 units only, as against goods of the next year they 
 might obtain an agio of more than twice that, sav 20 . and, 
 as against the third year’s goods, perhaps an agio of 40. But 
 such disproportionate prices for goods of different periods of 
 remoteness could not long hold. By a kind of time arbitrage they 
 would very soon be brought into an equal ratio. If, for instance, 
 the various market prices mentioned above were found quoted 
 at one given moment, speculators would immediately appear 
 on the scene, who would sell present goods against two years’ 
 goods, cover the purchase by buying present against next year’s 
 goods, and arrange for paying the latter a year later by a 
 second purchase of present against next year’s goods. The busi- 
 ness would work out thus. In 1888 the speculator buys 1000 
 present units for 1050 units of the year 1889, and sells them 
 at the same time for 1200 of the year 1890. In 1889 he 
 has to deliver 1050 units, and he gets them by buying, again 
 with a agio of 5^, the then present (1889) goods for the 
 then next year’s (1890) goods. For the 1050 units he 
 requires to deliver he must thus give 1102-|- units of 1890. 
 But, from the first transaction, he then receives 1200 of these 
 very (1890) units. He has thus, on the whole business, a 
 utility of about 100 units . Such arbitrage transactions must 
 evidently bring the prices obtainable for goods of various future 
 years to a level. The speculative demand for the much under- 
 valued two years’ goods must raise their price; the supply of next 
 year’s goods must depress their price ; till such time as the agio 
 is brought directly into proportion with the length of the timq. 
 
CHAP. V 
 
 SUMMARY OF PRESENT BOOK 
 
 281 
 
 Whp.Ti this h a ppftB fl — f^r pYampIp., 1 .V>p agio has hpp.nmp. 
 
 equalised at 5^ y^r year, it may hold on fit , that ratp HnHiRtnrhp.fl. 
 I^r then it is equally remunerative tp exchange present goods 
 against next year’s goods for three years, successively, or to 
 exchange present goods directly against three years’ goods, and 
 the arbitrage we have just sketched has no further occasion to 
 interfere in the formation of price. 
 
 Thus we may accept the following as positive result of the 
 present book. 
 
 The relation between want and provision fqr want in present 
 and future, the undervaluation of future pleasures and pains, 
 and the technical advantage residing in present goods, have the 
 effect that, to the overwhelming majority of men, the subjective 
 use value of present goods is higher than that of similar future 
 goods. From this relation of subjective valuations there follows, 
 in the market generally, a higher objective exchange value and 
 market price for present goods, and this, reflecting back on 
 present goods, gives them a higher subjective, (exchange) value 
 even among those whose personal circumstances happen to be 
 such that the goods would not naturally have any preference 
 in subjective use value. Finally, the levell iTi g tp.ndencie.s of 
 the market bring the reduced value of future goods into 
 
 a regular proportion to their remotp,np.R.s in tim e. In the 
 economic commiinity,. then, we find universally that future 
 goods have a less value, both subjective and objective, corre- 
 sponding to the degree of their remoteness in time. 
 
BOOK VI 
 
 TirE SOURCE OF INTEREST 
 
CHAPTEE I 
 
 THE LOAN AND LOAN INTEREST 
 
 In the previous book I tried to show, and account for, 
 the natural difference that exists between the value of present 
 and the value of future goods. I have now to show that this 
 difference of value is the sour c e and - origin nf . all Interest on 
 C apita l. But as the exchange of present commodities for 
 future commodities takes various forms, the phenomenal forms 
 of interest are as various, and our inquiry must necessarily 
 deal with them all. In the following chapters, therefore, _I 
 intend to take up. in succession, all the principal forms of 
 
 interest , and I shall endeavoiu’ to show that, notwithstanding 
 all differences in shape and appearance,(^e active cause in 
 them all is one and the same, namely, the difference in value 
 between present and future good^ 
 
 By far the simplest case of this difference in value is 
 presented in the Loan. A loan is nothing else than a real 
 an d true exchajig e of present goods for future goods ; indeed, 
 it is the simplest conceivable phenomenal form, and, to some 
 extent, the ideal and type of such an exchange. The “ lender,” 
 A, gives to the “ borrower,” B, a sum of present goods — 
 say, present pounds sterling. B gets full and free possession 
 of the goods to deal with as he Hkes, and, as equivalent, he 
 gives into A’s fuE and free possession a sum of entiiely similar, 
 but future, goods — say, next year s pounds sterling. 
 
 Here, then, is a mutual transfer of property in two sums 
 of goods, of which one is given as recompense or pajunent for 
 the other. Between them there is perfect ho moge nei ty,, but 
 for the fact that the one belongs to the present, the other to 
 the future . I cannot imagine how an exchange in general. 
 
286 
 
 THE LOAN AND LOAN INTEREST 
 
 BOOK VI 
 
 and an excliange between present and future goods in 
 particular, could be expressed more simply and clearly. ISTow, 
 in the last chapter, we proved that the resultant of Jdie 
 sii b jeetiv-c vahiations which determines the marlcet price o f 
 present and future goods is, as a rule, in favour of present 
 
 goods. The borrower, therefore, will, as a rule, purchase the 
 money wliich he receives now by a Imger sum of money 
 which he gives later. He must thus pay an “ agio ” or nre - 
 miuin (Anfqdd), and this auio is iuteroat . Interest, then, conies, 
 in the most direct way, from the difference in value between 
 present and future goods. 
 
 This is the extremely simple explanation of a transaction 
 which, for hundreds of years, was made the subject of inter- 
 pretations very involved, very far-fetched, and very untrue. 
 Since the days of Mohnseus and Salmasius,^ the T.oan has 
 been conceived o f as a transaction ana logous to the Hire ; as 
 a transfer of the temporary use of fungible goods. This 
 method of interpretation seems simple and natural enough. 
 It has, too the advantage and support of being in harmony 
 with popular ideas and popular speech. We do not say, “ I 
 sell you, or exchange you £100,” but, “I lend you £100.” 
 The tiansaction is a loan, and interest a usura.^ a use of 
 money . But, before a scientific basis could be given to this 
 popular conception, a whole series of subtilties had to be in- 
 vented, and to obtain these out of the circumstances of actual 
 life taxed all the resources of sophistry. 
 
 First it had to be shown that, in transferring a thing, it 
 
 is ■ pos.sibift to transfer more than the whole _Qf it ; namely, 
 that in giving the borrower possession of the loaned thing, it 
 is possible to transfer to him the right to all and every use 
 that can be made of the thing, even to the consumption that 
 annihilates it, and, besides that, the right to a separate kind of 
 remnant use, for whicli a separate claim, the claim of interest, 
 can be made. Then the further subtiltv had to be ■in vented . 
 that, in peri shable goods — goods which perish in the act of 
 use — there is. all the same, a continuous use, ever rising anew 
 from its own ashes ; a use which lasts even when the good 
 “ used ” has long ceased to exist ! It had to be discovered 
 that a cwt. of coal can be burned to cinders on 1st January 
 ^ .See my Capital and Interest, p. 29. 
 
CHAP. I 
 
 MIS UNDERS TANDINGS 
 
 287 
 
 1888, and yet be “ used ’ uninterruptedly throughout the whole 
 year, and, perhaps, for five, or ten, or a hundred years to come ; 
 and, what is best of all, that this lasting use can always be 
 bought for a particular price, although and after the coal 
 itself, and the right to consume it to the last atom, has been 
 given away for another and a different price ! 
 
 In my former book, Ca^pital and Interest, I subjected this 
 singular theory to a searching critical examination. I showed 
 how, under peculiar historical conditions, it came into the 
 world as the birth of circumstances, in which, to save interest 
 and justify it against the unquestionably unjust attacks of 
 the canonists, a decent foundation had to l^e found for it at 
 any price, or, if not found, invented. T _ s Kowed that this 
 theory had its troubled source in a fiction . It was a fiction 
 adopted, in its time, by the old jurists, in full consciousness 
 that it was simply a fiction set up for certain practical legal 
 purposes ; but afterwards, by a strange misunderstanding, this 
 fiction was adopted as a sufficient scientific fact. I tried, 
 further, to show that this theory is, in itself, full of mistakes, 
 internal contradictions, and impossibilities, and how, finally, 
 when carried to its logical conclusion, it leads inevitably to 
 further contradictions and impossibilities. In opposition to it. 
 and in place of it, 1 now offer my own positive theory , then 
 unpublished, and confidently leave it to the reader to judge 
 on which side lies illusion and error, and on which truth.^ 
 
 I would gladly refrain from any further commentary 
 here, were it not that, quite recently, we have had a new 
 literary pronouncement in favour of the Use theory which I 
 opposed, and directed against the Exchange theory which I 
 advocated ; and were it not that this revived pronouncertient 
 emanates from no less authority than Karl Knies. 
 
 In 1885 Knies published a second edition of his book 
 Das Geld. In it he replies to the criticism I made on 
 some passages of his first edition, and, at the same time, 
 expressly Tepee.ts certain positive objections he had made to 
 the conception of the loan as an Exchange., On both counts 
 I feel bound to anSwer. 
 
 It is unfortunate that Knies’s reply touches only one of 
 the many points on which I attacked his Use theory. I had, 
 
 ^ See Capital and Interest, pp. 214-259. 
 
288 
 
 THE LOAN AND LOAN INTEREST 
 
 BOOK VI 
 
 among other objections, put forward this; — that bis mp.t-.bnfi 
 of nroviiig the actual existence of a durable use, in penshable^ 
 goods rested on a dialectical confusion ; and I had endeavoured 
 to strengthen my contention by an exact analysis of the very 
 words of his arguments To this Knies answers that I have, 
 notwithstanding, mistaken his meaning, and he repeats his 
 positive statement in such “altered expression, and with such 
 additions ” as may put his real meaning beyond question. As 
 now put, K'nies’s demonstration is vp.T-y Tnnp.b amplified (in the 
 first edition it occupies pp. 7 2 and 7 3 ; in the second editiop, 
 pp. 106 to 114h but, substantially. I cannot consitler it any 
 more satisfactory . On the contrary, it seems to me to bring 
 out more clearly that the existence of this durable use, which 
 I disputed, is not proved, but only assumed. 
 
 In one of the weightiest of the new passages (p. 109), 
 Knies has no hesitation in explaining, in so many words, that 
 in the Loan, although “ not the same individual grains of corn 
 and pieces of money are returned, but (only) an equally large 
 and equally valuable amount of grains of corn and pieces of 
 money,” stiU, “ to economical consideration, the same goods are 
 given back .” Here he sanctions the fiction of identity between 
 fungible goods , in optima forma, within the sphere of economical 
 theory and economical discussion. AU that follows he bases 
 on the foundation thus obtained. He finds the essence of 
 hire and lease in the fact that here “the hirer, leaseholder, 
 etc., gets the land, house, or the like, transferred to him to 
 use for his own purposes for such and such a continuous 
 
 1 See Capital and Interest, p. 239, It goes without saying that I could 
 mean nothing else than an involuntary dialectical confusion in the writerls 
 mind , and nothing was further from my intention than to charge a scholar, so 
 much esteemed by myself and by all the world, with wilfully misleading his 
 readers. I should have thought that the very sincere expressions, in that and 
 other writings, of the respect in which I have always held the person of that 
 past master of our science, and particularly the express recognition of his 
 “thorough and conscientious efforts” with which I introduced this very 
 criticism (p. 239), might have sufficiently protected me against any such mis- 
 conception. I was therefore more than astonished to learn that Professor 
 Knies had taken my words as conveying an offensive imputation of wilful 
 misleading of his readers. Although I scarcely think that any one of my readers 
 will have understood me in this sense, I do not hesitate to explain here, 
 emphatically and publicly, not only that I had not the slightest intention of any 
 offensive imputation, but that 1 am exceedingly sorry if m y in con si derate choice 
 of words should unwittingly have made such an interpretation possible. 
 
CHAP. I 
 
 KNIES’S CRITICISM 
 
 289 
 
 period, at the expiry of which he has to give back the good 
 in question.” In the Loan, perishable goods are Likewise 
 transferred “ to be employed by the borrower for such and 
 such a continuous but limited period of time.” Consequently 
 Hire and Loan are, essentially, analogous transactions — which 
 was the point to be proyed. 
 
 To this I would simply answer, that the second premiss 
 is not truth but poetry. The sober, prosaic truth is that, 
 in the Loan , perishable goods are not transferred to the 
 borrovyer “ for a continuous but limited period of time ” ; they 
 are transferred definitely and for eyer : they are never giyen 
 Ifflck . What is given back is, in fact, other goods. WTiat 
 now becomes of the inferred analogy ? 
 
 I am not blind to the use of analogies, and even to the 
 demonstrative force which analogies may have under certain 
 circumstances. I have myself often used them in the course 
 of this book to drive home an argument. But an analogy is 
 a ^ weapon which requires careful handling . Comparisons, as 
 every one knows, are always imperfect ; if the compared things 
 have one side in common, they have always another in which 
 they differ. The “legal person,” for instance, may very well 
 be compared with the physical person in questions relating to 
 property, while, in questions relating to the family, it would 
 scarcely be safe. If, then, we draw some conclusion from the 
 similarity of two things, our conclusion must keep within the 
 sphere in which the similarity actually exists ; from similar 
 circumstances in one sphere we cannot draw a conclusion 
 that the circumstances are similar in another sphere to which 
 the similarity does- not extend. No one, for instance, would 
 consider an argument like this legitimate : — the legal person 
 is as much a person as the physical person ; a physical person 
 can marry ; therefore, a legal person also can marry ! 
 
 Vc>t-. if. that it i. s into this vicious a,nd false. 
 
 use of ana logies, that Knies and the other theorists of his, 
 s^ool have fallen. I grant at once that, in a certain point of 
 ■view, the individual goods replaced may be looked upon as if 
 they actually were the same individual goods which were 
 given away in the loan : they have identically the same effect 
 on the pcouoTnical position of the lender who receives them. 
 
 Now, so far as the ground of this identification extends, so far 
 
290 
 
 THE LOAN AND LOAN INTEREST 
 
 BOOK VI 
 
 also is one justified in drawing conclusions from it — but no 
 further. The analogical conelusiuns of tlie TTse tliooristg ^ 
 however, are entirely beyond this justifiable sphere. What 
 lias the theoretical question whether, in perishable goods, a 
 continuous use is possible or not, to do with the fact that it 
 is all the same, as regards the interests of the lender, whether 
 he gets the individual goods X or the indiAidual goods Y ? 
 Nothing at all^ — -any more than the question of the marriage- 
 ableness of a legal person has anything in common with the 
 fact that, in matters relating to rights of property, an institu- 
 tion or a corporation may without hesitation be conceived of 
 as an independent “ person ” ! Indeed, if the reader will 
 excuse a ridiculous but, as I think, a convincing example, one 
 might as well use the identity of funoible goods to prove that 
 
 oysters may keep fresh for ten years : they have only to be 
 lent out for ten years, and the lender receives “ them ” back 
 still fresh oysters ! The application is so evident that I need 
 scarcely put it in words. The identity of the oysters lent 
 with the oysters returned is no true identity, but only an 
 identity assumed ad hoc. So far as concerns the practical 
 interests of the lender the identity may pass, but, as a scientific 
 c[uestion of fact, like the physical question whether oysters 
 can remain fresh for ten years, there is no identity at all. 
 And just su’ch a scientific Question of fact is the question 
 
 whether, in perishable goods, there is a continuous one year’s 
 or ten years’ use . It is a question that must find its answer 
 in considering the nature of the perisliable good and the 
 nature of the use ; properly speaking, not the shadow of an 
 argument can be got from the fact that it is of no moment, 
 as regards the practical interests of a person, whether he 
 receives the particular good X or the particular good Y ! 
 
 Now Knies does make the attempt — and this is a second 
 and indeed the weightiest of the new passages in this edition — 
 really to point out a dura ble use in perishable goods , and 
 to give some indication wherein that use consists. He names, 
 by way of illustration, “ the maintenance of life, and of 
 labour power, the averting of a loss, the attainment of a 
 business return or profit” (p. 112), as useful effects of this 
 sort, which the borrower “ may obtain and make for himself 
 from the consumption (of the loaned goods) during the entire 
 
CHAP. I 
 
 JCN/ES’S CRITICISM 
 
 291 
 
 period of time before the similar quantum of perishable goods 
 is given back.” But by illustrations like this Knies again 
 shows that he is on the wrong track. T he enjoyment of 
 effects indirectly obtained from the consumption of goods is 
 
 not in the least a utility which we get in addition to the 
 
 consumption : it is just the utility we from the consump- 
 tkm. Accordingly it can never be the ground of a special 
 equivalent which we should have to pay over in addition to 
 the equivalent of the perishable good itself. What would be 
 said of a person who proposed to sell a cwt. of corn on the 
 following terms ; — “ For the quarter of corn itself, that is, for 
 all the useful services which may be got from the corn by its 
 — sudden or gradual — consumption, I want thirty shillings. 
 But for the lasting indirect use of the corn — the use which 
 consists in the subsequent enjoyment of useful effects, such 
 as life prolonged, labour power maintained, and so on — I want 
 another shilling.” Now, if , — as probably no one will deny.- — 
 in sdlinq grain, it is not possible to conceive of the subsequent 
 
 en joyment as the ground of a special equivalent ; if the 
 subsequent enjoyment is obviously included in the purchase 
 prihe of the good transferred into the buyer’s possession ; it is 
 inconceivable that, all at once, in the case of the loan (where, 
 too, the quarter of corn passes into the full possession of the 
 borrower, and justifies him in drawing all the uses he can 
 from it), every indirect use is to be separately paid for. And 
 why, again, should this indirect use be paid for only during 
 one, five, ten years, or for so long as the loan runs ? Is 
 the utility of sustained life not enjoyed so long as life lasts ? 
 Is the utility of preserved labour power not one which lasts 
 so long as we can work ? 
 
 In Capital and Interest I had so thoroughly and, in my 
 own opinion at least, so clearly laid down the facts about the 
 lasting “ indirect use.” and shown the impossibility of its being 
 the ground of loan interest,^ that I really did not expect to 
 see the thing emerge once more as stay and support of the 
 Use theory. Least of all did I expect it from a writer who 
 knew what I had said on the subject, and that without a single 
 word of explanation being vouchsafed in answer to the objec- 
 tions I had raised meantime. I cannot but express my 
 1 P. 229, and pp. 235-239. 
 
292 
 
 THE LOAN AND LOAN INTEREST 
 
 BOOK VI 
 
 regret — not indeed for personal reasons, but in the interest of 
 our science — that Knies has taken so little notice of, and 
 given such meagre answers to the theoretical considerations 
 which I brought against the Use theory. He replies on nrip 
 single point , and that a point which, however important it 
 may be in itself, has only the importance of an incident in the 
 struggle that is to decide the victory or defeat of the Use 
 theory; while, to the multitude of really cogent considerations 
 directed against that theory as a whole, — considerations which, 
 quite apart from the issue of this incidental question, show it 
 to be internally contradictory ^ and theoretically inadmis- 
 sible,^ — d m has. nnfnrtimat el y . -f Qnnd no word of rejoim ler. 
 Once submitted for discussion these considerations must be 
 met, and certainly no one was more called on to speak in the 
 defence of his own Use theory than was Knies.® 
 
 Hitherto the discussion has been limited to attack and 
 defence of the Loan theory of other economists. I have now 
 to reply to an attack made on my own theory . The dis- 
 tinguished writer we have just been discussing has now 
 repeated the objection he urged some years ago against mv 
 concention of the loan as a true exchange ; it is, he says, in 
 contradiction of the hitherto estatilished conception of what 
 an exchange is. “ For an exchange — as we are not taking 
 into account senseless and frivolous actions — takes place only 
 
 1 Capital and Interest, pp. 228, 247. 
 
 ® Ibid. p. 264. 
 
 * The criticism which Knies directs against me in the note to page 106 of his 
 second edition is limited unfortunately to a few passing remarks on points which 
 are, for the most part, of secondary importance. Moreover, several errors of fact 
 have slipped into these, and two of them I cannot let pass unchallenged. First, 
 I cannot admit that I have done what Knies ascribes to me, and explained that 
 the replaceableness of goods — that is to say, the fact that one sample of a class 
 can be adequately replaced and represented by another — is simply a legal fiction. 
 T only sa.id that the acltml identity of replaceable goods was a legal fiction 
 
 ( Capital and Interest, p. 253) ; and these are two very different statements. 
 And, further, in my book I do not regard it as certain that, if a person speaks of 
 uses in respect to perishable goods, he ought to point out, and wishes to point 
 out, exactly the same kind of process of use as is to be observed in non-perishable 
 goods. On the contrary, my entire criticism of Say and Schafiie (p. 232), 
 of Hermann and even of Knies himself (p. .233), rests on the idea that it was a 
 matter for the opposed theory to point out the existence of a something otherwise 
 
 f-nnctUiitarl tVnn fVip material servi ces, and tba^'- it KaA-nat. succeedeii iji 
 
 this attempt. 
 
CHAP. I KNIES’S CONCEPTION OF EXCHANGE 
 
 293 
 
 when goods different in some way or other are bartered. But 
 fimgible goods, sixch as grain of similar kind and quality, are, 
 economically, recognised as entirely similar goods.” ^ 
 
 I mnst say that this statement seems to me to beg the 
 
 whole questioq . Instead of inquiring what the connotation of 
 the conception of exchange is, and arguing from that whether 
 the loan can be called a true exchange or not, Knies starts 
 with a preconcei'ved conception of exc han ge , and that an 
 arbitrarily and unnaturally limited conception. As a fact, 
 Knies’s limitation of the conception of exchange to the barter 
 of goods of different kinds is one we do not find in the nature 
 of exchange, nor does it correspond with the “ hitherto 
 , estabhshed ” xxse of the conception. In the nature of exchange 
 what is involved is that two goods are given, the one for the 
 
 other — nothing more ; as to “ established usage,” it is very easy 
 7 to show that transactions in which entirely similar fungible 
 goods are bartered for one another are considered by all the 
 world true exchanges, and are called so. In proof of this I 
 might point out that two people, simply from whim or fancy, 
 will “ exchange ” two fungible goods, the one for the other, 
 two new copies of the same book. Knies guards hhnself, 
 indeed, against this argument by saying that “ we are not 
 taking into account frivolous and senseless actions,” but this 
 is making too light of the matter. For, certainly, it cannot 
 be denied that such capricious actions may happen, and occa- 
 sionally do happen, and it cannot very well be denied that 
 such transactions, when they do happen, are neither Hire nor 
 Loan, nor anything else than true Exchange. 
 
 But there is no need to appeal to rare cases like these. 
 Th&pe is one group of instances where men, quite deliberately 
 and on entirely rational economic grounds, do barter ftimilar 
 
 fungible goods : that is where goods, otherwise perfectly 
 similar, are available under different modalities — to use a 
 philosophic term — as, for instance, in different places. Take 
 the ease of a farmer A, who owns a plantation of trees two 
 hours’ journey away from his farm, while there is a plantation 
 belonging to his neighbour B immediately beside him.- In 
 both plantations, the wood, cut or ready for cutting, is of 
 
 ^ Der Kredit, part i., Berlin, 1876, p. 10: shortly repeated without new 
 arguments in the second edition of the book Bas Geld, p. 106, note 1. 
 
294 
 
 THE LOAN AND LOAN INTEREST 
 
 BOOK VI 
 
 exactly the same quality. Now, evidently, it is more convenient 
 and more profitable for A to have ten loads of wood near his 
 house than ten loads ten miles away from it. It will, there- 
 fore, be considered quite reasonable, and quite intelligible, to 
 propose that B should make over to A ten loads from the 
 near plantation, i n return for which A will give B ten loads, — 
 or perhaps twelve loads, including a premium — of the simila r 
 wood from his far-awav plantation . And if this is agreed to, 
 everybody would pronounce it a real and true exchange. 
 
 Or can we imagine anybody, from the fiction of identity 
 between fungible goods, drawing an analogical conclusion like 
 the following about the nature of the transaction : — “ A makes 
 over to B ten loads of wood at a spot ten miles away from 
 his house, and receives from B ten loads of wood here at his 
 house. It is all the same to A whether he receives back the 
 same ten loads or ten other loads. ‘From an economic point 
 of view,’ therefore, it is essentially the same ten loads which he 
 receives back, only at a different place. The essential nature 
 of the transaction is, accordingly, not an exchange — since no 
 exchange takes place between similar goods — but a transfer of 
 the same goods to a different point in space, — that is to say, a 
 freight transaction. And if, for the advantage which hes in this 
 transfer from one place to another, A pays B a premium of 
 two loads, the payment is essentially, from an economic point 
 of view, an expense of carriage .” I very much doubt whether 
 anybody would foUow him in this conclusion from analogy, 
 although it is, feature for feature, the same as the one above. 
 We should rather have expected that Knies would have been 
 ready to own that the exchange of two amounts of wood, 
 alike in every respect except that they are available in 
 different places, was a real and true exchange.^ 
 
 And now I ask : If it falls within the limits of the 
 conception of exchange when goods present in one place are 
 bartered for goods entirely similar but present in another 
 place, with what right can we -exclude from the -Conception 
 tbp. nasp. where goods present at one time arp ba.rtp.rp.d for 
 
 ^ I may note that it would be easy to multiply examples in which the same 
 state of things occurs. Grain merchants, c.g., may find it to their advantage to 
 exchange stocks held in dififerent stores ; bankers, to exchange sums of money 
 disposable at diflTerent places, etc. 
 
CHAP. I 
 
 FALLACY OF THE ENDURING USE 
 
 295 
 
 goods entirely similar, but present at another timp. ? When 
 so much has been made of analogies in the whole course of 
 this controversy, why exclude the one analogy which is, 
 most evidently, the appropriate one ? Tf the difference of the 
 place at which goods are available is a sound econ omie reasmi 
 for exchanging fungible goods that are in other respects 
 entirely similar, and if the advantage and convenience of the 
 present place may justify the claim and allowance of a premium, 
 j ust as much may the differ pupp o f the time at which similav 
 goods are availabl e be a s ound reason for their exchange, and 
 a guarantee that there will be a. premium on the — more 
 valuable — present goods. This premium, and nothing else, is 
 Interest. 
 
 A great tree does not fall at one blow. And I cannot 
 expect that a loan theory, which has dominated human intel- 
 lects for centuries, shoidd fall at the first attack. But I 
 venture to hope that I have at least awaked a general feeling 
 that it is necessary to submit the principles of that theory to 
 critical revision. There is one task which the next economist 
 who proposes to maintain the Hermann-Knies loan theory will 
 not, I imagine, venture to omit ; namely, once and for all, to. 
 point out positively the existence of that “ enduring use ” of 
 
 perishable goods, distinct from their consumption, for which, 
 
 interest is supposed to be paid , and to say, clearly and dis- 
 tinctly, wherein that use peculiarly consists. Up tiU now its 
 defenders have acted in a somewhat curious way ; they have 
 pointed out, by more or less questionable analogies, that, in 
 the loan; a temporary use is transferred, and concluded from 
 this that there must be such a use ; the consequence being 
 that — with the exception of this last unfortunate attempt of 
 Knies’s — the nature of the use, its contents and so on, were 
 left entirely in the background. I consider that our science 
 has a right to demand the opposite and the natural method of 
 demonstration. Let it first be shown that there is sp^.b a. nse , 
 and wh erein it consists : if that can be done, we shall willingly 
 believe that it is transferred in the lo an. If that cannot be 
 done — and I doubt very much if it can — then I shall have 
 the greater confidence in pointing to my solution of the 
 question. To the latter, at any rate, I have no fear that 
 the stigma of sophistry and unnaturalness can be attached. 
 
296 
 
 THE LOAN AND LOAN INTEREST 
 
 BOOK VI 
 
 Passing from this polemical digression — which I considered 
 only due, as well to the importance of the subject under 
 dispute, as to the scientific standing of my esteemed opponent, 
 — let us return to the main subject. According to our con- 
 ception interest is a complementary part of the price payable 
 for a su m of present goods in future goo^ . It is a part- 
 equivalent of the “ principal ” lent. In itself there would be 
 nothing to prevent this part-equivalent being paid along with 
 the bulk of the price ; in other words, interest and “ principal ” 
 might be put together in one single payment s,t the end of 
 the whole loan transaction . Reasons of practical convenience 
 have, however, made it the general rule that, jn loans made 
 for any considerable length of time, the premium should be paid 
 s eparately , and in rates graduated according to time, — monthly, 
 half-yearly, yearly, etc. With the essential nature of interest 
 this method of payment has nothing to do ; it may, indeed, be 
 expressly provided otherwise by the loan contract. But quite 
 possibly it is the case that this custom, which, practically, has^ 
 prevailed from time immemorial, of separating the payment 
 of interest from the payment of principal, has assisted — perhaps, 
 
 even, directly caused the popular opinion tbnt the prinr.ipa. 1 
 
 sum pai d back is. by itself, the equivalent of the sum originally 
 given, and that interest is a thing by itself, an equivalent for 
 another and separate something. 
 
 Now and the n a l oan may be granted without interest ; 
 but the reason of this is seldom or never that the market price 
 of present goods, as against future goods, is so favourable to 
 the latter, that, in the general loan market, they can purchase 
 an equal amount of present goods without premium. Almost 
 invariably these are cases where the lender dispenses with the 
 payment of premium on some special personal ground, such as 
 friendship, charity, humanity, class obligation, and so on. It 
 has been usual to conceive of the loan without interest as a 
 gift of the temporary “ use ” of the thing lent.^ Our theory, 
 of course, demands another conception. We put this kind of 
 loan simply among cases where a man, from some personal 
 
 Tuntivp, parts wi th hi.s p.ommodi ty L under the— m arket price . 
 We say it is the same thing as where a manufacturer gives 
 
 1 “A loan without interest is a gift of the use of so much capital,” Roscher, 
 Grundlagen, § 189. 
 
CHAP. I 
 
 INTEREST A PART OF PRICE 
 
 297 
 
 personal friends at the cost price, say, of 4s. the article wnich 
 he can sell anywhere at the general market price of 5 s. 
 
 Lastly, it very seldom occurs , and then neyer as regards 
 present and future goods in general, but only as regards one 
 particular kind of goods, that the relations of supply and 
 demand are such, that future goods obtain a higher price than 
 pre.^^ent gnnd.s of the same kind , and that a premium in present 
 goods must be paid for future goods. It will only happen in 
 cases where, presumably, the relations of supply and demand 
 in the future will be essentially more unfayourable than in 
 the present, and where, at the same time, for personal or 
 technical reasons, it is not possible to preserye the present ample 
 stocks till that future point of time when they are assured 
 of a higher yalue.^ Suppose the case of a brewer whose ice- 
 cellars are too small for his requirements. If in January he 
 puts in as much ice as the cellars will hold, and has still two 
 hundred carts of ice_o yer, he may be yery willing to exchange 
 these for one hundred carts of ice deliyerable in August.^ But 
 the possibility of such a case seems to me rather to aff ord a. nnt 
 i nsignificant proof of my loan theory . For, I should like to ask, 
 how would the Use theorists explain this ? As a transfer of 
 use like the loan ; only that the use has a negative yalue. 
 and that the borrower, instead of paying a premium, dema,nds 
 a premium? Or, perhaps, as a storage transaction, the difference 
 between the quantity giyen and that receiyed being considered 
 a fee for safe deposit ? 
 
 I think both interpretations are so clearly artificial and 
 fictitious that yery few people would seriously entertain them. 
 Probably the Use ' theorists would be qmte willing to admit 
 this as a case of real exchange ; but, so far as they did so, 
 they would be untrue to their own contention, according to 
 which exchange is only possible between goods of different 
 kinds, and not between fungible goods of the same kind. 
 Our theory, on the other hand, explains eyerything naturally. 
 
 and— hy one formula . Without forcing an interpretation, it 
 can recognise that, here, the position is exactly the same 
 as in the loan. There is a mutual transfer of property 
 
 ^ See above, p. 251. 
 
 - Similar cases may perhaps occur after very abundant harvests, where the 
 producers have not enough storage accommodation to secure the surplus. 
 
298 
 
 THE LOAN AND LOAN INTEREST 
 
 BOOK VI 
 
 in two sums of goods, which are entirely similar in every 
 other respect but that of being disposable at different points 
 of time. And to this entirely similar state of matters it gives 
 an entirely similar explanation : that, in both categories, there 
 is an exchange b etw een present and future goods, the prices of 
 PTP t.hp rpan1f.^nt. £>f the Subjective valuations put up on 
 these two-jcl asses of goods within the market . 
 
CHAPTEE II 
 
 THE PROFIT OF CAPITALIST UNDERTAKING. PRINCIPLES 
 OF EXPLANATION 
 
 We come now to the principal form assumed by the interest 
 
 problem . Among the phenomena of interest it is the one 
 which has, practically, been of most importance. Usually, 
 indeed, it passes for the spring and source from which all the 
 others are derived. And it has chiefly been the attempt to 
 explain this form of interest that has led to the terribly 
 involved war of opinions which gave only too ample material 
 for my Capital and Interest. 
 
 A word or two will indicate generally the peculiar kmd of 
 
 activity which the und erta kers exert , and from which they 
 draw their profit. They buv goods of remoter rank , such as 
 raw materials, tools, machines, the use of land, and, above all, 
 labour, and, by the various processes of production, transform 
 them into goods of flrst rank, finished products ready for con- 
 
 sumption . In doing so they obtain — independently of com- 
 pensation for their own personal co-operation in the work of 
 production as leaders of industry, head-workers, etc. — a gain 
 approximately proportioned to the amount of capital invested 
 in their business. This gain is called by some “Uatural Interest 
 on Capital” or “Profit,” and, by others, “Surplus Value.” 
 How is this gain to be explained ? 
 
 I must introduce the explanation by estabhshing one 
 important fact. Goods of remoter rank, although, materially. 
 present commodities, are, economically, future commodities. 
 
 As present commodities they are incapable of satisfying 
 human want ; they require first to be changed into consump- 
 tion goods; and since th isApr ocess, naturally, takes time, they 
 
300 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 can only render their services to the wants of a future period. 
 
 — at the earliest, that period distant by the time which the 
 productive process necessarily takes to change them into 
 consumption goods. A group of productive instruments, such 
 as Seed, Manure, Agricultural Implements, Labour, etc., which 
 cannot he transformed into the finished product Grain under 
 a year’s process, can _ only serve for the satisfaction of next 
 year’s subsistence wants. In this respect, then, goods of 
 remoter rank available in the present (present productive 
 goods) are similar to future consumption goods ; their utility 
 is a future utility ; they are “ future commodities.” 
 
 It is evident that this fact cannot be without some far- 
 reaching influence on the value which such goods obtain. As 
 we know, we value goods of remoter rank, in general, accord- 
 ing to the marginal utility a nd val ue of their finished a,nd final 
 products. The group of productive instruments from which we 
 get one hundred bushels of corn, has exactly the same import - 
 ance for the satisfaction of our wants as the hundred bushels 
 of corn into which it is transformed. But these hundred 
 bushels, the value of which is the standard for the value of 
 the productive group, are still, for the time, a hundred ftdiire 
 bushels, and, as we saw in previous chapters, future goods are 
 worth less than present goods. A hundred future bushels are, 
 therefore, worth, we may say, only as much as ninety-five 
 present ones. From this i t. follows that Means of E rodu ction^ 
 also, if estimated against 'present aoo(h, are fm] ud ^f 
 than the amount of finished , and-final products^which can be 
 made out of them. Our group of productive instruments 
 which, in a year’s time, will furnish us' one hundred quarters 
 of grain, is equal in value to one hundred quarters of next 
 year’s grain ; but, like that grain, is equal to, say, only ninety- 
 five quarters of this year’s grain. Or, if we translate the 
 whole matter into terms of money economy, and assume that, 
 next year, the quarter of corn will be worth twenty shillings, 
 then our group of produc tivejiiateriala. wherewith we Jiold in 
 our hands the condition of our obtaining a money return of 
 £100 next year, is equal in valu e to £100 nexlLJg&ar. MLIO-OQ 
 more than £95 now . If, then, we buy or exchange these means 
 of production now, the purchase price, naturally, is measured 
 in present money, and we buy them for a smaller number 
 
CHAP II 
 
 PRINCIPLES OF EX PLANA TION 
 
 301 
 
 of pounds sterling than they will bring their owner in the 
 future. 
 
 This, and nothing else, is the foundation of the so-called 
 “ chea p” hiiying of prndiietivp. instriiment.s, and especially of 
 l abour, which the Sociahsts rightly explain as the source of 
 jn’ofit on capital, but wrongly interpret, in round terms, as the 
 result of a robbery or exploitation of the working classes by 
 the propertied classes. The buying is not so cheap as it seems. 
 The appearance of cheapness comes, for the most part, from 
 this ; that the price is measured by a different standard from 
 the commodity ; measured, as it were, by one of these cheap 
 measuring tapes which stretch with wear and indicate a foot 
 ^ by ^ niches. The means of production, and their result. — 
 X the finished product towards wliich the buyer is looking in 
 purchasing them, — are future commodities, and the pn'ce i.s 
 measur ed and paid in (more valuable) present g oods. That, 
 in this case, the greater number of less valuable future goods 
 is purchased by a smaller number of more valuable present 
 goods, is not “ cheap buying,” any more than it would be cheap 
 to acquire one hundred florins of fifty florin standard for nmety 
 pieces of forty-five florin standard. The circumstances of 
 possession are only to a very limited extent responsible for the 
 fact, that the future commodity which the lahoux ers— have Tq 
 sell (their labour), is less valuable than the present goods 
 
 which the capitalists ha ve to offer fwagesl For the most 
 part, it is elementary facts of human nature and the techniq ue 
 of production that are to blame : facts which we have gone 
 into in detail in the foregoing book. The social importance 
 of the phenomenon of interest, however, will take up our 
 attention later on ; in the meantime I have only to explam 
 what Interest is. and why it is. 
 
 Knowing now that the undertaker buys the future com- 
 modity, “Means of Production,” for a smaller number of 
 pieces of present goods than the number of pieces which 
 will compose their future product, we ask. How does he 
 come by his profit ? The answer is very simple. From 
 his “ cheap ” purchase, indeed, he does not get any result ; 
 for, estimated by its present value, the commodity is dear.^ 
 
 ^ Of course it may happen in individual cases, that, outside of the reasons for 
 apparently cheap buying discussed in the text, there may be other reasons fo r. 
 
302 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 The profit comes first into existence in his hand. It is during 
 the progress of production that the future commodity ripens 
 
 gr aduaUv into the present commodity, and grows at the same 
 time to the full value of the present commodity. Time 
 elapses ; what was next year becomes this year ; and on the 
 great changing stage of life everything — man himself, his wants 
 and wishes, and with them the standard by which he measures 
 his goods — shifts one scene forward. The wants which, last 
 Year, were future wants, and little thought of as suchu_a ttain 
 their full strength and their full right of present wants ; and 
 a similar advance attends the goods which supply these wants. 
 A 'year ago they were goods of the future, and had to be 
 content with the lower value that attached to them as such : 
 to-day they are present goods, ripe for consumption, and enjoy 
 
 the full value of such goods. A year ago it was to their preju- 
 dice that they were measured in the, then, “ present ” goods. 
 To-day that standard has sunk into the past, and if the men of 
 to-day measure them again in “ present ” goods, they stand equal 
 with them in the first and chief est rank, and suffer nothing by 
 the comparison. Tn short, as time passes it cancels the causes 
 by reason of which the then future commodity suffered a 
 
 shrinkage of value, and brings it up to the full value of the 
 present good. The increment of value is the profit of capital. 
 
 This is not to say, of course, that, to make present goods 
 out of future goods, it is sufficient that time should elapse and 
 the future become the present. The goods themselves must^ 
 n ot remain stationary . On their part they must bridge over 
 the gap which divides them from the present, and this they 
 do through the production which changes them from goods of 
 remote rank into finished and final products. If there is no 
 product ioiL process, if , the cap ital is left dead, the means of 
 
 really abnormal cheat) bitving : as, e.g., skilful utilisiug of favourable conjunct- 
 ures, usurious oppression of the seller, and, in particular, of the labourer. The 
 emergence of such factors in this case results in a still further limitation of the 
 purchase price, and in the obtaining of an extra profit. This extra profit is to be 
 distinguished from Jiormal pro tit^Qn__capita^l_injyery respechi in its nature — for it 
 is not a true profit on capital but strictly a profit of the undertaker ; iujts 
 theoretical e^lanation — for it owes its origin to other and quite special causes : 
 and, finally, in the social and political judgment we must form of it. I need 
 scarcely say in so many words that what is said in the text has only to do with 
 profit on capital pure and simple. 
 
CHAP, il 
 
 PRINCIPLES OF EXPLANATION 
 
 303 
 
 pvodHotiou always remain undervalued future goods . In the 
 year 1888, a group of means of production which can be 
 changed into a finished product in a year’s process, — that is 
 to say, by 1889, — is one year away from satisfying the wants 
 of the present. If this group is left unused till 1889, its 
 product, of course, cannot now be obtained till 1890 at the 
 earliest, and it remains, as before, one year away from satisfy- 
 ing the wants of the present ; its value has no opportunity to 
 expand, and suffers the common fate of “ dead ca,pital-” ; it 
 
 bears no surplus value, and no interest. 
 
 This is the truth about Undertakers’ Profit, and I trust 
 it will be found simple enough. The Socialists are fond 
 of caUing this profit “ surplus value.” The name is more 
 applicable than they have any idea of. It is, literally, a profit 
 from the increment of value of the future commodi ty transmuted, 
 in the hand of the undertakers, into a finished present good. 
 
CHAPTER III 
 
 THE PROFIT OF CAPITALIST UNDERTAKING. COMPLICATIONS 
 
 The principle laid down in last chapter is simple, but Jn 
 practical life it is. as usual, obscured by a multitude of casuist- 
 
 i cal details and developments. These do not, indeed, prevent 
 its operation, but they conceal it under various phenomenal 
 forms such as make recognition of it not always easy. Some 
 of these developments we must take up, and we shall begin 
 with one of the simplest. 
 
 The contraction of value, from which, in our estimation, 
 future goods suffer, is, as we know, by no means uniform for 
 all future goods. It is graduated according to the time which 
 intervenes between the present and the date at which the 
 
 goods are ready for use. £100, for iiistanee, which will be 
 available in a year’s time, will be valued at, perhaps, something 
 like £95 in present money; £100 available in a couple of 
 years, at £90; £100 available three years hence at £85, and 
 so on.^ To this graduated contraction of value corresponds a 
 steady graduated increase in value of those goods wl iich are-ln- 
 process of ripening into present goo ds. A group of instruments 
 which, at the end of a three years’ production process, promises 
 a product of the value of £100, and, in virtue of that promise, 
 is valued at £85 at the beginning of the process, does not 
 remain stationary at the value of £85 till the moment when 
 the production is completed, and then make one bound up to 
 its full present value of £100. Its value increases gradually 
 as the time passes which divides the group from maturity, and 
 the production process nears its completion. This circumstance 
 
 1 Not quite exactly ; for easier understanding the figures in the text are 
 calculated roughly, and without consideration of compound interest. 
 
CHAP. Ill 
 
 COMP Lie A TIONS 
 
 305 
 
 is of great practical importance. Under the division of 
 labour, scarcely anv kind of production is carried through; 
 
 The 
 
 from beginning to ( 
 
 separate stages of production become branches of production, 
 visibly independent, and conducted by separate undertakers. 
 
 t.hp valnp tbn g increases bv stg gpg, « pnrrpgpnTir^iT^o gain 
 accrues, as profit on capital, not only to the last undertaker. — 
 
 the one in whose hand the good becomes an actual present 
 commodity, — but to eachj of- the undertakers , even to one who 
 has brought the product only a single step nearer maturity. 
 
 A very cornmnn^cemplication arises from the fact that 
 productive goods contri bute jra rious portions of their us eful 
 content to the making of various final products, which pro ducts. 
 arrive at maturity at various points of time . This is the case 
 with aU durable productive goods. A plough, for instance, 
 which lasts twenty years, will contribute a twentieth part of its 
 Life-work and use to the ingathering of twenty different harvests. 
 Corresponding with this twofold property — that of being 
 means of production, and at the same time durable goods — such 
 goods, both in the formation and in the increase of their value, 
 manifest a peculiar combination of phenomena ; they unite the 
 phenomena already known to us as characteristic of ‘productim 
 goods with certain other sp e cial - phenomena which accom - 
 pany all durMe goods — even those that are not devoted to 
 productive purposes. We have, however, to deal particularly 
 with this latter class of phenomena in a later chapter, and 
 accordingly we must postpone the full explanation of this 
 complication until then. 
 
 Another complicii.tinn arises from the fact, that almost all 
 
 productive instmrnents ad -mif-, of wn'nns ki nds of employment. 
 and that these employments turn out their finished products 
 at different points of time.^ The same fuel, for instance, may 
 be employed in cooking a meal, or in keeping up a smithy fire 
 where the tools are made for boring a coal seam. In the 
 
 ^ The analysis which follows is devoted to the circumnavigation of one of those 
 
 hidden rocks which, I suspect, might rise suddenly in the way of those readers 
 who venture on their own account to go further into the circle of ideas here 
 opened up. The digression which it necessitates forms one of the numerous 
 sacrifices of time which I imagine myself compelled to make with a view to the 
 safety of my theory, at the cost of brevity and ease of comprehension. 
 
306 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 first ease, only a few hours elapse till the finished product is 
 ■turned gu t ; in the latter it may be years, perhaps decades of 
 years. This is true in particular of that most important 
 productive good, “ unskilled labour.” Various portions of it 
 are always being employed simultaneously for productive 
 purposes that come to maturity in the most varying periods of 
 time. Some labourers must always get finishing work, which 
 pays its wages almost on the moment ; others must be em- 
 ployed in the intermediate stages; others, again, at the very 
 beginning of the total work of production. Yet none of 
 them has it written on his forehead whether his work is spent 
 for the present, or for the coming year, or for the remote 
 future. 
 
 At first sight it might appear that this complication must 
 sensibly prejudice what we have laid down as to the formation 
 and the increase of value. Here is a good which will he 
 used, perhaps as a present good, perhaps as a future good . 
 Suppose that it is valued as a future good, and therefore suffers 
 a proportionate diminution of value, it seems as if this diminu- 
 tion were unjustifiable if, after all, the good is used as a 
 present good. But, again, suppose it is valued, without deduc- 
 tion, as a present good, and is, after all, employed as a future 
 good, there is no room for increase of value. But obviously. 
 again, it is least of all possible to estimate different portions 
 o f the same commodity at different values, — one portion as a 
 present good without deduction, another as a future good with 
 deduction. Of ten loads of fuel of exactly the same kind and 
 quality, one load is worth just as much as the other, as well 
 to the householder as in the timber market. 
 
 Tlie apparent difficulty, however, entirely disappears if we 
 apply the universal law of value carefully to the special cir- 
 cumstances of the case. The value of a good is determined 
 ^ by its marginal utility . This marginal utility is _thp. IpAst. 
 i mpor^t~~use' or employment that is provided for nut o f the 
 available stock of goods. Suppose the stock contains five 
 hundred pieces of a kind which we shall call A. These goods 
 possess the three-fold capabihty of serving (1) immediately as 
 consumption goods, (2) as means of production in a five years’ 
 process, or (3) as means of production — in another branch of 
 employment — in a ten years’ process. If they are used for 
 
CHAP. Ill 
 
 COM PLICA TIONS 
 
 307 
 
 immediate consumption the capabilities are as follows : — one 
 hundred pieces can he used with a useful result which we shall 
 represent by the figure 6, another himdred with a result which 
 we shall call 5, and a third hundred with a result which we shall 
 call 4. But if the goods are employed in a five years’ produc- 
 tion process, there will be a product — call it X — of which the 
 first himdred can be remunerative at 9, the second at 8, and 
 the third at 7 per piece.^ But these products will not he 
 available before five years. In to-day’s estimate, therefore. 
 their value, hhe the value of aU future goods, suffers a reduc- 
 
 tioa: the amount of this reduction depends upon the amount 
 of the agio which emerges in favour of present goods as resultant 1 
 of the many intersecting subjective valuations in the market. 1 
 If this agio, for mstance, amount to 5%, the value of the 
 products available in five years, as compared with present 
 goods, suffers a reduction of a httle over a fifth part.^ In the 
 valuation of to-dav. therefore, the prospect of obtaining in fi ve. 
 years, from one of the pieces employed as a means of produc- 
 tion, a product which will then have the value of 9, is equal 
 to a use reahsahle at the moment of 7 ‘05. In the same way 
 
 the prospect of obtaining products of the value of 8 and 7 in 
 five years is equal to present uses valued at 6 ’2 6 and 5 ’4 8 
 respectively. Similarly if the goods are employed in a ten 
 years’ production process. If this gives the prospect of 
 obtaining a product — call it Y — of which the first hundred 
 can be remunerative at 16, the second hundred at 12, and the 
 third hundred at 8, these products, as not avaOable before ten 
 years, suffer a reduction in to-day’s estimate of somethiug 
 hke two-fifths, and’ are equal, respectively, to 9’82, 7'35, and 
 4-91. 
 
 If we group together the present valuation of aU these 
 possibihties. we get the following table. 
 
 ^ In order to remain true to actual cases, so far as possible within the narrow 
 limits of the illustration, I purposely assume that the value of product decreases 
 as production in the same branch increases — the more units the less the value of 
 each unit. The fact that even the most remunerative branch of production 
 ceases to be remunerative when it is over-stocked, is the very thing that makes 
 it possible for means of production to seek different employments simultaneously 
 
 ^ To be accurate it is 21 •65%, or as 100 :78'35. 
 
308 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 POSSIBILITIES OF EMPLOYING 100 PIECES 
 
 In immediate 
 consumption. 
 
 In a five years* 
 prcMjess. 
 
 In a ten years’ 
 process. 
 
 6 
 
 705 
 
 982 
 
 5 
 
 6-26 
 
 7-37 
 
 4 
 
 5-48 
 
 4-91 
 
 The- atock of five hundred pieces admits of only five of the 
 abcffi g possibilities being utilised Nafrurallv those fivp. will bp. 
 ta.kp.Ti whic h irv I, bp vain a linn nf — the only standard 
 
 for to-day’s decision — are the most remunera tive. They are 
 indicated in the above table by black figures, and we find 
 them to be as follows : — 
 
 100 pieces used in immediate consumption; 200 pieces 
 employed in a five years’ process, in making the goods XL; 200 
 pieces employed in a ten years’ process, in making the goods Y. 
 
 The least r e munerative of th e employmen ts indicates the 
 marg inal utility, and with it the value of the single good A. 
 That least remunerative use bears the value 6, and, as it 
 happens, belongs to the present. A good of the class A, then, 
 will be valued at 6. 
 
 How does this stand now as regards the increment of value 
 and the interest on capital? In the case of the hundred 
 pieces which are employed in the service of the present, and 
 fetch a utility measured by 6, there is no room for an incre- 
 ment of value. But as they afford their marginal utility 
 immediately, they do not require to bear any interest. Th^ 
 pieces invested in the five years’ process are worth 6. and ip 
 
 fi ve years turn out a product which wiU be worth 8.^ Here 
 there is room for an increase, — at the usual rate of 5^ for five 
 years, — in the ratio of, say, four to five ; that is, from 6 to 7 ‘5. 
 
 ^ If 200 pieces of the good are produced naturally aU the pieces obtain one 
 equal value, and not only the second hundred but the firs t h nuHred gets its value 
 according_to^ tl^ lower^rat^ of 8, at which the second hundred can be made 
 remunerative. 
 
CHAP. Ill 
 
 COM PLICA TIONS 
 
 309 
 
 Indeed, the room for increase, and the gam in value, is much 
 greater. Beyond the normal interest, which is secured when 
 fee product obtains the value of 7‘5. there is a further profit 
 of 0'5 per piece as premium for finding and utilising the most/ 
 favourable opportunities of employment in the present coni, 
 juncture ; in other words, as imdertaker’s profit. But usually 
 this premium will not long continue According to principles 
 with which we are familiar, its existence attracts competition, 
 and competition depresses p rice How far will it depress it ? — 
 Hot lower than 7’5. for 7 ‘5, obtainable in five years, is equal, 
 in present valuation, to 6 of present money, which is just the 
 value of the productive good itself. Anything less than this 
 price of 7 '5, consequently, would not be thought a sufficient 
 equivalent for the sacrifice of a good valued at 6, and, in this un- 
 remunerative branch, production would be suspended until the 
 linlitation of supply again raised the price of the product to 7‘5 
 of future money, as equal to 6 of present money. This being 
 a state of things favourable to permanence, although the produc- 
 tive (and, therefore, future) good has rp.r.ftivp.d its value of 6 fron^ 
 a marginal utility which belongs to the sphere of the present, 
 and so suffers no deduction on account of its future nature, 
 there remains quite sufficient room for a rise to the high er 
 value of the future product. 
 
 It is the same with the value and increase of value of those 
 pieces invested in the ten years’ process. At the moment , valued 
 at the common marginal utility, they are worth 6 . Their 
 product, which becomes attainable in ten years, will then be 
 worth 12. This leaves room for the normal increase of 5^ 
 per annum, from 6 to 10; and, therefore, over ten years, 
 makes possible an increment of about two-thirds of the original 
 value. Beyond this again it 1pji.vp.a rnnm — at least in the first 
 instance — for the obtaining of an undertaker’s profit . Should 
 this profit disappear later on in consequence of competition, 
 the future value of the product remains, aU the same, at 10, 
 and thus leaves room permanently for the normal increase of 
 value, in which consists the customary interest. 
 
 Thus we see that, although all the pieces of class A were 
 valued at the one figure, this one value ■g uamp-teas-tn each of— 
 fee jpossible uses ex actly that room for increase of v al ue wh i^h. 
 t he remoteness of i ts finishe d^ and final result demands. To 
 
310 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 the immediate use, where the utility of the good is at once 
 realised, it guarantees nothing; to the five years’ process it 
 allows an expansion of about one-fourth ; to the ten years’ 
 process an expansion of about two-thirds more than the 
 original value. Perhaps there is even a greater expansion, in 
 which case there remains a premium to the undertaker, but, 
 in any case, it guarantees the expansion just named. 
 
 And this nice harmony is easily explained from what has 
 just been said. Tn estimating the present value of_ the man y; 
 sided good, its possibl e future employments had already heeji 
 reduced to present value , whereby they experienced a discount 
 in exact ratio to their futurity. But only those future 
 employments are foimd economically permissible, whose 
 present (reduced) value is, at least, equal to the fixed 
 value of the good, and whose effective future importance, 
 therefore, is at least greater by the amount of the discount 
 made pro rata temporis. Therefore each of these future uses 
 has assured it in advance a corresponding scope for recovery 
 of its value. The lapse of time replaces the value which was 
 taken from the estimate by wav of discount, and this, in the 
 near-hand uses which require to bear little interest, is small, 
 and is correspondingly great in the remote uses which must 
 bear much interest.^ 
 
 What has here been represented on a s mall scale b y one 
 I'ngjgnpp ob tains over the w hole field of ipd ustrial employ- 
 ment. It is not a few hundreds, but millions of productive units 
 — days of labour, tons of coal, bars of iron, and so on — that 
 are invested ; they are invested, not in two, or three, but in 
 hundreds and thousands of separate employments ; and each 
 of these employments has a different p eriod of production. 
 All those means of prodixction enjoy one homogeneous market 
 price. That price is formed by the available stock being 
 
 ^ By varying the figures the reader may very easily convince himself that 
 exactly the same result emerges if the marginal utility, which determines the 
 value, lies within the sphere, not of the immediately remunerative, bnt 
 of the productive employments. T ]he only differenceJs that, in this case, the, 
 chances of a temporary “conjuncture profit” between the individual branches 
 
 of employment, are somewhat altered. That production which itself yields 
 
 just the marginal utility bears no conjuncture profit, while such a profit is now 
 possible temporarily in the present employments, and in the other branches of 
 production. 
 
CHAP. Ill 
 
 COM PLICA TIONS 
 
 311 
 
 distributed out among the most remunerative employments, 
 and according to the degree of advantage which they bring.^ 
 The most remunerative branches, in virtue of having the 
 strongest purchasing power, are supplied lirst and with the 
 greatest certainty ; then the next remunerative branches ; and 
 so on down the scale till the stock gives out. Some last 
 porHnn nf thp. stock, then, is taken for some last branch of 
 employme nt, and the modest advantage that accrues determmes 
 the modest measure of what those last buyers can pay for the 
 productive unit. But as the market price for all portions of 
 the commodity is a homogeneous one, the value of the 
 employment last supplied determines the total market price 
 
 o f the means of productioii But how, then, has the advantage 
 and value of the individual kinds of employment been 
 determined ? — By applying the same discount to employments 
 for future advan tage as has been described in our illustration l 
 only that, in rough, practical life, the discounting is made in 
 a rough way that takes a great deal for granted. In| 
 practical life men generally find already in existence the 
 things of which we have tried to explain the elements, and 
 are glad to accept them, without much reflection, as accom- 
 plished facts. In the same way do they take interest for 
 granted as an every-day fact, and without more ado, in all 
 calculations relating to future employment, they add or deduct 
 it. If an undertaker is considering whether or not he should 
 lay out one hundred pounds on a productive instrument 
 which will yield a result in two years’ time, he aimplv 
 calculates whether the future return will leave, at least, o ne 
 hundred pmmd s ov er and above the two years’ interesf. . and 
 after deduction of the same. If he has thus deducted, in 
 advance, from the future result an amount of interest propor- 
 tioned to time and capital, it is a very natural thing that the 
 future proceeds, when actually realised, should contain and 
 yield that very amoimt of interest. 
 
 The foregoing cases do not by any means exhaust the 
 
 series of casuistical comnlications- which obscure the working 
 of our principle in the infinite variety of practical life. 
 Happily it is not necessary to exhaust them. Many are not 
 
 1 See above, p. 230. 
 
312 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 of sufficient importance to justify us going into the tedious 
 abstract demonstrations that would be needed to explain 
 them, and, for the rest, I venture to hope that, in what has 
 been already said, the careful reader will find enough to 
 guide him among complications not expressly discussed, 
 without further assistance from me. 
 
 There still remains for us, however, another important 
 and by no means easy task. I t is, in _ a word , t.n fnlln-yy f.]^p 
 abs tract into the actual, and give it fonn and colour . Hitherto, 
 by an argument which I hope is incontrovertible, but which I 
 know to be highly abstract and general, I have tried to prove 
 that it must be as I have maintained : I have now to show 
 
 deduced everything from the general proposition that pro-^ 
 ductive goods are, by nature. “ future commodities,” I have 
 shown that, as logical result, the general reasons which explain 
 how future commodities have a less value, must also apply to 
 productive goods, and thus explain how there is room for 
 expansion into the full value of present goods, and for the 
 ''appearance of a surplus value. H shall now attempt, to show 
 positively that all this is as I have said, and why it is . To 
 this end I shall give a description of the markets, where, in 
 economic life, means of production or productive instnunents 
 are exchanged against present goods, and shall try to show 
 that, in these markets, the same motives, to which we 
 ascribe in general the power of calling forth a difference of 
 value between present and future goods, do reaUy emerge, 
 and emerge indeed in such combinations, and with such 
 strength, that, as the result of the formation of price, there 
 must always appear a disagio to the prejudice of the means 
 of production. In doing so I hope not only to bring forward 
 an adequate proof of the correctness of my general deductions, 
 but also to obtain a number of new and important lights on 
 the subject generally. 
 
CHAPTEE IV 
 
 THE PROFIT OF CAPITALIST UNDERTAKING. THE LABOUR 
 MARKET 
 
 The eyp-hanpf! of Mpjjns nf Prnrliip.tion against final and finished 
 
 present goods — practicaUv against Money — is made in three 
 
 kinds of market : t he Labour market, the market for Uses, of 
 Land , and the market for Intermediate Prndnets, such as 
 raw materials, tools, Machines, factories, etc. Inasmuch as ; 
 labour and uses of land, are the original means of production f 
 from the co-operation of which all finished products come 
 into existence, the formation of their price is peculiarly the 
 one which decides the existence of profit on cn,pital . In the 
 markets for intermediate products we have only the continu- 
 ance of a process which has received its own peculiar impulse 
 in the other two markets. And, of these two ■markets^ again , 
 the labour market is hv far the more important. I shall, 
 then, first take up the circumstances of this market, and 
 shall endeavour to show and explain how tlie markeLptfice of 
 the pr oductive goo d_l!JL abou r ” must always he less th an the 
 value an d prm e of the finished produpk^fjahour. 
 
 Eet us assume^ that, in~the methods of production current 
 in ecmomical society at the moment, the making of a produc t 
 ready for consnmptinn require.s a period of time- extendi ngL 
 iiL _alL over two— ypR ,r§. The technical productiveness of this 
 method, we shall assume, is such that it takes a week’s labour 
 to turn out a product which will have the value of 20s. 
 The same product may be turned out by shorter methodST^ut 
 the result will be disproportionately unfavourable. If a three 
 months’ process is adopted, the technical result falls to one-half.: 
 
 if the worker has no capital, and his process is, accordingly, one 
 
314 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 that yields its return immediately, th e nroduetiveuess falls 
 to one -quarter: — that is. respectively, to -lik- and Rr. The 
 price which can be paid for the commodity “ labour ” in 
 these circumstances is the question now under discussion on 
 the labour market between the labourer and the employers 
 I of labour. The price is fixed, in methods with whick -we are 
 f amiliar, as re^tont of Jjie subjective valuations of both 
 parties . How is it ndw^ith these valuations ? 
 
 \ In the circumstances of modern industry, the wage workers 
 
 scarcely ever possess sufficient means to utilise their own 
 lA&hovLT in methods of production extending over years.^ They 
 have, therefore, to face the alternative of selUng their labour. 
 
 or of employing it o n their o.wn ^ a ccount in such short and 
 unproductive processes as the scanty means at their disposal 
 permit. Naturally they will make that choice which is most 
 advantageous to them. Those workers who are well enough 
 off to embark, on their own account, on a production process 
 lasting at least three months, and yielding a return of 10 s. 
 per week, will be willing to seU their labour at any price 
 ^ver IQs. at any price under 10s. they will rather work on 
 r their own account. On the other hand, those workers who 
 are entirely without means, and who, working on their own 
 account in a hand-to-mouth process, coidd only have a return 
 of 5 s., will be willing to sell their labour at any price above 
 5s. As. unfortunately, the labourers w ho pnt.i-pply - without 
 capital, form to-day the great majority, we may assume for 
 our illustration that the “ Supply ” of labour will be repre- 
 . sented by a long row of workers who are ready, in the worst 
 •/ case, to sell the week’s labour for 5 s., and a shorter row who 
 will do the same for 10s present money 
 
 How is it now with the Demand for labour that confronts 
 this supply ? 
 
 ^ Whether it take the form of completing the two years’ production process ^ 
 from beginning to end by their own labour, or that of introducing their own 
 labour at a later stage, — e.g. in the fourth half-year of the total production 
 process, — an d buying the fruits o f the prepa ratory labour. — raw materials, tools, 
 etc., — from the others who have performed that previous labour. 
 
 " T he pleasure of an independent position may indeed very often create a 
 preference for labour on one’s own account, even although the labourer might 
 obtain a somewhat greater income by taking a wage. Influences of this kind, 
 however, can alter only the figures, not the principle. 
 
 ^ Of course the possibility open to the -labourer in question of realising 
 
CHAP. IV 
 
 THE LABOUR MARKET 
 
 315 
 
 The demand comes from the Capitalist-Uiidertakeiir ^he 
 valuation they put upon the labour thev wish to buy is so far 
 more definite, inasmuch as the commodity labour, capable of 
 so many employments, is looked at by them in connection 
 with one definite employment; namely, the one carried on[yA 
 by themselves. To them, accordingly, the week’s labour, 
 which they wish to buy for the capitalist process, is worth 
 just so much as the product which it will turn out in this 
 capitalist process. On our assumption, this will be 20 s. 
 available in two years. But the question for the undertaker 
 still remains : what are 20s.. available in two years, worth in 
 rpj^f.lnn tn t.hp present shillings in which he must pay tire- 
 
 week’s lahmin 
 
 Once for aU, let us make this entirely clear. If the 
 capitalists were to realise their entire resources as present 
 goods, — that is, to consume their wealth in present enjoyment, 
 
 — the want of the present would evidently be provided for 
 in superfluity, while the want of the future would have no 
 provision whatever. Thev must, therefore, find pnsil.ivply 
 advantageous to change a part of th eir— re sources into future 
 goods of some kind or other . In other words : if we look 
 only at the relations of want and provision for want in present 
 and future, present goods, as such, are worth even less than 
 future to the owner of a stock of wealth which is greater than 
 his present wants. It is true, of course, that there is a very J 
 simple wav of changing present goods into future : they can 
 be stored away either in natura, or in the neutral form of 
 j jiture money. This possibility naturally saves them from the 
 prejudice to their value, which would, in itself, result from 
 the overabundant provision for the present, but, on the other 
 hand, it does not give them any positive advantage in value, 
 or, at any rate, a very trifling one.^ 
 
 his labour in other branches of activity, can do little or nothing to alter the 
 position of circumstances assumed in the text. For if the other branches are 
 such as likewise demand a somewhat long production period the matter stands 
 just the same with the labourer of this branch ; and the few branches which 
 a man with no capital, or almost no capital, can take up with any result. — 
 
 such as in particular the performance of personal services, domestic service, 
 and the like, — can, from their nature, afford a remunerative refuge only to a 
 l imited number o£ w o rk e r s, while any strong pressure would immediately result 
 in overstocking and a corresponding curtailment of the advantage. 
 
 1 See above, p. 250. 
 
318 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 Nor can the n nrlPirfAstiTnnrp. .of future wants form a reason - 
 able any juch advantage. ^TlTv^i seldom be strong 
 
 enough to outweigh the counteracting consideration of the 
 overabundant provision for the present, and to prevent the 
 capitalists from preferring to employ part of their wealth in 
 the service of the future. Persons, moreover, in whom this 
 want of foresight might, exceptionally, be found, are not, or 
 at least would not long remain, capitaUsts. An estimate 
 like theirs, dictated by momentary desire and carelessness of 
 the future, would soon bear its consequences, and bring their 
 fortunes into spendthrift consumption. 
 
 Of the three considerations, therefore, which, as we have 
 seen, generally serve as foundation for the preference of present 
 over future goods, the first two do not apply as regards the_ 
 great majority of capitalists. It is our third consideration . 
 the well-known technical superiority of presen t_gqpdg, or, as it 
 is usually called, the “ productivity of capital.” which is decisiv e 
 w ith them . The way in which it takes effect is essentially 
 different in simple circumstances from what it is in the full 
 development of our modern economic life. 
 
 In simple circumstances, where the undertaker is himself 
 a worker, and has no capital to speak of, present goods imme- 
 diately obtain a higher use value. An undertaker, for instance, 
 has just enough wealth to defray the subsistence of one working 
 person for four years, — or to advance that amount. The choice 
 is now open to him, either to work by himself iu a four years’, 
 process, or to assume a helper and work alongside of-iiinLin a, 
 
 two years’ process . In a two years’ process the week’s labour 
 yields, as we have assumed, 20s.: in a four years’ process — 
 since longei; methods are, technically, more productive — it 
 will yield, say, 24s. The balance now stands as follows. 
 If our capitalist pays his helper, for the week’s work, the full 
 20s. in present money, he has to pay him £104 for the two 
 years’ work ; from its product he recovers just this sum of 
 £104; and finally, he can pay himself only 20s. a week, that is, 
 in aU, £104. His total net income, for the two years, thus 
 amounts to £104. On the other hand, if. instead of spending 
 £104 in paying a labourer, he spends it on his own mainte- 
 
 TT g.ucp. during a third and fourth year of production, he may , 
 from the 104 weeks of his own labour time at the higher 
 
CHAP. IV 
 
 THE LABOUR MARKET 
 
 317 
 
 rate of 24s. per week, reenver £1 24 : 1 6s. : so that his two 
 ypars’ ne t income is increasefi hy £20 1 1 6.s. Tn these circmn- 
 stances it is obviously more advantageous for the capitalist to 
 have no helper. To obtain any advantage from a helper it 
 must be possible to pay him at such a price, t hat the capitalist 
 gains more by the buying of another person’s labour than what 
 
 h e loses in the realisation of his own labour, b v the shortening 
 of the production period: in other words, that 20s. a week 
 present money paid in wages should bring him more than 24s. 
 a week, future money, in products. This will only be the case 
 if he can pay a weekly wage that is under 1 6s. 8d4 
 
 Were the circumstances of capitalist production generally 
 so simple as this, the value to the undertakers of 20s. in future 
 products would, speaking generally, be equal to the value of 
 16s. 8d. present money, — the actual figures varying a little, 
 but not the tendency. And if the buyers value the commodity 
 labour at not more than 16 s. 8d., while the sellers value it at, 
 perhaps, 5 s. or 10 s., it is clear that the resultant of these 
 valuations, the price of labour. wiU. in no case, exceed the 
 amount of 16s. 8d.. and must a foi'twri come under 20s.. the 
 
 fu11_ j^uTn of the future product — which was the point to be 
 proved. 
 
 But the circumstances of present-day industry are not so 
 simple. The great majority of our undertakers are not them- 
 selves workers, and their capitals, moreover, are generally so 
 great as to be far above what any one man coiQd use for hi& 
 subsistence during the very longest practicable process. Th^ 
 possibility, which capital gives it s o wner, of employing his ovmi 
 labour in long er production proce ss es does not, therefo 7^ aj 
 rule, under present conditions, give any higher use value to l 
 present -goodsr- Our illustration of simple circumstances has'^ 
 very great importance in other lines of proof, — of which later, — ‘ 
 but it does not suffice to explain the profit of capital in the 
 circumstances of capitalist industry. These very complicated 
 circumstances, however, develop a phenomenon which works, 
 in another form, to the same end ; this phenomenon is Credit. 
 The capitalist cannot use his present~goods to make his^wn 
 labour more fruitful, but others are willing to take them in , 
 exchange for future goods to make their labour more profitable. ' 
 
 1 16s. 8d. : 20s. =£104: £124 :16s. 
 
318 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 nd are very willing to pay an agio in future goods. An d, 
 
 ^vidently, the capitalist need not barter his present money at 
 par with the workers for their future product, when he can 
 
 obtain on the loan market, for a certain sum of present goods, 
 greater sum of future goods. 
 
 One is tempted to apply this fact to the explanation of 
 profit, as if it were owing to the chances offered on the 
 market for loans that the capitalist’s present goods had, in all 
 j cases, a higher subjective exchange value than future goods. 
 But this is not my idea of explanation. We have no right 
 either to represent loan interest as a faii acc.om,pU, and pyplaip 
 
 na tural profit on capital from it. or, conversely, to represent 
 the latter as a fait accompli, and explain loan interest thereby. 
 The fact is that the Loan market and the Labour market are 
 two markets on which one and the same commodity is mutually 
 offered and demanded, viz. Present (lond.c!. On both markets 
 the demand is for means of subsistence, with the view of 
 making labour more profitable by longer processes of production; 
 only the circumstances of demand are different. Por the 
 present goods which he receives the wage worker gives. 
 wholly and entirely, the indefinite future nrod upt. wViir^h 
 labour mav create : the borrower in productive cred it — con- 
 sumptive credit is much less important, but manifests its 
 effects, in the long-run, in exactly the same direction — gives, 
 in exchange for present goods, a definite quantity ef future 
 products , and, if the actual product differs from this quantity, 
 may gain or lose by it. Thus wage workers and borrowers 
 form two branches of the same demand ; they mutually 
 support its effect ; and jointly help to form the resultant 
 price. Only in outside appearance are they two distinct 
 markets ; in reality they overlap each other ; and the market 
 price of present goods is their joint result. 
 
 To get to the root of the matter therefore, before consider- 
 j ing isolated and partial markets, we must take a. cnmprphftnaivp. 
 / survey of that total market for advances of subsistence which, 
 L. in every economic community, is built upon numerous com 
 ' municating partial markets. 
 
CHAPTEE V 
 
 THE PROFIT OF CAPITALIST UNDERTAKING. THE GENERAL 
 SUBSISTENCE MARKET 
 
 At the outset we must enunciate a proposition, as simple as 
 it is fundamental, but one on the proper understanding of 
 which everything depends : In any economical p.nTr|prn,n{:t$rFFj>;’ 
 supply of subsistence, available for advances of subsistence, is V 
 — with one trifling exception — represented by the total sum | 
 
 of its wealth (exclusive of land). The function of this wealth J 
 
 {Vermogm) is to maintain the community from the time that 
 their original productive powers are put in motion till these y 
 powers obtain their final and mature fruits — i n^otlier words. tn(^ 
 mninta in- rh^ -^o m mnnity during t h e average social period of' 
 productio n. The greater the total stock of wealth in the com-/ 
 munity the longer may be this social period of production. 
 
 Here we really have three propositions, but they are so in- 
 timately connected that they may be conveniently grouped into 
 one, and explained and proved by one and the same argument. 
 
 If we look at the uses to which a country’s accumulated 
 wealth is destined and put — leaving land out of account — we 
 get something like the following picture. Some few owners 
 of wealth, whether from necessity or from prodigality, tbero^- 
 selves consume it . Others who produce on a moderate scale 
 for their own account spend their wealth in furnishing them- 
 selves with the necessary maintenance, during their production 
 period. But all other wealth — and that is by far the greater 
 amount — is, in some form or other, brought to the great 
 market for Advances of Subsistence as Supply . The owner 
 either puts it into some undertaking carried on by himself, or 
 he lends it to other people. If be pu ts •'nt» his own 
 
320 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 business it is, directly or indirectly, employed in giving 
 
 a dvances of subsistence to labourer s. I say directly or 
 /indirectly, for the division of labour, splitting up, as it does, 
 the one united work of production into a series of apparently 
 independent stages, causes an important distinction in form, 
 although it does not affect the essence of the matter. If the 
 different stages of one and the same production process were 
 united in the hand of one and the same undertaker, he would 
 n ot 'buy any previous product : all previous and intermediate 
 products needed would be made, from the beginning, by the 
 workers in his employment. Here, therefore, his entire 
 “ business capital ” would evidently be directly devoted to 
 advancing subsistence to labourers. As it is, under the 
 division of labour, he gets his previous products made by other 
 undertakers, and buys them from these other undertakers. 
 This amounts to saying that, by this purchase, he takes upon 
 himself the burden of the advances hitherto borne by the othe^- 
 
 [y undertakers, and thus puts them again in a position to take 
 upon themselves the burden of advancing subsistence for 
 the following period of production. These previous and inter- 
 mediate products, then, thus purchased, he gets worked up by 
 labourers who are directly in his pay. In this way, there- 
 fore, by his wage payments he advances subsistence directly 
 to one set of workers, and indirectly by his “ outlays ” to a 
 number of other sets (employed in the preceding stages).^ 
 
 ' It will perhaps be objected that the purchase amounts which the under- 
 takers of the previous stages receive contain, not only a simple replacement of 
 the advances of subsistence paid by them to workers, but frequently also replace- 
 ment of the uses of land consumed, and, in any case, some profit o n capi tal. 
 The fact is correct, but it makes no difference in the conclusions which I think 
 are to be drawn from what I have said above. The necessity of paying in 
 advance for uses of land, the return of which will not be obtained till after long 
 methods of production have been completed, has the same effect on the price relation 
 between finished present goods and original productive powers, as the necessity of 
 paying for labour in advance has. The market for uses of land is only a third 
 part-market in addition to the market for credit and the market for labour, 3 a!li£ie, 
 in similar ways, present goods are sold agains t future go.oda_(see above, p. 313), 
 and, consequently, as^egards its effects on price, the demand of this market for 
 present goods mutually assists, and is assisted by, the demand of the other part- 
 markets. This, however, will be made clearer as we go on. Finally, T must 
 here leave nut of consideration the profit of the undertaker, if I would not beg 
 
 the question . Its existence is the result of a certain market condition in the 
 subsistence market, and therefore cannot be assumed. It is not because tne 
 
CHAP. V THE GENERAL SUBSISTENCE MARKET 
 
 321 
 
 If, again, the owner Ip.nd his wpalt.h to others, it may be 
 either for nnri.qnmpl-ioTi nr for production. If the former, the 
 sum lent is a direct advance of subsistence to the borrower : 
 if the latter, it passes, as already described, from the borrowing 
 employer to the labourers, as advance of subsistence. Thus a 
 the entire accumulated wealth of society — with the very trifling j 
 exception of that portion which the owners themselves con-/ 
 sume ^ — is really brought into the market as supply of advances, 
 of .qubsistencp. 
 
 But the objection may be raised : How can the entire -^ 
 stock of wealth be offered as advances of .subsistence .whop 
 
 that stock consists only partially , and, indeed, to a very small 
 extent, of actual mpaos of Rnb.sistencp such as food, clothing, 
 dwelling-houses, etc., while the great bulk of wealth is 
 represented by goods that are not adapted for immediate 
 consumption, such as tools, machines, raw' materials, factory 
 buildings, and the like ? 
 
 The seeming inconsistency is, however, easily explained ; 
 it is simply that men never need their subsistence for the 
 
 entire production period all at once. If, in any community, 
 ten millions of men invest their original productive powers, 
 Labour and LTses of Land, in an average production period of 
 two years, it is quite unnecessary — indeed undesirable — that 
 at any one moment the means of subsisting the ten millions 
 for the whole two years should be accumulated in finished 
 form. It is sufficient if there is enough in finished form for . 
 sav, one month^ and if, in the meantime, the means of subsist- 
 ence for the following month are ripening into finished goods. 
 
 / 
 
 
 profits of the undertaker absorb a part of the available means of subsistence 
 that the sunnlv of means of subsistence is so weak as to give them an agio as 
 
 against productive ^ood s^ It is because the supply of means of subsistence, even 
 without consideration of profit, is insufficient, that these means of subsistence 
 receive an agio, and the undertakers who advance them receive a profit. More- 
 over it is easily seen that, by eliminating profit from the argument with which I 
 started in the text, I do not make it any easier to reach the final result, that of 
 giving a reason for the agio on means of subsistence, bu t make it more difficult. 
 That is to say, if, as I assume, the whole stock of means of subsistence is dis- 
 posable for the granting of advances to labourers, it will be more difficult in any 
 case for this more ample supply to be exceeded by the demand, than if a portion 
 of the supply appears to be already hypothecated to profit. 
 
 ^ The much more important matter of the consumption of the income from 
 capital does not belong to the present question : as was shown in last note it is 
 only a result of the supply of wealth being insufficient as against the demand. 
 
 Y 
 
322 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 Tn other words, all that is needed is that previous labour 
 pT-nviflpd so many gOOc1s-rr:^.pflrt,1y rparly for rr|n- 
 
 gnmptinn . partly in the intermediate foriiL of products ripening 
 successively into consumption goods — as will cover the sub- 
 sistence needs of two years, and thereby make it possible 
 for the workers to invest their current labour in methods of 
 production that will turn out the finished product in two years. 
 
 Here we come to the second part of our threefold proposi - 
 tiiin. The entire wealth of the economical community serves 
 as subsistence fund, or advances fund, and, from this, society 
 draws its subsistence during the period of production customary 
 in the community. All good s which appear to-day as the 
 stock or parent wealth of society, so far as they are not already 
 consumption goods, will, in the more or . less near future , after 
 a certain addition of finishing labour, ripen into consumptio n 
 
 g(2£4^ and will consequently cover, for a more or less lengthy 
 t im e to come, the people’s demand for consumption. Of course 
 this must not be understood as if there were some sharp line 
 of division separating the period which is covered by the wealth, 
 already on hand from that later period which is not yet covered, 
 and for which, consequently, provision must he made through 
 the current productive powers. What I mean is that tfie 
 stock of wealth projects itsp K intn fhe. future, as prri visin n. for 
 the consu m ption of the future, as it were by stages, and not 
 all at once. 
 
 It does so in two respects : in respect of the number of 
 classes of goods for which provision is made, and in respect 
 of the rlp pfpp of maturity at which the work of production 
 stands in the present. As regards the first ; it is to be noted 
 that, for technical reasons, in many classes of goods in 
 various foods) provision is limited to th e near „ future., perhaps 
 
 to a couple of months, while, simultaneously, in other classes of 
 goods, provision may be made for a couple of years. In others, 
 again, where permanence is aimed at, or goods must be got 
 ready long in advance {e.g. in dwelling-houses, mining products, 
 machinery, and the like), the means of provision must be prepared 
 perhaps twenty or fifty or even a hundred years before. Tims , 
 tfipn, it is in the nature of things tha t goods required in the Im r 
 mediate future must _naw,be.ready_or al most ready: ; for goods 
 needed later, it is enough if, at the moment, they have gone 
 
CHAP. V 
 
 THE GENERAL SUBSISTENCE MARKET 
 
 323 
 
 through, perhaps, half of the production process; whi le, for goods 
 recjuired still later, it may be enough if their production should 
 have just begun. If a commodity, for instance, requires five 
 years to make, then, in the year 1888, the goods of this class 
 destined to be used in the year 1889 must be ready, perhaps 
 to the extent of four-fifths ; those to be used in 1890 to the 
 extent of three-fifths ; those to be used in 1891 to the extent 
 of two-fifths ; while, as regards goods destined for the service 
 of the year 1892, it is enough if, at the moment, they have 
 gone through the first fifth of their total production process. 
 
 Thus it comes that the stock of wealth existing at the 
 
 moment makes provision for the future in a doubly decreasin 
 
 raUo : in proportion as the time of consumption is remot^ 
 there are fewer classes, and the goods in these classes are less 
 advanced or mature. To get an adequate representation of 
 the circumstances of provision, then, we should have to suppose 
 that thp .qfnpV nf wpn ith existing on 1st January 1888 ^ con- 
 tai ns of the goods required during 1888 and tbn.<^p. gonds; 
 are, on the average, finishecL. so that, on the whole, the 
 labour required for the needs of 1888 is already finished and 
 incorporated in the existing wealth to the extent of : that, 
 further, it contains of the goods required during the year 
 1889 finished, thus incorporating of the labour 
 
 required for 1889 : that it contains ^ of the goods wanted 
 for 1890 finished, thus incorporating of the labour 
 
 required for 1890, and so on for 1891, 1892, 1893, incor- 
 porating respectively and of the total labour 
 
 required for the service of these years. Adding up these 
 amounts we come to the result which I wished to elucidate 
 by this illustration ; viz., that the entire p.yisting stnp.V nf 
 wealth provides in advance for something like two years’ ^ 
 
 demand of the population, with this peculiarity that the stock 
 of wealth, instead of covering the exigencies of two continuous 
 years, covers successively a decreasing portion of the exigencies 
 of a greater number of calendar years. 
 
 Now the way in which this provision is made by the 
 existing wealth, and the extent to which it is made, exercise 
 
 ^ The figures are, of course, only chosen for illustration. 
 
 2 0-81-i-0-56-l-0-24-tO-12 + 0-06-t-0-04+. . . 
 
324 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 a very suggestive and impoitant influence on the employment 
 of the original productive powers, labour and uses of land, 
 coming into operation in the current year. For dmplicity’s 
 sake we shall consider the former only in detail. If the stock 
 of wealth in existence in 1888 covers the want of the 
 current year to the extent of 3 ^, it is clear that from the 
 
 / labour of this year the other ^ will first be covered. But it 
 is as certain that the remainder of the current labour will not 
 
 be devoted to tbe service of the year 1888. and that for two 
 
 reasons : ( 1 ) that any return in the year 1888 could only 
 be obtained by an unremunerative han d-to-mouth method of 
 production, and ( 2 ) that the few products thus obtained would 
 come upon a market already .stockejl and find poor sale and 
 poor prices. The other of the labour of the year will, 
 ! therefore, be directed to the service of later years. And here, 
 again, the following is clear : the fewer the -wants of 188D 
 covered by the existing stoc k j)f^ wealth, the g reater will l ;)e 
 tb^ amount of the c urrent .year’s labour directed to the service 
 of th e, year 1889 — if there is not to be a gap in the provision 
 from year to year — and the smaller will be the amount of 
 labour directed to the service of the years that come after it. 
 Conversely if the wants of 1889 are already (relatively speak- 
 ing) amply covered by the stock of wealth, only a small 
 fraction of the current labour will go to the service of 1889, 
 and a proportionally greater amoimt can be reserved for 
 remoter periods.^ The current labour thu s adapts — itself 
 naturally to the existing stoc k of wealthy The one begins 
 where the other ends. If it were to begin sooner, and so 
 duplicate the provision already existent, it would come under 
 the double disadvantage, already inen tinned, of overstocked 
 markets and less productive methods of production ; and if it 
 were to begin later, there would be a ga p in the provision 
 which would immediately cause scarcity prices, and thus call 
 out speedy assistance from the productive powers. 
 
 1 It would be erroneous to assume that, after the demand of the current year 
 is Covered, the current la bour must be directe d to the demand of the next 
 annual period till such .time as this is /M</ 2 /_covired ; that, e.g., if of the 
 demand of 1889 is covered by existing wealth, the labour of 1888 must, or even 
 might, immediately prepare the remaining But in 1888 the maturing of. 
 finished products is c ^ried forward only one stage, and is i tself fu lly terminated 
 only in the year 1889 b.Y.an addition of .the, labour of 1389, 
 
CHAP. V THE GENERAL SUBSISTENCE MARKET 
 
 325 
 
 Thus it is — and here we come to the last part of our 
 threefold proposition — that, in reasonable economic speculation, 
 t he current productive powei^s will and mu.st ou the average, 
 be directed to remote nroductive purposes (or, in other words, 
 invested in longer production periods), in proportion to the 
 length of time for which the existing stock of wealth is able, 
 to provide. If the accumulated wealth is so small that it 
 only provides subsistence for one year, it is perfectly clear 
 that it is impossible to invest the current productive powers 
 in processes that average three years, since, in the interval 
 that must elapse between the consumption of the old wealth 
 and the production of the new, the people would starve. And 
 it is equaUy clear that it would be. in the highest rjegree, 
 foolish and uneconomic to make the production period shorter 
 than the existing wealth allows . The average period of pro-t" - , 
 duction in a community is in exact correspondence with th^ 
 amount of its stock of wealth, and is entirely conditioneA 
 by it. 
 
 The principle is clear, but one not unimportant question of 
 figures still remains to be considered : What is the. TmTnp.rica.1^ . 
 ratio between the amount of a nat.inn’. s wealth and the av erage 
 production period which that wea l th limits ? 
 
 At the first glance one would be inclined to answer ; — 
 the average production period may be just so many month s 
 or years as there is months’ or years’ provision in the, accu- 
 mulated wealth . If, for instance, the year’s wants of a nation 
 are five hundred millions, and the nation’s wealth contains 
 goods to the value of a thousand mUhons, we should be 
 inchned to say that the average production period would be 
 two years. 
 
 This answer, however, would be incorrect : or, to put it 
 more exactly, it would only be correct under conditions which 
 do not actually occur in practical life. It would only .h e 
 correct, that is to say, if the work of production was not 
 carried on bv stages . If production were so arranged that 
 all the workers co-operating generally in the manufacture of 
 a finished product were employed simultaneously in the same 
 stage — I mean if all the workers were to begin with the first 
 and preliminary processes simultaneously; were then to pass on 
 simultaneously, as it were in line, to the second, third, fourth 
 
 / 
 
 
326 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 
 stage, till, in the end, they simultaneously turned out the 
 total product finished and completed, — then, of course, the 
 community’s wealth must contain, in the form of finished goods, 
 enough to supply the wants of just as many years as there are 
 years in the production period. Suppose, for instance, that the 
 manufacture of clothing were so arranged that all the workers 
 employed in it prepared the wool in the first year, built 
 machinery in the second, spun yarn in the third, wove it in 
 the fourth, and made up the cloth in the fifth, the stock of 
 wealth would require to con tai n— fim' shod provisirm for the 
 entire demand of all the workers during five y puTg. For, 
 under a division of labour of this kind, during all the five 
 years there would be no addition of finished goods to the 
 original finished stock. 
 
 It is quite different if production i s arranged in stages, 
 a s it actually is in modern industry . Of the workers occupied 
 in the production of clothing — to continue our illustration 
 —various groups are employed simultaneously at various 
 stages of it. In each year a fifth part of them, perhaps, will 
 produce wool, another fifth make machinery, another spin, 
 another weave, and another do the making up.^ The result 
 is that, during the five years that elapse between the growing 
 of the wool and the making of the coat, additions are succes- 
 ^sively, made to the fruits of labour which constituted the stock 
 of wealth at the beginning of the period : that, is tn say^_Q£bpr 
 fruits of labour, the results of labour expended at later periods. 
 
 are arriviug at th e stage of finished goods. Say, for instance, 
 that on 1st January 1888 a group of labourers begin the 
 manufacture of woollen clothing. Nothing of the fruits of 
 this labour will be ready before 1st January 1893. On the 
 other hand, besides the wholly or partially finished products 
 contained in the inventory of 1st January 1888, the following 
 goods will arrive at maturity before 1st January 1893 ; — viz. 
 the fruits of one year’s labour of those^ workers who are busy 
 with the final stage in 1888 ; of two years’ labour of those 
 busy with the second last stage in 1888 and with the last 
 
 * It is all the same as regards the effect whether the same persons perform 
 the labour of all stages of production successively, or whether — as is the case 
 under the division of labour — certain persons remain constantly occupied in one 
 and the same stage. 
 
CHAP. V THE GENERAL SUBSISTENCE MARKET 
 
 327 
 
 stage in 1889; of three years’ labour of those who in 1888 
 reach the third last and in 1890 the last stage of production ; 
 and, finally, the fruits of four years’ labour of those who, in 
 1888, are occupied with the second stage, and wiU reach the 
 final stage in 1891. Now since these goods, thus successively 
 maturing, would provide for a very considerable portion of the 
 subsistence needed for the five years 1888-92. it is evidently, 
 not necessary that the community, before entering on a fiv e- 
 years’ production period, should have a stock of wealth equal 
 to the entire five years’ needs. Or, if there is such a stock, a 
 longer process than five years can be entered on. 
 
 If we look at the same thing from another side, and one 
 perhaps better suited to illustration, it is clear that, where 
 workers are employed in stages, subsistence need be pro- 
 vided five years in advance only for those who work on the 
 lowest or earliest stage of the production . The workers on 
 the second stage, the fruit of whose labour matures after 
 four years, require subsistence advanced them only for four 
 years. The workers on the third and fourth stage require sub- 
 sistence only for three and two years respectively. The workers 
 on the last stage, those whose products will be finished in a 
 year, require advances only for a year. Striking the average, 
 we may say that, to allow the entire body of labourers to 
 embark on a five years’ production process, all that is required 
 is subsistence for = 3 years, or a little more than 
 
 half the period of production. 
 
 What is true of a five years’ process is true for all periods. 
 If we take the trouble of calculating a number of concrete 
 examples,^ we very easily come to an exact statement of the 
 law relating to it as follows. The stock of wealth mu.st be 
 sufficient for half the production period, plus half the usual 
 
 stage nenod: RT’TqF example, the work of production is 
 carried on only by yearly stages — that is to say, if finished 
 products are turned out by the process in question only at 
 intervals of one year — then, in a five years’ production period 
 such as we have been discussing, the stock of wealth must last 
 for half the production period {i.e. for 2|- years), and, beyond 
 that, for half what we have called the “ stage period ” {i.e. for 
 half a year) ; in all, three years. If again the stages of 
 ^ Hot to cumber the text I have done this in Appendix. 
 
328 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 production are monthly, so that every month there is an out- 
 put of finished products, the stock of wealth need only he 
 such as will last years -f month. To put it in general terms 
 yre may say : If the production period PTnhraooa t. stap p 
 ' /periods the stock of wealth must always he sufficient fnr_^l 
 ^ ^tage periods. ~ 
 
 Obviously, the greater x is, the smaller is the difference 
 between this exact formula and the rough expression of 
 “ half tire production period ” ; while x again increases with 
 the length of the production period and the subdivision of 
 the stages. In a two years’ process where goods are turned 
 out once a year, the production period embraces two stages : 
 the value of the exact expression is, therefore, years 
 
 — that is, fully 50% higher than the rough expression. If, 
 again, the process takes five years, and the goods come forward 
 by monthly stages, a: = 60, and the exact expression has the 
 value -^=30^ months, which shows very little difference 
 from “ half the production period ” of .2|- years. And if the 
 production period be ten years, and the output be a weekly 
 one, X will equal 620, and the exact expression will have the 
 value of 260^ weeks, which practically coincides with the 
 rough expression of “ half the production period.” Now since, 
 in any organised industrial community, the average process is 
 pretty long, and the subdivision into stages very minute- — for 
 not a day passes but finished products are turned out of some 
 workshop or other — it mav be assumed without much error 
 that a community mav. on the av erage, engage in pr oduc tion 
 p rop.pssps wbipb n.rp. twir.p. as long as the period for which the 
 nccnmnlated stock of wealth would provide subsistence.^ 
 
 ^ Of course many productions are, for technical reasons, very little divided 
 up into stages ; agriculture, e.g., yielding its harvests only from year to year. 
 All the same the above formula will be found to give an approximately correct 
 presentation of the case, and we may be the better pleased with it that I do 
 not intend to draw a single deduction in which anything depends on definite 
 figures. What I have to do with is rather the mere negative recognition, lhat 
 pie period of time, for which the accumulated subsistence fund mu st contain 
 pro vision, need not ha so great as the average economical production p eriod. 
 
CHAPTEE VI 
 
 THE PROFIT OF CAPITALIST UNDERTAKING. THE GENERAL 
 SUBSISTENCE MARKET — {continued) 
 
 It may be thought that in the disquisition of last chapter 
 we have wandered entirely from our subject, the subsistence 
 market. This, however, is not the case. We are here, indeed, 
 at the very centre of the question, for we are speaking directly 
 of those things which form and regulate the supply anjd / 
 demand on the subsistence market. Who are the people ths^ 
 require to get subsistence ad vanced- them ? The answer is : 
 Every one who wishes to produce in capitalist methods. ^ How 
 much is required ?-^^^^^^AirSniount proportioned to the length of 
 the production process. And in what form is it required ? — 
 Bv instalments. Again, who are the people that have subsist- 
 ence to give ? — All owners of wealth who do not consume 
 but “ save ” it. How much can they give ? — As much as their 
 stock of wealth contains. And in what form can they give 
 — Similarly, in instalments — in the propoTt.ion that the 
 unfinished goods containe d in t heir inventory successively 
 mature. This is the true nature of what occurs in our market 
 for means of production and in our market for credit — over 
 which, I admit, the division of labour and the use of money 
 throw a veil very difficult to penetrate. 
 
 Now at what price will finished present goods be exchanged 
 
 ^ I repeat again that it is quite true that, during the period of the national 
 production process, the idle capitalists and rentiers also mu s t be main ta ined by 
 advances of wealth, and, indeed, as a rule maintained at a pretty fair rate. Their 
 claims on subsistence, however, are not causes but effects of the condition of the 
 market creating an agio on present goods. If there is no agio, and so no interest^, 
 the n no one could l ive in idleness as a rentier ; he would either have to work or 
 positively consume his parent wealth. See above, p. 820 in note. 
 
330 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 for future g oods on thft snhsist.p.nnft ma rl^ ? This is the 
 question in which our whole interest peculiarly centres. To 
 answer it we must describe, with more care than hitherto, 
 both the extent and, in particular, th e intensity of supply and 
 demand. To-beg in with Supply. ^ 
 
 The extent of the supply of subsistence we have already 
 gone into with sufficient exactness. I t is represented by the 
 to ffil stock of wealth accumulated in a community, exclusive 
 / of land, and after deduction of those amounts which are con- 
 L sumed partly by owners who are getting poorer, partly by 
 \ owners producing independently and spending either on 
 I themselves or by way of advances. 
 
 As to the intensity of supply , it may be assumed from 
 what was said on p. 315 as regards modern economic 
 circumstances, that, to the capitahsts. the subjective use value 
 o f present goods is not greater than that of future goods. In 
 the most unfavourable case, then, they would be willing to 
 give almost 20s. present money for 20s. obtainable in two 
 years, or, what is the same thing, for one week of labour which 
 would bring them in 20s. in two years.^ 
 
 Over and against this supply of present goods stands, as 
 Demand : — 
 
 1. An enormous number of w age -earners who cannot 
 ^ employ their labour remuneratively by working on their own 
 account, and are accordingly, as a body, inclined and ready to 
 sell the futiire product of their labour for a. considerably less 
 amount of present goods ., Eecurring to the figures of our 
 illustration on p. 313 we may assume that, for the future 
 product of 20s. value- — the product turned out complete as 
 the result of a week’s work, and valued after two years at 
 20s. — one class of the labourers vdll, in the most unfavourable 
 circumstances, a.cc.ept a, price or wage of lOs.j, while another 
 class will accept as low a sum as 5 s. in present money. 
 
 ^ It is scarcely necessary to note that we have now chan p -ftfi the names of the 
 parties who e nter the market . So long as we were considering the special rela- 
 tions of the labour market, we thought of labour as the commodity oflfered, and 
 of the means of subsistence as the equivalent price Now, conversely... the means 
 of subsistence appear as the commodity looking for a market, or as Supply. 
 
 ^ Never, of course, quite 20s. ; otherwise they would have no advantage from 
 the exchange, and consequently no motive to conclude it ; but, perhaps, 19s. 6d. 
 or 19s. 9d. — a difference so insignificant that it may be entirely neglected in our 
 inquiry. 
 
CHAP. VI THE GENERAL SUBSISTENCE MARKET 
 
 331 
 
 2. A number of independent producers, themselves work- 
 ing, who by an advance of present goods are put in a position 
 to prolong their process, and thus increase the productiveness 
 of their personal labour, say, from 20s. to 24s. per week. 
 Since these persons, obviously, get an advantage from this 
 
 advance so long as it enables them to obtain anything over 
 20s. a week, they will be prepared , where necessary, to give 
 
 a portion of the surplus product of 4s. a week, as agio on 
 the present goods to which they owe this surplus product. 
 
 I purposely here mention only those undertakers who demand 
 productive credit for the assistance of their own labour, and 
 not those who demand it for the employment of workers 
 auxiliary to themselves. The demand of these latter forms 
 only a passing stage : they take some part of the supply, pro- 
 vided by the owners of wealth, out of the market, but only 
 to offer it again, on a different part-market, to the auxiliary 
 workers. 
 
 3. A small number of persons who, on account of urgent 
 personal wants, seek credit for pur poses of consumption, and 
 are also ready to pay an agio for present goods.^ 
 
 Here then we see that, in these groups constituting the 
 demand, the circumstances are such that those who demand 
 are willing and are able to pay for the present goods they 
 require, where necessary, by a larger sum of future goods ; that 
 is to say, by an ^o. This being the state of the case, then, j 
 that all who own the supply value present and fntiirp, goodg / 
 alike, and alT who form the demand~value present goods hiahsi A 7 
 than future, the determination of the price simply depends oii 
 which side has the numerical preponderance. If more presen, c 
 goods are offered than are desired by the united demand there 
 can be no interest. The resultant market price, as we know, 
 must always be lower than the subjective valuation of those 
 would-be sellers who do not effect a sale. Now if the demand 
 
 ^ I might name, as a fourth group of demand, those lando wners who live, 
 not on the return of their labour but on their rents, and who, like the labourers, 
 get the price of a future commodity sold by them — in this case the productive 
 good, use of land — advanced them in the form of subsistence. I intentional ly. 
 however, make no mention here of this group of demand since there need not be 
 in every economy landowners living on their rents, and since, in any case, the 
 emergence of interest which we have to prove in the text is quite independent of 
 the simultaneous existence of rent from land. 
 
332 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 is, numerically, too weak, and if, in consequence, all the present 
 goods offered cannot find a sale, and if all capitalists — even 
 those who cannot find a sale for their present goods — value 
 20s. present money at something like 20s. future money, the 
 market price of twenty present shillings cannot be higher 
 than twenty future shillings, and there is no agio on present.. 
 
 I goods^ If, on the contrary, more present goods are wanted 
 1 than are offered, all the suitors cannot be supplied. In 
 / methods with which we are famihar the weeding-out process 
 \ )f competition now ensues ; those who are able to offer the 
 jighest a giri fnr prpgpnt. g ood.q succeed in effecting an exchang e ; 
 while the others, be they few or many, are shut out, even 
 V although they may have been ready to offer some (smaller) 
 agio. But since the market price must always be higher 
 than that bid by the excluded buyers, and since this latter 
 contains an agio, jt is clear that, in the circumstances. th C' 
 market price also m ust contain an agio — great or small — for 
 present goods. 
 
 Now it can be shown — and with this we come to the 
 goal of our long inquiry — that_t he supply of pre sent good , s 
 
 must be numerically less than the de mand . The supply, 
 
 even in the richest nation, is Limited by the amount of the 
 people’s wealth at tne moment. The demand, on the other 
 ^ hand, is. pra.cticallv infinite ; it continues at lea.st so long qs 
 
 V the return to production goes on increasing with the extensioii 
 of the production process, and that is a limit which, even in 
 the richest nation, lies far beyond the amount of wealth 
 possessed at the moment. 
 
 Where a people, as in the case of Eoscher’s poor fisher- 
 folk, live from hand to mouth, it goes without saying that 
 they will be eager to acquire the first hardly saved stocks 
 which allow them to make boats and nets, and their exchanges 
 will be made with an agio against futni’e goods. But among 
 comfortahly-off and wealthy people the position is different, not 
 in kind, but in degree. If the stock of wealth be sufficient 
 to maintain the population during an average one year’s 
 production period, e very one will wis h , to e ngage in a two 
 year s’ pr ocess, with its greater product iveness, and, the stock 
 of wealth not being sufficient to advance subsistence to every- 
 body for two years, there will be, as before, bidding against 
 
CHAP. VI THE GENERAL SUBSISTENCE MARKET 
 
 333 
 
 each other ; the circle of suitors will be weeded out ; and the 
 agio on present po nds will appear, Nor does it make any 
 rlifference if the co mmunit y’s wealth is sufficient fnr an average 
 of five or ten years’ production period. Since, the provision 
 for human wants would be still more abundant if, instead 
 of five or ten years, six or eleven years were the average 
 periods, men will always wish to embark on these more 
 fruitful methods, will compete to obtain the subsistence that 
 is not sufficient for aU, and will thereby inevitably call forth 
 an agio for present goods. 
 
 Interest and Agio must appear . Assume for a moment 
 that they do not. Present goods and future goods are 
 exchanged on the great subsistence market at par, and the 
 labourers, for the week’s work, get the whole value of their 
 future product paid down to them in present goods. Say 
 that the average production period, assuming the nation to be 
 enormously wealthy, is ten years : that the week’s work con- 
 sequently yields 40 s. and that the labourer receives the whole 
 of this as wage. What will happen ? The undertaker who 
 empiny.s people to. work with him in a ten years’ process makes, 
 
 no profit outside of his own personal labour . For the 40s., which 
 the labour of his people yields him at the end of the produc- 
 tion period, has already been wholly expended as wage. But 
 how if he extends the production period stiU further ? If the 
 week’s labour has returned 40s. in the ten years’ process, 
 experience tells us it will return more in a twelve years’ 
 process, say 44s. In stiU longer processes, say, fifteen years, 
 it may return perhaps 48s. Now as the undertaker, by 
 hypothesis, can buy present goods at par on the subsistence 
 market, it would be foolish of him not to extend the produ c- 
 tion period for him.self an rl his emplnyt^s tn fiftp.pn yPAr?; If 
 he does so, he pays his workers out of the borrowed advances 
 40s., the price on the labour market : in fifteen years he 
 recovers 48s. from the product; from that sum he pays back 
 the advanced 40 s. at par, and has remaining the respectable 
 profit of 8s. out of each week of labour. And with this we 
 have the “ surplus value. ” the profit on capital. 
 
 To prevent its appearance the labourer’s wa.gp wnnirl 
 
 to be raised from 40s to 48s. But this is not possible. 
 
 For the weU-known levelling tendencies of competition do not 
 
334 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 allow wages to rise permanently in any isolated branch — so 
 long as it does not presuppose peculiar personal qualities — 
 inasmuch as there will at once be a rush from less paying 
 branches into any particularly paying branch. Rut neither 
 is a general rise of wages to 48s. possible , bpoan sp. the eyisten-t 
 st ock of wealth is only suflSicient for an a.verage ten years’ 
 period. The extension of the process to fifteen years, conse- 
 quently, can occur only in isolated cases ; the bulk of pro- 
 ductive employments must continue the ten years’ process 
 which yields only 40 s. per week, and cannot, therefore, permit 
 of any higher wage than 40 s, 
 
 On the other hand, it is obvious that something else will 
 make its appearance. However sharp undertaker A may be 
 in borrowing money free of interest, and securing a nice 
 surplus value of 8 s. per week of labour, undertakers B, C, D 
 and E will not be far behind. The desire to prolong the 
 production period, and, with that, the demand for increase d 
 advances of subsistence, will become general : it will not be 
 possible to supply this increased demand from the limited 
 funds of subsistence : and, finally, the weeding out of com- 
 y petition will begin among the classes who constitute the 
 V demand. Here, then, we have t he agio again appearing in 
 the universal market price of present goods, from which, by 
 hypothesis, we had for the moment banished it. 
 
 And this result, as regards the normal and really economic 
 provision of society, is no less healthy than it is necessary. 
 Tbp. po.ssihib'ty of obtainin g mp. a.ns of subsiste nce free of agio 
 would be certain to temp t undertakers into Jmmgderatfi_ex.* 
 tension of the production p eriod. If this were to occur only 
 partially and in a few branches of production, naturally the 
 limited stocks of subsistence would leave so much less for 
 the other branches of production ; these latter would have to 
 curtail their processes unnaturally ; and there would ensue a 
 deficiency in the social pro yLsinu- which would outweigh the 
 increased return got from the favoured branches through the 
 immoderate extension of their processes.^ But if the excessive 
 
 1 The deflciepcY is greater, because it is well confirmed by experience that 
 
 the sHrplii.q return constant ly tends to decreas e as the production ] 3eriod is 
 extenjded. (See above, p. 84.) The difference between the return which can 
 be obtained in a five years’, and that which can be obtained in a ten years’ 
 
CHAF. VI THE GENERAL SUBSISTENCE MARKET 
 
 335 
 
 extension were to be introduced all over, the communitv!s 
 stock of subsistence would come to an end sooner than the 
 fruits of processes thus unduly extended could mature ; there 
 would be deficiency in provision, want, and distress ; famine 
 prices would recall the misdirected natural powers, and put 
 them, with difficulty, to supply provision for the moment. All 
 this could not happen without serious disturbance, expense, 
 and loss. 
 
 liow the constant presence of the agio on present goods ^ 
 ^ like a self-acting drag on the ten d ency to extend the pro- 
 pprird ; without checking it all at once it makes it 
 more difficult, and more difficult in proportion to the projected 
 length of the process. Extensions which would be harmful as 
 regards social provision are thus made economically impossible. 
 Moderate extensions over the average process, however, are 
 not absolutely prevented, but are limited to those branches 
 where, from peculiar economic or technical circumstances, the 
 productiveness that goes with the extension of the period is 
 so great that they can bear the progressive burden of the 
 agio. Branches, again, where longer processes are somewhat, 
 birt only a little, more productive, are tempted to escape the 
 burden of agio by recurring to periods under the average. 
 Thus, finally, un der the influence of the agio , the total fund of 
 subsi.stence is divided out automatically among the individual 
 branches of production, in such amounts that _each branch 
 adopts that length of process which — in the given condition 
 of the fund — is most favourable to the tota l proviaiiiQ..^ 
 
 production period, is greater than the difference between the returns of a ten 
 , and a fifteen years’ period. If now, in a communit}^ where the stock of wealth 
 is such as to allow of an average ten years’ period, one branch is forced to limit 
 its own period to five years because another branch has extended its period to 
 fifteen years, the gi-eater difference is lost to the community, and the lesser one 
 is won. The total result of such a procedure is, therefore, uneconomic. 
 
 ^ The fact that tlie agio stands at a certain height may now and then lead 
 to the appearance of there being a deficiency in rem.unerative opportunities of 
 emploj'ment, and a “glut of capital.” The truth is that there is always a 
 surydus of remunerative opnortunities of employment, and a (ieficiency of 
 
 capital ; only that the high agio, which is the result of the deficiency of capital, 
 excludes a mass of remunerative opportunities as not remunerative enough 
 economically. It is exactly the same as when, in a year of bad crops, sufficient 
 buyers cannot at the moment be found in some one market for the strongly 
 appreciated grain, on account of the price being so high. It cannot he truly 
 said that there is a surplus of grain and a defieiptiey of demand : on the contrary. 
 
336 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 At this point I think we may congratulate ourselves on 
 having finished one of the most important demonstrations in 
 the scope of our present task. It fully confii’ms those infer- 
 ences which we had drawn from the nature of Jdie pro duerivp 
 instrument Labour as a future commodity and it gives us the 
 key to the explanation of the much-disputed “ Surplus Value ” 
 of the undertakers. It shows that, in the great combined 
 subsistence market of society, present goods must have an 
 agio, as legitimate consequence of the constant fact that 
 present goods are more useful, and are more desired, than 
 future goods, and that they are never present and offered in 
 unlimited abundance. This ngin ^ thus organically necessary, is 
 given directly on the loan market in the shape of interest, 
 while, on the labour market, it is given in the form of a 
 
 price for labour which remains unde r thp amonid ih.;. 
 
 future product of labour , and which, on that account, leaves 
 room for the accretion of a surplus value. 
 
 / The same principles as regulate the price of the productive 
 instrument. Labour, re gulate the^pricg of the originaI_pxodnctiv£ 
 instrument “ Nature. ” or those services rendered by the earth 
 which possess an economical character — generally called, from 
 their chief representative. Uses of Land {Bodennutzungen). If a 
 piece of land — after deducting the share of the complementary 
 productive goods which co-operate — will produce in one year 
 100 bushels of corn, or will rear in five years 100 cwts. of beef, 
 no one would be willing to pay the par value of 100 present 
 bushels of corn or 100 present cwts. of beef for the use of the 
 land, when these last-named amounts, employed in lengthening 
 the production process, or directly exchanged against future 
 goods on the loan market, or spent in buying labour, could 
 
 ^obtain more than the 100 future bushels or cwts. Thus TTrp.s 
 of Land, w hpn PYr.bang ed against pres ent goods,. ca nnot escape 
 a deduction in price any more than ca n th e productive good 
 Labon r, 
 
 And, finally, on e xactly similar grounds the v ery same i§ 
 prip.p nf TTitp.rmerha.t p. Prod nets. Concrete capital 
 
 there is so great a deficiency of grain that, after the weeding out which has 
 resulted from the war of competition, only a very small part of the demand 
 finds, economically, admittance to the scanty stocks. 
 
CHAP. VI THE GENERAL SUBSISTENCE MARKET 
 
 337 
 
 generally — raw materials, tools, and so on — is bought and sol4 
 at a price w]n'ch_r eTTia.ins under the amount of the fo tuxn. 
 pr oduct resulti^ froin jii. It would be a very easy matter to 
 prove this point by point, as we did with the price of labour, 
 but the case of intermediate products is so closely allied that 
 it seems to me quite unnecessary. 
 
 Speaking generally, the importance of the demonstration 
 we have just completed does not consist in its proving that 
 productive instruments are bought at a price which remains 
 under the price of their future product, for this is an old and 
 familiar fact taught not only by daily experience but by the 
 theory of the most diverging schools. The really important 
 result of our investigations is, that this well-known fact hag 
 been shown to be the necessary outcome of the same causes as 
 
 oive present goods the superiority in value over future goods . 
 
 A few chapters back I assented to one feature of the Socialist*^ 
 interest theory — that which explains surplus value from the low 
 price at which productive powers are purchased I may now 
 add wherein the theory is wrong. It is wrong, first, in ex- 
 plaining int erest by th e cheap purchase of lahour only . Interest 
 is got as much by the cheap purchase of uses ot land. 
 Quantitatively, of course, the profit from buying labour bulks 
 much more largely in importance. The profit from the 
 “ cheap ” purchase of intermediate products need not be 
 mentioned here ; it is explained on the same principles as 
 the profit from the purchase of the original productive powers. 
 
 Second-, as I have already said on p. 301. the purchase is not 
 so cheap as it seems to be . because the object of purchase is 
 measured in (undervalued) future goods, while the price is 
 measured in (full- valued) present goods. 
 
 And, finally, the fact that the price of labour is relatively 
 
 low. -is not the naked result of an eyp]m'ta.tinn in which want 
 forces the labourers to acquiesce. To som,e extent, although, 
 probably, to a less extent, the same would be the case without 
 any compulsion, if wealth were divided almost equally among 
 all. To prove this let us recur for a moment to the considera- 
 tion of those primitive circumstances which I hurried over as 
 not immediately appropriate to modem economy.^ Suppose a 
 society where all are owners of wealth, and all independent 
 ' See above, pp. 316, 317. 
 
 Z 
 
338 THE PROFIT OF CAPITALIST UNDERTAKING bk. vi 
 
 producers. Their labour, embodied in, say, a two years’ process, 
 is moderatively productive. Suppose that, in this society — 
 which is not a poor one — a certain producer possesses means 
 enough to make it possible for him, either to maintain himself 
 for six years, or to maintain himself and one worker for three 
 years. The product of a year’s labour, we shall suppose, is as 
 follows: — in a two years’ production period £52 (at 20s. per 
 week), in a three years’ process £60, in a six years’, £65.^ If 
 this man employs his wealth in lengthening the period of his 
 production without employing an assistant, he obtains by his 
 
 six years’ laWir 6 x 65=::£390. If he employs an assistant, 
 
 and works along with him in a three years’ proeess, he reaps 
 from his own labour in six years 6 x 60 = £360, while the 
 same amount is produced by the labour of his employ^. How 
 much can he pav this employe in wages ? 
 
 Obviously it is quite impossible to give him the full £360 
 (that is £60 per year) in wage, for this would be to inflict 
 positive injury on himself. Working by himself he would 
 have obtained in six years £390 ; by employing another he 
 gets only £360. To avoid loss he must, therefore, keep back 
 of the product of the employ^ at le ast £30. and, thus _he_ will 
 be able to pay him a t mo.st £330. or £55 per .ye^i. If he 
 does so, the whole advantage of the business is, obviously, still 
 on the side of the labourer. The undertaker gains nothing, 
 ■•'out the labourer gains, inasmuch as he now earns £55 
 instead of the £52, which is aU he could have earned as an 
 independent undertaker with a two years’ process. In these 
 cireumstanees the idea of exploitation is out of the question : 
 so is the idea of a forced agreement : and still the wage, 
 although stretched in favour of the labourer to the extremeSt 
 limit of the economieally possible, remains under the full 
 amount of his future product. Surely this is a clear enoug h 
 proof that there i s some other reason for the “ ch eap)-!!, buying 
 of labour than compulsion and exploitation! 
 
 * 1 assume that the figures of the return in a six years’ period are a little, but 
 not very much higher than those in a three years’, in harmony with the experi- 
 ence, so often alluded to, that g radu al extension of the pro duction period tend^ 
 to always d ecreasing surplus returns. 
 
CHAPTEK VII 
 
 INTEREST FROM DURABLE GOODS 
 
 Material goods are of use to mankind through the action of 
 the natural powers that reside in them, or, as I have expressed 
 it in another place, through the rendering of their material 
 services. On the nature and importance of these material 
 services I have said enough in my former work,^ and I shall 
 repeat only a few considerations which seem necessary to 
 connect what was then said with the subject now before us. 
 
 M^Tiy gnndfi ciT-Q gr' pn-ngfli.nfpfl tp.ch u i rally as to he capable 
 
 of rendering one single service , and in that service to exhaust 
 the whole of their useful content. These are what we call 
 Pprishahlp. goods. In them the good and the service coincide. 
 Many other goods, again, are able to render several successive 
 services. We call these Durable goods : tools, dwellings, 
 clothes, land are instances of such. Here the single service 
 forms a smaller economical unit clearly distmguished from 
 the good itself, and is capable of obtaining a certain economical 
 independence. To afford a single and limited act of satis- 
 faction, a single service may be detached from the useful 
 content of the good. Various services of the same good 
 may be independently and differently disposed of Sinp-le_ 
 ser\~ices, or groups of services, may be indenendentlv trans - 
 ferred, gifted, or sold t o different people, as we see every day 
 in the famihar legal contracts of Letise and Hire. Such 
 services may obtain an independent price, and, as this of 
 course presupposes, an independent value.^ It is the value of^ 
 these material ser\ices that now claims our attputimi 
 
 ^ Capital arid Interest, p. 219. Also Rechte und Verhdltnisse, p. 57. 
 
 - Are Matfii Hal .Sprvippg thpma pIvRs “ Goods” ? — Many writers will have it so, 
 
340 
 
 INTEREST FROM DURABLE GOODS 
 
 BOOK VI 
 
 This value cannot be subject to any other laws than those 
 which regulate the value of g ood s in ge neral A service 
 obtains value exactly as a good does — that is, by the satisfac- 
 
 as Hermann {Staatsvnrthschaftliche Unters^ichungen, second edition, p. 109), or 
 Alenger {Gnindsatze, p. 132). Other re cp^^' like Sax {Grundlegung, 
 
 p. 209) and R. Meyer {Das Wesen des Einkommens, pp. 155, 168), emphatically 
 e xclude the services themselves from the . conception- of (Sax speaks 
 
 primarily of personal services, but what is true of them must logically be true 
 of material services. ) To my mind the matter appears to stand as follows. First 
 of all, the whole question is not one of scientific knowledge, but simply one of 
 terminology . And provided that the nature and the place of material services 
 in economics were really and properly recognised, in the end it would not much 
 matter whether the name Good was attached to them or not. Those authors 
 who refuse to recognise material services as goods appear to me, how'ever, to 
 have some notions that are not really and properly correct. Thus Meyer (pp. 
 156, 157, note 4) denies to material services the character of economic means, 
 and explains them rather as “satisfactions of want.” How the material service , 
 as I understand it. is a real mean towards the satisfaction of want, not that 
 
 satisfaction of want itself. It stands as independent intermediary between the 
 good from which it comes, and the satisfaction of want which it is intended to 
 cause but does not by any means always cause. If, e.g., I hire an oven for the 
 baking of bread — that is to say, buy its use or its material service — what kind of 
 thing is it I really have bought? Have I directly bought the satisfaction of 
 want, the allaying of hunger? — Certainly not. Or the oven itself? — No. Or, 
 perhaps, the bread that is to be made by the oven ? — Again, no. But what I 
 have bought is just one material service, or group of services, of the good called 
 Oven ; these services are means to the production of bread, and thus, beyond that, 
 to the satisfaction of one of the needs of subsistence. The material services are, 
 therefore, true and — according to the sense indicated in the text — independent 
 economical instruments and objects. — If now, with the view of settling the 
 terminological question, we. inqnire as to the position of th e material services 
 a mong the other eco-nomical instr ument, we seem to arrive at the following. 
 There can be no doubt as to the inventory of the causes of wellbeing, — the causes 
 which we summon to the satisfaction of our wants. Our wellbeing i.s f ur thered , 
 on - the one aide, bv versons who are useful to us (such as teachers, guardians, 
 clergymen, artists, workers, domestics, etc.), and, on the other side, by useful 
 things . And the nee of both comes to us through the exertion of their useful 
 powers, — that is, through useful services. In the sphere of material instruments 
 of wellbeing we treat both the things and their services as economical objects : in 
 the sphere of personal instruments of wellbeing, since the abolition of slavery, 
 we do not treat the useful persons themselves, but only their services, as 
 economical objects. Thus the scheme of our economical means of satisfaction 
 w'ould receive something like the following shape : 
 
 Economical Means of Satisfaction 
 
 (Useful Persons) Material Goods 
 
 Personal Services Material Services 
 
 And now it is a question of appropriate terminology to which of these categories 
 the name “Good” should be attached. P ersonally I believe that the science 
 has great need of one short expression which would embrace all kinds of means of 
 
CHAP. VII 
 
 THE GOOD AND ITS SERVICES 
 
 311 
 
 tion of some want being dependent npoii it — and the amount 
 of its value is measured by the importance of the dependent 
 want — that is, by the amount of the marginal utility which 
 may be obtained from a ser\dce of such kind and such extent. 
 
 Thus there is, naturally, an intimate relation between the 
 value possessed by the material good itself, and the value 
 possessed by its services. The nature of this relation scarcely 
 requires explanation ; — a material good obviously has the '^ 
 vahip. Rs- tba- snm of all its services. If a good is capable 
 of rendering ten services, and if the satisfaction of a certain 
 want depends on each of these services, it is obvious that what 
 depends on the possession of the good is the receiving of these 
 satisfactions, and, indeed, of all the ten satisfactions from 
 which the services get them value. 
 
 Katurally the case of perishable goods is the simnlesb 
 
 Here the value of the single service coincides purely and 
 simply with the value of the good itself. The value of the 
 service rendered me by a cartridge is identical with the value 
 of the cartridge. The case of durable goods is more compli- 
 cated. We have always to think of the value of a durable 
 ^ood as a compound amount ; as made up of the importance 
 of more or less numerous wants to which it ministers by its 
 successive services ; or — to put it another way — as made up 
 of the individual values of the services on which those satisfac- 
 tions depend. If a farmer is calculating the use value of a 
 threshing-machine with a view to buying it, he will take into 
 account the time the machine will last and the work it is 
 capable of doing, and will calculate from that how many 
 services it will render, and how much each service will be 
 worth to himd 
 
 satisfactioD., Now, since the word “good” is quite suitable for this purpose, and 
 has already long been used for this purpose, I see no reason why it should now 
 he deposed. Of course there is quite as strong a need to keep the material services 
 in their turn separate from the material goods which bear these services. But 
 this can he done, both simply and sufficiently, bv in.stituting the distinction, insid e 
 the universal conception of the “Good,” between “Material Goods” and “Material 
 
 Servi ces.” — Things like Eights, Kelations, Properties, would, for good reasons, 
 find no room even in the widened conception. 
 
 ^ The perception of the above is made very difficult bv the usual method of 
 valuation according to “Costs” which, naturally, is always directed to the unit 
 of goods as a whole (see my Reehte und Verhdltnisse, p. 64, note 1). The reader, 
 however, who has followed our conception of what the nature of the law of costs 
 
342 
 
 INTEREST FROM DURABLE GOODS 
 
 BOOK VI 
 
 In this, however, there may be another comphcation. If the 
 services of the durable good be exhausted in a short space of 
 time, the individual services, provided they are of the same 
 quality — which, for simplicity’s sake, we assume — are, as a 
 I'ule, equal in value, and the value of the material good itself 
 is obtained by multiplying the value of one service by the 
 number of services of which the good is capable. But in the 
 case of many durable goods, such as ships, machinery, furniture, 
 land, the services rendered extend over long periods, and the 
 result is that the later services r.a,nnnt. hpi rendered _nr at Ipast 
 cannot be rendered in a normal economic way, before a long 
 time_has_expired. 
 
 As crmseqnen c.e. the value of the more distant material 
 services suffers the same fate as the value of future goods.. A 
 
 material service, which, technically, is exactly the same as a 
 service of this year, but which cannot be rendered before next 
 year, is worth a httle less than this year’s service ; another 
 similar service, but obtainable only after two years, is, again, 
 a little less valuable, and so on ,* the value of the remritf) 
 services decreasing with the remoteness of the period at which 
 t hey can be rendered- Say that this year’s service is worth 
 100, then next year’s service — assuming a difference of 5% 
 per annum — is worth in to-day’s valuation only 95*23 ; the 
 third year’s service is worth only 90*70; the fourth year’s 
 service, 86*38 ; the fifth, sixth, seventh year’s services, respect- 
 ivelyj worth 82*27,78*35, 74*62 of present money. The value 
 of the durable good in this case is not found — b y. multiplying 
 the value of the current service by the total n u mber of servic es. 
 but is represente d by a smn nf services de ci eafiing in value. 
 If the current year’s use of a machine is worth 100, and the 
 machine is capable of doing work of equal quality for five years 
 
 is, and has, consequently, recognised that, even where goods seem to get their 
 value from their costs, the utility of the goods always stands in the background as 
 the true source of value, and that, jn any case, the “costs ” must always be in 
 harmony with the — independently established — marginal utility of the goods, will 
 not be misled by any appearance to the contrary. Even in the consideration, for 
 instance, of whether a durable good in general is worth its cost, and whether, 
 consequentljq we should produce or buy it, we must form an opinion to ourselves 
 as to its utUity, and I should he puzzled to know how this opinion is to be 
 formed if not on the basis of the value which the material services of the good — 
 singly and taken together — have for us. — On the whole question treated in the 
 text see also my Rechte und Verhdltnisse, pp. 61-68. 
 
CHAP. VII DISCOUNTING OF FUTURE SERVICES 
 
 343 
 
 more, the machine is not worth 6 x 100 = 600, hut 100 + 96'23 
 + 90-70 + 86-38 + 82-27 + 78-35 = 532-93.1 Now what 
 happens during the working life of this machine ? — In the first 
 j-ear of its use the owner realises the “ current ” service with 
 its value of 100. Naturally this ser-vdce, thus consumed or 
 rendered, comes off the value of the machine (which we may 
 call the “ hearer of the use ”), and the good suffers a loss of 
 value. Eiit this loss of value cannot lie quite so great as the 
 value of the ser-ydce rendered and deducted. It is partly com- 
 pensated hy the increased value of the services that still remain 
 embodied in the machine. That particular ser-vice which, at 
 the heginning of the year of use, figured as “ next year’s,” and 
 had a value of only 95-23 in present money, figures hy the 
 end of the year as “this year’s use”; it has advanced one year 
 nearer maturity and grown into the full present value of 100. 
 Shnilarly the former third year’s service has now become next 
 year’s, and its value has grown from 90-70 to 95-23 : the fourth, 
 fifth, and sixth year’s services have passed into the rank and 
 value of third, fourth, and fifth year’s services. Behind each 
 of these latter services there remains another service ready to 
 take its place, and entirely supply it. It is only the last, the 
 sixt L veaj’. S- service, that is not replaced bv any succeeding one.^ 
 And thus we find that the loss of value which the durable good 
 
 ^ TPiPtiP ar< > based Oil the assumption that the whole year’s utility is 
 
 obtained all at once, and, indeed, obtained in anticipation at the beginning of 
 the year ; e.g. by hiring the good at a year’s interest of 100 payable on each 
 1st January. If, on the other hand, the year’s use can only be had at the end 
 of the year, a valuation undertaken at the beginning of the year will show figures 
 not inconsiderably lower. , That is to say, on 1st January 1888, the present year’s 
 use which will be obtained only by 31st December, — that is, practically, a whole 
 year later, — will not be valued at the full 100, but at 95-23 only ; and again the 
 “next year’s use,” that obtainable 31st December 1889, — that is, practically, two 
 years later, — will be valued at 90-70, and so on. Now this shows, for the whole 
 good, a sum of value of 95 -23 + 90-70 + 86 -38 + 82 '27 + 78 -35 + 74 -62 = 507 -55. Jk 
 finally, the utility were always obtainable in the middle of the year, or, what 
 comes to the same thing, were to be spread equally over the whole year, the 
 figures would be — for a valuation taken on the 1st January — 97-56 + 92-85 + 38-38 
 + 84'12 + 80-07 + 76-21 = 519‘19. — That the figures should alter according as the 
 date of the valuation stands nearer or farther from the date of obtaining the 
 utility, is an entirely natural thing, and one quite familiar in financial life. 
 The value of pap£ r — which is just a “durable good” with annual uses — always 
 stands a little higher shortly before the interest or d ividend terms than some time 
 before. I may note that the above figures are taken as before from Spitzer’s 
 Tables, and are based on an interest rate of 5%. 
 
.344 
 
 INTEREST EROM DURABLE GOODS 
 
 BOOK VI 
 
 siiffipTR during the yp-ar’s iisp, turns ri-.it 
 
 initial value of the most remote service inherent in the goo^ . 
 This value, of course, is less than the value of the present 
 service, the service known as the “ current return ” : and 
 thus it happens again that, to the owner of the durable good- 
 something of the current ret urn always remains- -over L as net 
 profit or net interest , after deducting the loss of value which 
 the good suffers during its year of use (that loss of value 
 familiarly known as “ wear and tear ”). This “ something ” 
 amounts exactly to the cpstomary percentage of the total value 
 (the “ capital value ”) of the parent good, the bearer of the 
 utility — a coincidence which it is the easiest thing in the world' 
 to explain. For this “something” is got from the increasing 
 value of the total services of the goods as these services come 
 nearer to the present. ISJ'ow, naturally, each service increases 
 in value as it comes nearer the time of its realisation in the 
 same ratio as it was underestimated formerly by reason of its 
 remoteness : that is to say, it increases in va1ue _b y: the usual 
 nj a-rkel ^ percentage on its individual value . But since, as we 
 saw, the sum of the individual values of all the services inherent 
 in a good constitutes the value of that good, the increment of 
 value of all the services added together must be exactly equal 
 to the usual market percentage on the total value of the good. 
 
 To put all this into figures. At the beginning of the first 
 year of its use the good, as bearer of six annual services, was 
 worth in present value 100 + 95'23 + 90'70 + 86’38 + 82‘27 
 -1-7 8 ‘3 5; that is, 532'9_ ^ At the end of the first year, as 
 now capable of five annual services of the present value of 
 100 -H 95-23 + 90-70 + 86-38 -f 82-27, it is worth 45 4-58. 
 The loss in value is, therefore, 78-35, which is exactly the 
 same as the former most remote service was. But since the 
 sum received from the current years service — the value of 
 the ser-vice sold and now deducted — amounted to 100, there 
 remains a net gain of 21-65, which is exactly 5% of 43 2' 9 3^ 
 the sum which the good became worth immediately on deduc- 
 tion of the first service realised, as one might say, to account.^ 
 
 1 On the part return of 100, wliich was separated off from the good on the 
 first day of the year, the good naturally will no longer yield any interest. If, on 
 the other hand, the year’s utility is only obtainable at the end of the year, it 
 must naturally pay interest on the full initial value of the bearer of the utility, 
 as will be brought out somewhat more fully later on. 
 
CHAP. VII GROSS RETURN LESS WEAR AND TEAR 
 
 345 
 
 Similarly, in the second year’s use, the owner again realises 
 the service now become present and worth 100, This comes 
 off the value of the parent good. But the succeeding service, 
 which before had become worth 9 5 '2 3, now arrives at the fidl 
 value of 100: that succeeding it, becomes worth 9 5 '2 3, and so 
 on. Only the last service, that originally worth 8 2 ’2 7, finds 
 nothing to replace it. At the end of the second year’s use, 
 then, the gooff as capable of four remaining annual services of 
 the individualvalues of 100 + 95'23 + 90-70 + 86-38, i.s worth 
 372-31. As against the value of 454-58 which it had at the 
 beginning of the year, it has suffered a loss of value of 82-27 
 which is equal to the value of what was the last service ; and 
 as against the receipt of 100, it returns 17-53 net, the interest 
 on the somewhat reduced capital ^ that remains. And thus it 
 goes on from year to year, the gross return always remaining 
 the same (because by hypothesis the amounts of service remain 
 unchanged in technical quality), the quota for wear and tear 
 always increasin g (because the marginal service, that which 
 determines the loss of value, stands nearer to the present, and 
 so to the full present value), and the net interest always de- 
 p.rpa.m'ng (in correspondence with the decrease of the capital, 
 owing to wear and tear, on which interest has to be paid), till 
 finally the good has entirely given up its useful content and is, 
 as we say, consumed. 
 
 Put in general terms, then, we get the following very 
 simple explanation of the phenomenon of interest on durable 
 goods. The owner of a durable good can always realise ^ 
 the full (higher) value of the then present utility, and this 
 represents the “ gross return ” of the good, its “ gross interest.” 
 fie loses, on the other hand, on account of the steady 
 advance of the more remote services towards the presen t, onlY 
 the smaller value of the last service then inherent in the 
 good. This smaller value determines the amount of the 
 “ wear and tear,” afid thus there is always a difference between 
 g ross interest and the amount of wear and tear, which differ- 
 ence forms his net profit or net interest. Thg ^cause, then, to^ 
 t^jp.b np t interest owes its existe nce , is nothinq _-eh;ft— tha. Ti an 
 
 ^ Of 354-58, because again the 100 taken off at the beginning of the yeai— 
 which may independently obtain interest — need no longer obtain interest through 
 the good. 
 
346 
 
 INTEREST FROM DURABLE GOODS 
 
 BOOK VI 
 
 increase of value of the future services — services which were 
 previously of less value, but during the period of the good’s use 
 have pressed forward into or towards the present.^ 
 
 Thus our theory traces back the profit which durnble goods 
 
 yield their owner to the selfsame causes as explain interest on 
 lo ans and undertakers’ profit on production . I think I am 
 justified in claiming this as the peculiar merit of the theory, 
 and, at the same time, as a strong proof of its correctness. 
 For it was just this interest on durable goods {Nutzungsguter) 
 that formed the stone of stu mbliiig to all earlier interest 
 theories, and stood, as it were, a standing contradiction of them. 
 Supposing that the other kinds of interest could be explained 
 by the productivity of capital, obviously this was no explana.- 
 tion of the interest yielded by a durable co nsumption good 
 which produced nothing, such as a dwelling-house, household 
 furniture, a hired piano, the books of a lending library. Or, 
 if undertakers’ profit was traced, with more or less appearance 
 of justification, to an exploitation of the labourers, the ques- 
 tion remained : What labourers are _ex ploited by the ownen-oT 
 a house ? Suppose he has paid away the whole £2000, the 
 worth of his house, in wages to the labourers who built it, so 
 that in the origin of the house there is not a particle of profit 
 from exploitation : still, the house, year after year, yields him 
 £100 of interest on capital. Where shall we find the worker 
 from whom the £100 could have been taken either by fraud 
 or force ? 
 
 The “ Use theory ” appears, at first sigh t at least, better 
 
 ^ If the y ear’s service can be obta i ned only at the y e ar’s end, ths fig iirm of 
 the valuation, and with them the figures of the interest, will be altered, hut the 
 principle of the process, and, in particular, the reduction of value by the amount 
 of the then last service, remains unchanged. I shall put together in the follow- 
 ing tables the course of the value movement for one such case. The initial value 
 of a good which will last six years, and has an annual utility, obtainable at the 
 end of the year, of 100, is, as stated above (p. 343 in note), equal to 95‘23 -f 
 
 90-70 -f 86-38 + 82-27 -H 78-35 4- 74-62 
 Value on Value on 
 
 Tear. 1st Jan. 31st Deo. 
 
 507-55. 
 
 Gross 
 
 Int. 
 
 Wear and 
 Tear. 
 
 Net Int. 
 
 1888 
 
 507-55 
 
 432-93 
 
 100 
 
 74-62 
 
 25-38 
 
 1889 
 
 432-93 
 
 354-58 
 
 100 
 
 78-35 
 
 21-65 
 
 1890 
 
 354-58 
 
 272-31 
 
 100 
 
 82-27 
 
 17-73 
 
 1891 
 
 272-31 
 
 185-93 
 
 100 
 
 86-38 
 
 13-62 
 
 1892 
 
 185-93 
 
 95-23 
 
 100 
 
 90-70 
 
 9-30 
 
 1893 
 
 95-23 
 
 — 
 
 100 
 
 95-23 
 
 4-77 
 
CHAP. VII UNEXPLAINED BY OTHER THEORIES 
 
 347 
 
 able to acoount for this form of interest, since it borrows its 
 special foundation directly from the phenomenon of the durable 
 use of non-perishable goods.^ Ent-ne ither does it get beyond 
 t he mere semblance of an explanation . It gets entangled in 
 subtleties of a “ wider ” and a “ narrower ” use, of a “ gross ” 
 and a “ net ” utility, — terms, by the way, which may be quite 
 proper as convenient expressions to indicate certain pheno- 
 mena, but represent anything but clear and definite conceptions 
 — and leaves entirely unexplained the nature of the relations 
 existing between the value of the net and the value of the 
 gross use, between the value of the parent good and the 
 amount of its wear and tear. Whether net intp.rp..c!t is higb *-^ 
 bp.cH,iisp. the value of the capital is high, or whether capital 
 value is high because net interest is high ; whether the amount 
 of gross interest is cause or effect of the value of the other 
 tw'o amounts — on these questions we should seek in vain, 
 in the writings of Hermann, Knies, or Schaffle, for anything 
 approaching to clearness of inquiry and for anything like 
 a real explanation. To all thes'e questions our theory give s 
 one concise answ er. The value of material services (Gross 
 Use) forms the first link in the causal chain. The value of^ 
 the “ bearer of the use,” the parent good, is the sum of the 
 individual values of its material services. Wear and tear is a 
 result of the diminution of the services which still reside in 
 the good, and is, on account of the progression in time of the 
 later services, neither equal to the value of the material service 
 de tached during the year of use, nor yet corresponding to the 
 degree of physical wear and tear^ (which, if the good last six 
 
 ^ See Capital and Interest, p. 194, and particularly p. 233. 
 
 ^ ^ very Tif^tpwnrtliy which theory Up till uow has left entirely without 
 notice and entirely without explanation. I have already called attention 
 to it in my book Rechte und Verhdltnisse, p. 68, note 6. As to the actua l 
 Fact that the successive diminution of value, which a good suffers in the course of 
 its wear and tear, does not go parallel with the desfree of its physical wear and 
 t ear. ,b ut is slower at the beginning and quicker as time goes on, there can be no 
 doubt. It may be seen in its purest form, because there it is not confused through 
 subjective inexactnesses or caprice, in the rating of valuable paper which brings in 
 a fixed annual amount for a limited number of years. A bond, e.g., which assures 
 its owner the right of drawing ten years’ coupons of £1000, and possesses (on 
 a calculation of 5% compound interest) an initial course value of £7722 (Spitzer’s 
 Tables, p. 274), does not lose £772'2 for each of the ten years which make up 
 ^ts lifetime , although in each of these years it loses exactly one-tenth of its 
 content. In the first year it loses £614, in the second £645, in the third £677, 
 
348 
 
 INTEREST FROM DURABLE GOODS 
 
 BOOK VI 
 
 years, would amount yearly to one-sixth of the whole useful 
 content), but is equal only to the value of that service which 
 is the last, the most remote, at the time of calculation. And 
 it is this same progression in time which causes the increase 
 in value of the later services and from which comes a net gain, 
 the interest on capital. 
 
 The same considerations that have elucidated the cause of 
 interest from durable goods throw a strong light on anothe r 
 ])henomenon, equally familiar and equally misunde r stood. — ^that 
 of Capitalisation . It is a well-known circumstance that, to 
 such goods as yield us a more or less permanent return, we 
 ascribe a certain “ capital value ” in consideration of this 
 return. We estimate them as equal to a money capital which, 
 at the ruling rate of interest in the particular country, would 
 yield a similar amount of return for the same period. Thus a 
 house which returns £500 a year, we value at £10,000 if the 
 usual rate of interest is 5^, or at £12,500 if the rate is 
 4^ ; or we value a machine wliich, for six years, throws off 
 annually a gross amount of £100 and certain net decreasing 
 amounts, at something over £500. 
 
 Why do we attach just this value to them ? The com- 
 mon explanation is ; Because these goods yield a certain net 
 return we must hold them equal in value to a sum of money 
 which yields just the same net retxirn. This, however, is 
 incorrect, or rather it is not an explanation at aU but a 
 reasoning in a circle. The existence of a net return is not the 
 primary fact, which can be given as cause of the parent good 
 having a definite value, but, conversely, a definite value must 
 already be put on the good if this net return as such is to 
 appear . If, in our example, the machine, which in six years 
 returns in all £600, had been valued at £600, its whole 
 return evidently would have been absorbed by the “ wear and 
 
 and .so on successively £710, £747, £783, £823, £864, £907, and, finally, in the 
 tenth year, £952, the sum it was still worth at the beginning of this latter year. 
 But in all other kinds of durable goods the same course of wear and tear may be 
 observed with sufficient accuracy, although, for obvious reasons, we seldom make 
 so exact and mathematical a calculation. Later on I shall have another occasion 
 to mention cases of this kind. Now in all the literature known to me I have 
 found no attempt to give an explanation of this fact. — which is certainly notable 
 enough to deserve explanation. Indeed, such an explanation is simpl}' not to be 
 got from the machinery of previous theories, particularly the “Use theory,” while 
 it offers itself unsolicited on the lines of my theory. 
 
CHAP. VII 
 
 CAPITALISA TION 
 
 349 
 
 tear,” and there would have been nothing left over as net 
 return. It is simply because it was valued at less, at some - 
 thing only a little over £500, that there remains a net interes t 
 after deducting the quota for wear and tear. And it is exactly 
 the same, as I shall show farther on in another connection, as 
 regards the return and capital value of houses, lands, etc. 
 
 The only correct conception, and the only conception which 
 really gives an explanation of the phenomenon, is the one now 
 stated. The true primary fact is the lower vabie of fntnfo 
 goods and future services : next we have the parent good, as 
 capable of containing future services, estimated at a less 
 amount than the total value which the services successively 
 given off will represent as they are given off : and finally, as 
 consequence, comes the fact that the capitahsed sum is le.ss 
 than the sum of the amounts realised.- J3y-the_services.JiL the 
 course of time, and that there is a net surplus from the current 
 return. That, on the one hand, the value of the bearer of 
 the use, and, on the other, its net return, are represented 
 by such figures that the former may be held equivalent to a 
 money capital yielding, at the current rate of interest, exactly 
 the same net return, is a coincidence which I have already 
 explained.^ And, in virtue of this coincidence, it is. finally, as 
 intelligible as it is justifiable thaT , in practical economic life 
 which finds and adopts, as facts ready to its hand, the things 
 which we try to explain, the net return of gnndg . should be 
 taken as foundation for acts of valuation. It is an abbreviated 
 method which, practically, is quite appropriate, although it 
 turns the relation of cause and effect exactly the other way.^ 
 
 1 See above, p. 343. 
 
 ^ In Menger^ most valuable contribution Zur Tlieorie des Kapitales (Conrad’s 
 Jahrbilcher, vol. xvii. p. 47), which appeared while this was passing through 
 the press, the author likewise has urged against the Use theory that, in its 
 conceution of canitalisation. it has not solved its problems, but only gone 
 
 round about them. 
 
CHAPTEE VIII 
 
 INTEREST FROM DURABLE GOODS {continued) 
 
 To proceed. The phenomenon of interest-, jnst explained is 
 characterist i c of alL dumMe-goads^ousiimptiQn, arKL^raductioii 
 <yoods alike. But, in the case of production goods, there comes 
 in one circumstance the influence of which has to be investi- 
 j/gated. In goods which are to serve as instruments of production, 
 not only are the future services remote from the present, but 
 both the present and the future services are remote from that 
 
 economical goal which is first to Jbe reached througli produ ction. 
 The final destination from which, according to principles with 
 which we are now familiar, they derive their value, is the 
 product obtainable from them^ in the future. But from the 
 attainment of this goal the current service — even that service 
 in the very act of realisation — is distant by the whole produ c- 
 t ion period ^ which must intervene between its incorporation 
 in the process and the turning out of the finished product. If 
 this period, for instance, amounts to two years, the current 
 service is two years away from attaining its goal, and at the 
 same time from attaining its full present value : the next year’s 
 service is three years away, the next again four years, and so 
 on ; while, in the case of durable consumption goods, ever y 
 ser vice attains its full present value in the year, or in t he 
 ig •’-endp^p'^ Now this has a twofold result : first, 
 the services of productive goods undergo a greater reduction as 
 compared with their full final value, and, second, the growth 
 of their value lasts longer on that account. After tliey are 
 produced and set to work, they bear interest during the whole 
 
 ^ After deducting the share of the co-operating complementary factors. 
 
CH. VIII WHEN BOTH DURABLE AND PRODUCTIVE 351 
 
 period of the production process on which they enter ; only, 
 in practice, this interest is ascribed, not to the durable good; 
 that forms an integral part of the “ outlay ” — from which, 
 indeed, it is now separated — hut to the “ business ” or “ circu - 
 lating” capital into which it is transferred at the moment of 
 its separation. 
 
 To illustrate this. A durable consumption good which 
 lasts six years, and yields at the end of each year a use ^ of 
 100, is worth, as we have seen, 95’23 + 90'70 + 86‘38 + 82‘27 
 + 78’3 5 + 7 4‘6 2 -- 507‘55. ^ A durable productive good, on 
 the other hand, which lasts six years, and w hose year’s use 
 affords a fina l utihty of 100 after a further production peria d 
 of two years, has the following value . Its “current” year’s 
 use, which is first obtained by the end of the year, and then 
 brings in the amount of 100 after two years more (that is, 
 after three years in all), is only worth in present valuation 
 86’38. Its next year’s use, which wiU bring 100 in four 
 years, is to-day worth 82'27. Similarly the third year’s use 
 has a present value of 78'35, the fourth year’s, a value of 7 4’62, 
 the fifth, a value of 71 '06, and, finally, the sixth has a value 
 of 67‘68. The whole productive good, accordingly, has a value 
 of 460-36. 
 
 At the end of the first year’s use the first service is 
 detached ; this, meanwhile, has come nearer to its final goal 
 by a year, and accordingly advances in value from 8 6 '3 8 to 
 90’70 ; the other services foUow suit in the usual way. Thus 
 the good, as still bearer of five prospective services of the 
 individual values of 86-38 82-27 -|- 78'35 -|- 74-62-l-7l‘06, 
 is now worth in all 392-68. It has therefore lost 67-68, 
 in the cnnrsp. nf the year’s use, and, as against the return o f 
 90-70 represented by the service detached, has borne 23-02 
 of interest — exactly 5*^ on the initial value of 460-36. So 
 
 y 
 
 ^ Here I must assume that the utility is pot obtainsd in advance, but a t 
 the expiry of the particular p eriod, because in the case of durable productive 
 goods employed in a personal undertaking — with which the comparison is to be 
 made — there is, in the nature of things, no anticipative use. The utility , e.g., 
 whic h an agricultura l implement afford s in f ar ming , cannot possibly be obtained 
 on 1st January, for the whole year in advance : obviously it can be realise d only 
 at the end of the year, in the harvest . 
 
 “ P. 343, note 1. At a different interest rate, of course, the figures would be 
 different. 
 
352 
 
 INTEREST FROM DURABLE GOODS 
 
 BOOK VI 
 
 far everything runs as before. But the service which was 
 separated off, with the value of 90-70, neither remains in its 
 former shape nor retains its former value. It is detached 
 f rom the fixed capital, and has passed over into the circn ia.tjng 
 capital , where it remains incorporated in some or other of 
 the intermediate products, say, in the yarn spun by the 
 machines. In this new shape it is the object of the further 
 production process, and is by it brought step by step nearer 
 to fuU maturity, and so to its future value of 100. This 
 it attains in the following — the second — year of use. 
 
 At the end of the second year’s use again, the service, 
 which is now the current one, is detached from the parent 
 good with a value of 90-70 : the parent good, now valued at 
 321-62, has lost 71-06, and, as against the return of 90-70, 
 haa borne 19-64 as interest. But during this same year, the 
 service detached in the -previous yea r and incorporated in the 
 circulating capital, has risen from 90-70 to 9.6-23 in value 
 and BaarB guntlipr of intere.st. And, again, in the same 
 
 way at the end of the third year of use, a service of the then 
 value of 90-70 is detached, by which the parent good loses 
 74-62 in value, and interest gains 16-08. But since 
 simultaneously the service detached two years before, and 
 incorporated in the circulating capital, increases from 95-23 
 to its full value of 100, and that detached one year before, 
 from 90-70 to 95-23, there is a further gain in interest of 
 4-77 + 4-53; that is, of 9-30. 
 
 ^ In this way the peculiar combination of circumstances in 
 durable productive goods edves occasion to a twofold interest 
 relatiqp . Tha ^services already detached bear intere§t L-aitgi: 
 
 integral part, of the circulating capital ; 
 that is, their claim or title to interest is based on their trans- 
 formation into finished and final product. The services stil l 
 contained in the good bear interest after the manner, nf. 
 
 durable consumption goods ; that is, their claim is based 
 simply on their approximation to the present. But, of these 
 two elements of the interest return, only the second is formally 
 ascribed to the parent good from which it springs ; for it the 
 calculation is concluded at the moment in which the individual 
 service is detached, and with the value which it then has. 
 What further happens with it is ascribed to the circulating 
 
CH. VIII THE CASE OF VERY DURABLE GOODS 
 
 353 
 
 capital into which it passes at the moment of its separation.’ 
 And thus we come to the final result : All inte rpst home by 
 durable uroductive goods is borne by them simply in the u' 
 character of diirable goods^ while their second property, that 
 of being productive, only comes into play in the iuterpst borne' 
 bv the sp.rvir.R.g airp.arly dp.tA o hed and transferred to circulati 
 ing capital In this lies the complete explanation of a 
 developed interest phenomenon, which I before suggested but 
 had to delay going fully into until now.^ 
 
 There is still, however, another highly important explana- 
 tion we may gather in passing. 
 
 In .goods capable of only a moderate number of services 
 the contraction of value, even in the case of the last ser\dces.^ 
 
 is but small. The result of this is, on the one hand, that the 
 value of the parent good is only a little behind the gradually 
 developing value of its collective services — in our first example 
 the value of the machine lasting six years was not quite 600, 
 but still it was over 500 ; and, on the other hand, that the 
 amount of wear and tear, even in the first year,^ is relatively 
 high, and almost equal to the entire value of the current 
 service — in our illustration the value of the current service 
 was 100, the value of the last service, that which decides the 
 wear and tear, about 78. 
 
 In goods, again, capable of a very long series of services, 
 
 both the value of the parent good and the am ount of wear 
 and tear fall proportionately . A good capable of~relldenng 
 ser^dees of the annual value of 100 for 100 years, is very far 
 from being valued at lOOx 100 = 10, 000. At most (where 
 the usual under-valuation of future goods is at the rate of 
 
 ^ This is most clearly shown when the intermediate product made by the 
 assistance of the durable good — e.g. the cotton yarn spun by a machine — is 
 immediately sold to another undertaker by whom the process is completed, and 
 the yarn made into thread or cloth. All increment of value which the intpj - 
 mediate product, the yarn, th us obtains, is now natura lly put tn t.he-acconnt of 
 this particular intermediate product- (or the money capital for which it is sold) 
 and not to that of the parent durable good. 
 
 ^ See above, p. 305. 
 
 ® In the later years the “wear and tear” increases progressively, because the 
 last service, which is not replaceable by any one coming after it, gets always 
 nearer to the present, and becomes, therefore, always higher in value. See above, 
 particularly the table on, p. 346, note 1. 
 
 2 A 
 
354 
 
 INTEREST FROM DURABLE GOODS 
 
 BOOK VI 
 
 5%) it is worth 2000 ; and the loss of value in the course of 
 t he first year’s use — although a service worth 100 has been 
 consumed and detached from the use-content of the good — 
 is. not 100 but '76, that and no more being the present value 
 (at a discount rate of 5% per annum) of a sum of 100 falling- 
 due in 1 0 0 years ! ^ 
 
 ly Finally, if a good is capable of rendering not onl y a gre Hf 
 many, but, practically, an infinite number of services, the 
 phenomenon just mentioned is seen in full development : the 
 present value of the parent good is infinitely less than the 
 successively increasing value of its services. A piece of land, 
 for instance, which bears £100 each year for an infinite series 
 of years, is worth, not 100 times infinity, not £100,000, not 
 even £10,000, but only some £2000, and its loss of value 
 sinks to zero : the niece, of land- whosp. annual current ser-vice 
 i s worth £100. yields the whole £100 net . The law remains 
 just as before ; but the very remote services of the second, 
 third, tenth century, have so exceedingly small a value in the 
 present that they can add almost nothing to the present value 
 of the land, and the last service, the one which should decide 
 the amount of depreciation, as infinitely far away, has n o 
 present value at all. 
 
 l/" This is the ultimate reason w hy rent oL lan d appears as 
 a net income , and here first is the, solution of the problem 
 of rent traced to its real issue . The old rent theory gave 
 only a preliminary and partial answer, and, strangely enough, 
 had not the slightest suspicion that its tentative solutions 
 had never come near the heart of the problem. All preced- 
 ing attempts, from Eicardo downwards, exhausted themselves 
 in more or less successfully pointing out that the annual 
 uses of land have an economic value, or yield an economic 
 return, and why they do so. But the yield of suck services 
 is in itself, first of all, a gross return. That the owner gets, 
 a net return, a net incom e, has nothin g t o do.'with-fr uitful- 
 ness, situation, kind of groun d, or anv such thing, bu t simply 
 with the lower value put upon future goods, and the deter- 
 mination of the present value of the land in conformity with 
 that. Suppose that a quarry, after deduction of all other 
 recognised costs, produced for a hundred years a — what we 
 1 Spitzer’s Tables, p. 121. 
 
CH. viii LAND RENT A SPECIAL CASE OF THIS 
 
 355 
 
 may call — net annual return of £100; and suppose that 
 future services were not less valued than present ; the value^ 
 of the quarry would be the full amount, 100 x 100. The 
 quarry -owner would draw an annual income of £100, but 
 not a shilling of that would he “ rent ” in the present sense 
 of that term, that is to say, a net income. The whole of 
 it would be a protracted consumption of the parent wealth of 
 £10,000 . And the case of all other lands is different from 
 that of the quarry, not in kind, but only in degree. If a field 
 is considered capable of producing crop for 1000 years — or 
 2000 years if one should prefer it, for literal infinity in 
 human affairs is out of court — and if the future crops are to 
 be valued as highly as the present ones, the valuation put 
 upon such a field wiU reach an exorbitant height, viz. 
 £100,000 or £200,000, and the yearly rent of £100 will pre- 
 sent the character of a breaking-off of the parent stem of wealth 
 — a very gradual destruction of the stem, but still a destruc- 
 tion, not a net income. Landowners would be lords of a 
 giant stem or stock of wealth, but they would have no net 
 income. 
 
 The theoretical explanation of rent from land, then, coin- 
 cides ultimately with the explanation of interest obtained 
 from durable concrete capital, and land rent is n ntbiTig a, 
 special c.ase of interest obtained from durable goods. _ That the 
 two explanations do not entirely coincide, and that, on the 
 contrary, the current rent theories are substantially so very 
 different from the interest theories, is only traceable to the 
 fact that, in the course of the explanation of rent, an inter^ 
 calation had to be made which did not require to be Tnade in 
 the case-of interest on durable capital : and that, at the same 
 time, from a faulty conception of the rent problem, economists 
 exhausted the whole content of the rent theories in making 
 this special intercalation. I n the case of all products of 
 hliQiui and, consequently, in all goods that constitute 
 capital, it needs no explanation that they and their materia l 
 services have economic, value : were it not so they would not 
 
 be produced . I n the case of the services nf lan d on tliP 
 other hand, this is not self-evident . And, therefore, the 
 economist must first exert himself to show why and under 
 what circumstances the use of land receives a value and a 
 
356 
 
 INTEREST FROM DURABLE GOODS 
 
 BOOK VI 
 
 price. With a correct value theory, a few strokes of a pen 
 will supply this proof ; — by means of the doctrines of marginal 
 utility and of complementary goods. Wanting the guidance 
 of such a theory, and entangled in the fetters of the labour 
 value theory, economis.ts gave it a shape which was un- 
 necessarily circumstantial and clumsy, and was, at the same 
 time, not very satisfactory in principle. Of Ricardo’s rent 
 theory, which in essence has remained the ruling one up till 
 the present day — the theories of his opponents Carey and 
 Eodbertus being quite exploded — it must be said that it 
 c ontains an abundance of truth put in a form u la essentially. 
 It is a brilliant piece of casuistry, which is out of 
 connection with the central fire of correct principles ; it 
 lights up a bit of the road, but leaves the rest in obscurity 
 and error. Hence the peculiar fate of the Eicardian theory. 
 It does not quite satisfy anybod /. Even its friends are fain to 
 discover a number of weak points in it, and its most universal 
 propositions are, for the most part, its weakest. But there 
 remains in it an indestructible core of truth , which lives on 
 under the most varied metamorphoses, and, even to-day, con- 
 stitutes the better part of its substance.^ 
 
 But how far does the Eicardian, or any other rent theory, 
 take us, even if it were correct in every point where it is 
 disputable ? It takes us no further than we get in the question 
 of interest, when it has been shown that a threshing-machin e, 
 after deducting all other costs, yields an annual gross interest. 
 
 and why it does so^ Where Eicardo ends his rent theory, 
 there in truth ends the intercalation, which, because of its 
 obviousness, did not require to be made in the case of mov- 
 able capital. But it is just then that the chief question of 
 the problem suggests itself : why there is a net interest 
 wi thin that, gross interest which is yielded by the year’s 
 nse or service of the threshing-machine or the field, after 
 deduction of all other costs. And to this question — which 
 the rent theory up till now has entirely omitted to put — 
 no answer can be given, either as regards the field or the 
 
 ^ On the relation of Ricardo’s rent theory to the modern value theory, see 
 
 Dr ,T'.moc; Ponar’s aiiggestive re maife in an article entitled “The Austrian 
 
 economists and their view of value” in the Quarterly Journal qf Economics, 
 October 1888. 
 
CH. viii FAILURE OF RICARDO’S RENT THEORY 
 
 357 
 
 machine, but to point to the under -valuation of future goods 
 and future ser'sdcesd 
 
 ^ Manifestly the fact that Rent of Land and Rent of Capital have one common 
 final cause is not a sufficient reason for abolishing every distinction between 
 them. Between land and capital there are so many important diflTerences, 
 both theoretical and practical, that, notwithstanding the common feature just 
 described, we are justified in adhering to the decision mafip. in a fnrmer c hapter 
 to keep land out of the conception of capital . — Quite lately Carl Menger, in 
 Conrad’s Jahrhiicher, vol. xvii. p. 48, has ably put forward the necessity of a 
 comprehensive “ universal theory of the return to wealth. ” 1 trust that, in 
 the contents of the present chapter, he will see an earnest attempt to develop 
 such a theory. 
 
CHAPTEE IX 
 
 RESULTS 
 
 ^ We have traced all kinds and mp.f-.hnrla nf angninripf interest 
 tn one identical sourc e — the increasing value of future goods 
 as they ripen into present goods. Thus it is with the profit 
 of the undertakers, who transform labour — the future good 
 which they purchase — into products for consumption. Thus 
 it is with landlords, property-owners, and owners of durable 
 goods generally, who allow the later services of the goods they 
 possess to gradually mature, and pluck them when they have 
 ripened into full value. Thus. finaUv. it is with the loan. 
 Even here it is not tke case, as one might easily think 
 at first sight, that the enrichment of the capitalist comes 
 from the creditor receiving more articles than he gives — 
 for at first, indeed, the articles concerned are less in value — 
 but from the fact that the loaned objects, at first lower in 
 value, graduaUv increase in value, and on the moment of 
 fruition enter into their complete higher present value. 
 
 /' What, then, are the capitalists as regards the community ? 
 
 V — I n a word, they are mer ch ants w ho have prese nt goods , tg 
 sell They are the fortunate possessors of a stock of goods 
 which they do not require for the personal needs of the 
 moment. They exchange this stock, therefore, into future goods 
 of some form or another, and allow these to ripen in their 
 hands again into present goods possessing full value. Many 
 capitalists make this exchange once for all. One who bui lds 
 a house with his capital, or buys a piece of land, or acquires 
 a bond, or gives a loan at interest for fifty years, exchanges 
 his present goods, wholly or in part, for goods or services 
 which belong to a remote period of time, and consequently 
 
CH. IX CAPITALISTS MERCHANTS IN PRESENT GOODS 359 
 
 creates, as it were at a blow, the opportunity or condition of 
 a permanent increment of value, and an income called interest 
 which wiU last over this long period. One, again, who diST 
 cou nts a three months’ bill, or enters on a one year’s productioin 
 n mst frequeTitlv repeat the exchanged In three months or in 
 one year the future goods thus acquired become full-valued 
 present goods. With these present goods the business begins 
 over again ; new bills are bought, new raw material, new 
 labour ; these in their turn ripen into present goods, and so 
 on again and again. 
 
 0 O 
 
 Tn thpi rirp.mnstances, then, it is very easily explained wliv 
 capital bears an “ everlast ing ” intprp.|C!t We may dismiss any 
 idea of an inexhaustible “ productive power ” in capital, assur- 
 ing it eternal fruitfulness, — any idea of an eternal “Use” 
 given off, year out year in, to the end of time by a good perhaps 
 long perished.^ It is because the stock of present goods 
 is always too lo;g that the conjuncture for their exchange 
 against future goods is always favourable. And it is because 
 time always stretches forward that the prudently purchased 
 future commodity steadily becomes a present commodity, grows 
 accordingly into the full value of the present, and permits its 
 owner again and again to utihse the always favourable con- 
 juncture. 
 
 1 do not see that there is anything objectionable in tbi.g. 
 
 For natural reasons, present goods are certainly more valuable 
 
 1 The incQi rsftnpss of a tliporv is shown in its not being able to give a satis.- 
 
 factory solution for all given cases. I have already had frequent occasion to 
 
 point to cases which could not be satisfactorily explained by means of the — to 
 my mind — incorrect “Use theory” (see above, pp. 297, 347). Here I have to 
 add another instance ; — the bu ying of a perpetual interest, e.a. Consols, where the 
 original debt can neither be called up nor paid back. In these annual payments 
 the Use theory would see the price for a “ use of capital ” perpetually transferred. 
 But what has happened with the capital stock 1 It has of course been transferred. 
 B ut it is not simply lent, for it will never be paid back . Nor, in the view oi the 
 Use theorists, can it be transferred against payment, for the annual interest is 
 the price of the “ use,” and there is nothing paid beyond that. Nor, finally, 
 is it transferred without payment, — presented as a gift : the rentiers, the repre- 
 sentatives of those who made the loan, have no intention of making any such 
 present, and tlie government which received the loan certainly does not feci 
 that it has received a gift. — Now what the Use theory could not explain, or 
 explained only in a most artificial way, is explained perfectly simply by our 
 theory : it is just an exchange of present goods (the original ca]ntal') against 
 series of future .sums of goods (the annual interest jiayments).. 
 
360 
 
 RESULTS 
 
 BOOK VI 
 
 j commodities than future goods. Ij L the owner of the more 
 ' valuable commodity exchange it for a greater qua n tity of tho. 
 less, valuable, there is nothing more objectio na ble in this than 
 that the owner of wheat should exchange a peck of wheat for 
 more than a peck of oats or barley, or that a holder of gold 
 should exchange a pound of gold for more than a pound of iron 
 or copper. For the owner not to realise the higher value of his 
 commodity would be an act of unselfishness and charity which 
 could not possibly be translated into a general duty, and as 
 a fact would not be so translated in regard to any other 
 commodity. 
 
 In the essence of interest, th en .-Acre is -nothing— wbicfi 
 should make it appear in itself unreasonable o r unjust. But 
 the essence of an institution is one thing, and the circum- 
 stances which may accidentally accompany it in its practical 
 working out are another. That the community has a power of 
 choosing representatives is good ; but if at every election there 
 are broken heads, and pot-house agitation and brute force 
 instead of patriotic deliberation decide the majority, it is not 
 good. And, like every other human institution, interest is 
 exposed to the danger of exaggeration, degeneration, abusf? ; 
 and, perhaps, to a greater extent than most institutions. 
 
 / It is undeniable that, in this exchange of present com- 
 modities against future, the circumstances are of such a nature 
 as to threaten the poor with exploitation of monopolists. 
 Present goods are absolutely needed by everybody if people 
 are to live. He who has not got them must try to obtain 
 them at any price. To produce them on his own account 
 is proscribed the poor man by circumstances ; the only kind 
 of production he could take up would be one yielding an 
 immediate return, and this is not only uuremunerative but 
 almost impracticable under modern economic conditions. He 
 must, then, buy his present goods from those who have them, 
 either in the form of a loan, or, more usually, by selling his 
 labour. But in this ba.rgain he is doubly handic ,a,pped ; first, 
 by the position of compulsion under which h e finds h imself, 
 and, second, by the numerical relation existing between buyers 
 and sellers of present goods. The capitalists who have pre- 
 sent goods for sale are relatively few ; the proletarians who 
 must buy them are innumerable. In the market for present 
 
CH. IX ESSENCE OF INTEREST NOT EXPLOITATION 361 
 
 goods, then, a majority of buyers, who find themselves com- 
 pelled to buy, stands opposite a minority of sellers, and this 
 is a relation which obviously is profoundly favourable to the 
 sellers and unfavourable to the buyers. 
 
 Kow. of course, the circumstances unfavourable to buyers 
 
 may be corrected by active competition among sellers . The 
 fewer the sellers, the greater are the amounts of present goods 
 they have to dispose of To find purchasers for them all, 
 competition must bring down the price from extreme heights 
 to a moderate level that leaves no room for exploitation of 
 poor men.^ Fortunately, in actual life this is the rule, not 
 the exception. But, every now and then, something will 
 suspend the capitalists’ competition, and then those unfor- 
 tunates, whom fate has thrown on a local market ruled 
 by monopoly, are deli^"ered over to the discretion of the 
 adversary. Hence direct usury, of which the poor borrower 
 is only too often the victim : and hence the low wages forcibly 
 exploited from the workers — sometimes the workers of indi- 
 vidual factories, sometimes of individual branches of pro- 
 duction, sometimes — though happily not often, and only under 
 peculiarly unfavourable circumstances — of whole nations. 
 
 It is not my business to put excesses like these, where 
 there actually is exploitation, under the aegis of that favour- 
 able opinion I pronounced above as to the essence of interest. 
 But, on the other hand, I must say with all emphasis, that what 
 we might stigmatise as “ usury ” does not consist in the obtain - 
 ing of a gain out of the loan, or out of the buying of labour.*^ 
 but in the immoderate extent of that gain. If exchanges are 
 to take place between present and future commodities, the 
 existence of some gain is an entirely normal phenomenon ; is, 
 indeed, an economic necessity. Some gain or profit on capital 
 there would be if there were no compulsion on the poor, and 
 no monopolising of property ; and some gain there must be. 
 
 It is only the height of this gain where, in particular cases, 
 it reaches an excess, that is open to criticism, and, of course, 
 the very unequal conditions of wealth in our modern com- 
 munities bring us unpleasantly near the danger of exploitation 
 and of usurious rates of interest. 
 
 As little, again, will the unbiassed spectator deny that, in 
 * See below on the Rate of Interest. 
 
36-2 
 
 RESULTS 
 
 BOOK VI 
 
 the circumstauces accompanying tlie receipt of interest, it is 
 freqnently the case that one’s sense of fairness is offen ded by 
 the contrast between gnin ami flp.sp.rl-.^ Where capital has 
 once been obtained by personal exertion and ability no one 
 would grudge its owner the further profit he makes, without 
 exertion, by exchanging his hard-won present goods into future 
 goods. But often it is_ iiist the greatest fortune that., falls iatp 
 the lap of its owner without any personal desert on his part, 
 simply by the happy chance of a legal enactment giving him 
 the preference, and in this case also the lucrative exchange, of 
 present goods for future goods which steadily ripen into more 
 valuable present goods, is made without exertion and without 
 personal deserving. In all other branches of exchange clever 
 speculation is needed, timely seizing of opportunities, favourable 
 conjunctures, if a gain is to be made by the exchange. But 
 t he merchant of present goo ds finds _thft con junctu re always 
 favourable . He need only put out his hand to dispose of his 
 goods, with a profit, to any one among the thousands of eager 
 buyers, while, by his side, the poor labourer drags out a painful 
 existence of heavy toil, at a sacrifice of personal strength and 
 personal happiness. 
 
 But what is the conclusion from all this ? Surely that, 
 owing to accessory circumstances , interest may^ be associated 
 with a usurious exploitati on and with bad ocial conditions ; 
 not that, in its innermost essence, it is rotten. And the 
 logical conclusion is that the axe should be laid to the decayed 
 branches, and not to the sound stem. — just as it would be 
 foohsh to take away the right of self-representation instead of 
 simply putting down the riots at election time. But what if 
 the se abuses are so inseparably connected with interest that 
 they cannot be eradicated, or cannot be quite eradicat ed ? 
 Even then it is by no means certain that the institution 
 ^lould be abolished. Arrangements absolutely free from 
 drawback are never allotted to us in human affairs. Instead 
 of the absolute good, which is beyond reach, we must choos.e 
 wh at, on t he whole, is the relativ^bfisE where the balance, 
 between attainable advantage and the drawbacks that must 
 be taken into the bargain, is the most favourable possible for 
 us. Living in a great city has certainly many disadvantages ; 
 so has living in a small city ; and so has living in the country. 
 
CHAP. IX BALANCE IN FA FOUR OF INTEREST 
 
 36.3 
 
 But we must live somewhere ^ and so we make our choice of 
 the place where, after wise consideration of all the circum- 
 stances, the unavoidable evils seem to be most outweighed by 
 the advantages. And in the same way, before we abolish 
 interest as such, we must first draw out a balance-sheet to 
 show whether human wellbeing is better promoted in a society 
 which permits gain from capital and recognises it, or in one 
 which permits only income from labour. 
 
 In making this calculation it wiU n6t be overlooked that 
 the institution of interest has its manifold uses : particularly 
 as the prospect of interest induces saving and accumulation of 
 capital, and thus, by making possible the adoption of more 
 fruitful methods of production, becomes the cause of a more 
 abundant provision for the whole people. In this connection 
 the much-used and much-abused expression, “ Eeward of 
 Abstinence,” is in its proper place. The existence of interest 
 cannot be theoretically explained by it : one cannot hope in 
 using it to say anything about the essential nature of interest : 
 every one knows how much interest is simply pocketed without 
 any “abstinence” that deserves reward.^ But, just as interest 
 sometimes has its injurious accompaniments, so in its train it 
 brings others, fortunately, that are beneficent and useful ; and 
 to these it is due that interest , which has its origin in quite 
 different causes, acts, a.mong other things, as a wage an d as an. 
 inducement to save. I know very well that private saving 
 is not the only possible way to the accumulation of capital, and 
 that, even in the Socialist state, capital may be accumulated 
 and added to.'"^ But the fact remains that private accumula- 
 tion of capital is a proved fact, while socialist accumulation 
 is not ; — and there are, besides, some very serious a priori 
 doubts whether it can be. 
 
 Still it is neither my purpose nor my duty to inquire 
 what organisation of society on the whole is best, — the present 
 
 ^ I gladly embrace this opportunity to repair an omission in my Capital and 
 Interest. At the time when I published that work I unfortunately had not 
 made the acquaintance of Loria’s La Rendita Fondiari-a (Mailand, 1880). It con- 
 tains (pp. 610-624) an unusually spirited and subtle variation of the Abstinence 
 theory, of which I can only say that, if the Abstinence theory were tenable — 
 which, of course, I do not believe it to be — Tioria’s setting of it would be t he 
 first to gain recognition . 
 
 ^ See above, p. 114. 
 
364 
 
 RESULTS 
 
 BOOK VI 
 
 or the Socialist. I have only here to answer what comes up 
 for answer in an inquiry as to the nature and origin of interest. 
 And the answer here runs : There is no inherent blot in the 
 essential nature of interest Those, then, who demand its 
 abolition may base their demand on certain considerations of 
 expediency, but not, as the Socialists do at present, on the 
 assertion that this kind of income is essentially unjustifiable. 
 
 Js the abolition of interest, then, possible.? It may, I 
 think, not be unprofitable to many of my readers to follow 
 the fate of interest in the Socialist state. 
 
CHAPTEE X 
 
 INTEREST UNDER SOCIALISM 
 
 Let us i'map;me the Socialist stat.p. pe.rfftp tly rftaE'sp.d ; all 
 private property in land and capital aboEslied ; all instruments 
 of production vested in the hands of the community ; all 
 citizens working as labourers in the service of the common- 
 weal ; and the national product distributed to all according to 
 work done. How is it now with the action of those causes 
 which produced interest imder the individualist eccmomy ? 
 
 First of all, it must be made clear that the causes are still 
 there . There is always a natural f difference of value between 
 present and future goods ; and since under Socialism time does 
 not stand still, future goods gradually become present ones, 
 and bring a surplus value with them. The difference of value 
 between present goods and f uture, I sav. is always there . For 
 its peculiar causes continue to exist ; — the difference between'V 
 the circumstances of provision in present and future, the | 
 partial underestimate of the future which is characteristic of man, | 
 the uncertainty and shortness of life. In the Socialist state no 
 one will he allowed to be an undertaker on his own account, 
 and, of course, the consideration of the greater technical pro- 
 ductiveness of present goods employed as productive instruments 
 ceases to be a motive for individuals : all the more strongly 
 does this motive obtain as regards the great economic common- ^ 
 wealth which now conducts and guides the total national pro- 
 duction. 
 
 Thus, even for the Socialist state, it is absolut e l y- iu - 
 conceivable that economic subjects , whether as individuals 
 or as the powerful economic commonweal, should, in their 
 economic judgment and their economic practice, treat present. 
 
366 
 
 INTEREST UNDER SOCIALISM 
 
 BOOK VI 
 
 and future goods as on the same footing . How, for instance, 
 could it be all the same to the Socialist worker whether, 
 he received his hard-earned wage by instalments of £1 a 
 week, or in £52 at the end of a year, or in the shape, perhaps, 
 of £5 2 five or ten or fifty years later ? Or how is it con- 
 ceivable that, under Socialism, a young oak sapling which will 
 be an oak tree, with the value of an oak tree, in two hundred 
 years, can be made equal in value to an oak full-grown now ? 
 The central authority directing the national production mus t 
 jhgsp. its enti re arrangements and dispositions on a calculation 
 / of present a.uH future goods having different values, if its 
 I dispositions are not to be quite inept and monstrous. If 
 • it do not put a less value on future goods it must find that 
 a process which promises a greater number of products in the 
 far future is more remunerative than a process which yields a 
 small number in the present or near future, and it must, 
 accordingly, always turn its productive powers to remote 
 productive ends, however remote they are, as being, technically, 
 the most fruitful. The natural con.sequence would be very_ 
 much as we have alreadv pictured it ^ — misery and want in 
 j/ tlie__^resfiat : and those in* charge of the national economy 
 would have no more pressing duty than to overturn this inept 
 disposition, give the less amount of present goods the preference 
 over the greater amount of future ones, and so prove that the 
 
 i difference in value between present goods and future is an 
 elementary economic phenomenon independent of any human 
 arrangements. 
 
 If it is now clear that, even in the Socialist state, present 
 goods win, universally, be valued more highly, it goes without 
 saying that, if there is an exchange between the two, it cannot 
 be effected at par. Exactly as under the present economic 
 organisation, present goods, as more valuable, will claim and 
 will receive an agio. PTnprgQnce o Lthis agio — and with 
 
 it the emergence of interest in its most legitimate form — 
 could only be repressed if every opportunity for' it were 
 
 \ repressed : in other words, if the exchange or barter of present 
 1 goods for future were removed out of the world altogether. 
 
 How, of course, this would be attempted to a considerable 
 extent in the Socialist state. All private ownership in the 
 1 See above, p. 335. 
 
CHAP. X 
 
 COULD NOT BE ABOLISHED 
 
 367 
 
 means of production being banished, all production on private 
 account would be banished also, and all opportunity of buying 
 the future commodities, Lalx)ur, Uses of Land, and Capital, 
 would be taken away from private individuals. Since, then, 
 in any case the loan at interest would also be forbidden, the ^ 
 two chief springs, from wdiich inter ^^t flnw.g tr> priva te persons 
 in the present day, would be happily stopped up. But certain 
 opportunities would still remain open if exchange transactions 
 between individuals were not entirely forbidden. Suppose, for t 
 instance, that free exchange were allowed jo rlnraMe gnnH^J 
 agio and interest would immediately sl ip in. as it were, by a /■ 
 back door. Say that a good lasts one hundred years, and that 
 its (present) year’s service is worth £100, £10,000 must be 
 the price of the good if the hundredth year’s service — rendered 
 perhaps to some grandchild or great-grandchild — is to be 
 paid fuU £100. No man would be willing to pay this price. 
 But the moment that the purchase price is calculated at less 
 than £10,000, the owner receives, in course of time, an income 
 greater than the purchase price, and harvests the excess as 
 true interest. 
 
 But much more important than any such sporadic obtain- 
 ing of interest by_private indi v idual s is t he fact that , in the 
 Socialist state, the commonwealth itself, as against the citizens, 
 would m^e use of the pi^ciple of interest wEich to-daY it 
 
 re viles as “ exploitation ” and deduction from the product of 
 labour. The Socialist state, as possessing all means of produc- 
 tion, gets all the citizens to work in its factories, and pays 
 them a wage. It conducts, therefore, on the largest scale the 
 buying — forbidden to private individuals — of the future good 
 Labour. Now, on technieal grounds, various portions of the 
 labour it buys it necessarily sets to wor k simultaneously to - 
 wards various pro ductive ends widely rem oved in point of time. 
 One group of labourers, for instance, it sets to baking ; another 
 it sets to sink mining shafts, which, perhaps, assist in turn- 
 ing out consumption goods only twenty years later ; another 
 it sets to replant a forest. The labour directed to distant ends , 
 for reasons with which we arfi nn w fa.Tnilia.r, obtains a greater 
 t.p,chnica.l prndnrt^ and that product when ripe wUl possess also 
 a greater value. While, for instance, the produet that a baker 
 turns out in a day is worth, perhaps, 4s., a labourer engaged in 
 
368 
 
 INTEREST UNDER SOCIALISM 
 
 BOOK VI 
 
 w 
 
 3 
 
 
 forestry may plant one hundred oak saplings in a day, and these 
 saplings, without added labour, may mature in a hundred years' 
 time to strong oak trees worth 20 s. apiece. 
 
 Now how much can and should the Socialist state pay as 
 wage to those workers whose labour it directs to these far-away 
 \ but productive ends ? Will it pay the forostprs thp whnlp 
 \ vahip. of thoir fut ure product, sav. £100 a day? — Tmp o.ssihfe. 
 That would be a glaring injustice to the workers of other 
 departments.' If the entrance to individual branches of employ- 
 y^ent were left free to all comers, everybody would he a forester 
 /and nobody would hake bread; the country would relapse to 
 j primeval forest ; and the present, with its pressing needs, would 
 I remain unprovided for.^ If, on the other hand, the entrance 
 was not free, and a very favoured minority were to be paid 
 £100 a day, while the others received 4s. or 6s., a plutology 
 would emerge again in optima forma ; only that it would not 
 be based, as now on property, but, more fatally, on favour 
 and protection ! 
 
 But if foresters are paid exactly like baker s at 4Si_ per d ay, 
 they ax e exploited . just as they are by the capitalist undertakers 
 under the present system. In buying the future commodity, 
 labour, an agio is put on present goods, and the labourer, 
 instead of his future product of £100, is put off with a present 
 wage of 4s., which represents the present value of the planted 
 saplings. But the surplus value which these s aplings take on 
 as they grow into oak trees ready for cutting, the So cialist 
 I commonwealth puts into its pocket as real interest. Perhaps, 
 
 ' — probably, it is to be hoped, — not to keep it in its pocket, 
 but to employ it in a general bettering of the wages of its 
 workers. But any such supplementary common purse distri- 
 bution of the interest thus pocketed does not make any differ- 
 ence in the fact that interest, as interest, has been received. 
 
 \ In this the Socialist state only acts like a capitalist in the 
 ^ present day, who accumul ates a fortune fr om his .surplus values,'^ 
 
 1 It may, perhaps, be pointed out in reply that, owing to the increasing 
 supply of wood, its value would be press ed down, and so, by and by, forestry 
 would become only as remunerative as baking and such like. I would, however, 
 suggest that this result would only be reached when the value of hundred-year- 
 old timber had come down to a halfpenny ; and to press down the value of wood 
 so low, in the midst of a dense population, an enormous portion of the country 
 would require to be turned into forest again ! 
 
CH. X COULD ONLY BE DIFFERENTLY DISTRIBUTED 369 
 
 and then (disposes nf it fnr pnrpnsfts nf f,hf> g eneral good. A 
 wage earned can be disposed of egoistically or altruistically, 
 and interest received can be disposed of egoistically or altruis-i 
 tically, but it would be as rash to assert that a wage becomes' 
 an interest by being egoistically spent, as to assert that an 
 interest changes its nature, and turns into wage, when it is 
 altruistically spent ! 
 
 It is, too, well worthy of remark that an equal distribution of 
 the interest obtained by the Socialist state does not establish the ^ 
 same economic conditions as if the interest had not been taken' 
 at all. In this distribution it is not the persons to whose labour 
 and product the interest was due that get the interest, but en- 
 tirely different people. The forester has an amount of £99 : 16s. 
 deducted from the value of his future product as interest. If, 
 now, through the distribution of aU the interests thus obtained, 
 the average day’s wage is raised from 4s. to 6 s. per day, the 
 forester gets a couple of shillings returned him of the £99 : 16s. 
 taken from him ; the remaining £99 : 14s. other people get 
 and get, indeed, just as at present, not by the title of wage, bu' 
 
 by tl^ title of property, — or rather of ioint-nronertv . The' 
 people who are employed in immediately remunerative produc- 
 tion, such as baking, and create a day’s product of 4s., could, 
 as labourers, ask and receive a wage of only 4s. The other 2 s. 
 the y receive only because they are at the sa,Tnp. timp. jnin.t 
 
 owners in the national wealth , and because the Socialist state 
 which administers the common national wealth, as proprietor 
 of this wealth, brings its entire right of property to bear on 
 those workers whose labours are directed to more remote pro- 
 ductive ends. In the Socialist state, therefore, exactly as in a 
 capitalist society, interest is deserved by the proprietor of 
 present goods as against those labourers who creati 
 future product by their labour. The only^ifference is that in 
 the capitalist society p roperty is unequally divided, and interpat, 
 falls to a few pronrietors in great amounts^ while in the Socialist 
 society all are joint owners to an equal a mount, and all obtain 
 an equally sm all quota of the total interest. 
 
 In the above analyses I have taken my illustration from 
 forestry because it illustrates the circumstances in question in 
 the most striking and unambiguous way. In the most striking 
 way, because the difference of time between the forth-putting 
 
 2 B 
 
 / 
 
370 
 
 INTEREST UNDER SOCIALISM 
 
 BOOK VI 
 
 of labour and the receiving of the mature product, and, with 
 it, the difference in value between labour a.iiH future product . 
 "^ is at its maximum, : in the most unambiguous way, because 
 here no additional labour of any sort is necessary, and, conse- 
 t^uently, the calculation of the final product produced by a 
 definite expenditure of labour is quite simple. But it surely 
 needs no further demonstration tha t exactly the sa.mp. rplatinna 
 occur, in more or less weakened dearree, in the case of all 
 labour which is directed to more remote goals nf production. 
 
 They are all technically more productive than those which 
 yield their results on the moment. Their abundant future 
 product, too, must always have a greater future value, because 
 it could not, economically, have been produced at all if already 
 its present value, reduced by perspective, were not equal to the 
 otherwise normal value of a similar amount of labour.^ Since, 
 finally, the wage for similar and similarly valuable labour cannot 
 be assessed at different levels according as the Socialist state 
 directs its labour to a near or a remote goal of production, the. 
 wage of those labourers who are put to more remote ta,sks must. 
 Tiece.s sari1y, be measured M?i( f.er__th B full valu e- X)f their future, 
 product ^^ and this secures that, to a greater or less extent, 
 there appears a surplus gain for the community which is the 
 owner of the present goods.^ 
 
 Nor does it require any demonstration that the phenomenon 
 of interest must emerge to a still g reater-degree if the-Socialist 
 
 1 See above, p, 310. 
 
 2 The levelling up of wages — that is, up to the value of the future product of 
 the most remuneratively employed labour — is, of course, impossible, because the 
 national product would not suffice for that. 
 
 ^ I may remark in passing that the same position holds in the case of land. 
 
 rent. It is obvious that, even in the Socialist state, a labourer working on a 
 
 peculiarly fruitful piece of land, e.g. in a Kiidesheim vineyard, will produce a 
 greater or more valuable product than one who puts forth the same exertion and 
 skill on a common piece of land or vineyard. But it is as evident that it would 
 be insufferable “protection” to allow the former labourers their entire greater 
 product as wage. To avoid injustice the wage here must be levelled down ; that 
 is to say, of the product of the more frui tful lands, the “lan d re n t” mu.st be first 
 of all retained for the comm on purse, to be divided afterwards to all the citizens 
 in their capacity as joint, owners of the national land. Land rent, therefore, 
 pven in the Socialist state, would exist, would come into operation as against 
 the labourers cultivating superior land, and would only be divided according 
 to another plan than now, on account of the equal share of all in the nationalised 
 land. 
 
CH. X INTEREST INDEPENDENT OF ORGANISATION 371 
 
 society be organised, not nnp. imitftd po mmunity. but as a 
 system of independent economic proups. ^ For in this case, at 
 every exchange between mature and immature commodities, 
 each group would appropriate surplus value, not only as against 
 its own workers employed to remote productive ends, but, in a 
 much greater degree, as against the other groups, and would 
 divide out this surplus value to the shareholders of the wealth 
 belonging to the group, as dividend. 
 
 Thus we come to a very remarkable and noteworthy result. 
 Interest, which to-day the Socialists abuse as a gain got by 
 exploitation, a robbery from the products of labour, would not 
 disappear eveu in the Socialist state , but would remain, in 
 promise and potency, as between the community organised 
 under Socialism and its labourers, and must so remain. The 
 new organisation of society may make some change in the 
 persons who receive it, and in the shares into which it is 
 divided, by altering the relations of ownership ; but the fact 
 that the owners of present commodities, in exchanging them 
 for future commodities, obtain an agio, it neither will nor can 
 alter. And here, again, it is shown that interest is not an 
 accidental “ historico-legal ” category , which makes its appear- 
 ance only in our individualist and capitalist society, and will 
 vanish with it ; but an economic category, which springs from 
 filementarv economic causes, and therefore, without distinction 
 of social organisation and legislation, makes its appearance 
 wherever there is an exchange between present and future 
 goods. Indeed, even the lonely economy of a Crusoe wo 
 
 not be without the basis of the interest phen omenpn,_ the 
 increasing value of goods and services preparing for the service 
 of the future ; only, of course, that, in the absence of exchange 
 transactions, there would be wanting the chief occasion to put 
 exact figures on the value of goods, ‘and therewith almost the 
 only opportunity of calling attention and giving fixity to the 
 phenomenon. 
 
 > On these forms of organisation see Anton Menger, Das Recht auf den vollen 
 Arheiisertrdg, Stuttgart, 1888, pp. 104, 112. 
 
BOOK VII 
 
 THE EATE OF INTEREST 
 
CHAPTEE I 
 
 THE RATE IN ISOLATED EXCHANGE 
 
 The exchange of present goods for future, in which interest 
 has its origin, is only a special case of the exchange of goods 
 in general. It goes, then, without saving that the formation 
 
 V 
 
 n ^ 
 
 of price in this case is subject to the same laws as govern 
 
 the formation of price in economical exchange gene rally. The 
 question whether present goods in general obtain an agio, and 
 also the further question of the height of that agio, are both to 
 be answered according to the rules laid down in Book IV. as 
 regards prices of goods in general. What remains for us here 
 is only to amplify and vivify the colourless scheme which 
 demonstrated that the current price of goods is the resultan t / 
 of subjective valuations coming together in a markeA by 
 pointing out those concrete circumstances which in this case — 
 the exchange of present against future commodities — influence 
 the mutual valuation of both. 
 
 As before, it is advisable to distinguish between isolated ✓ 
 exchange and competitive exchange. 
 
 In the exchange which takes place between an owner of a 
 present commodity and a suitor for it, the price, according 
 to the formula laid down on p. 199, will be fixed some- 
 where between the value of the present good to its owner as , 
 under limit, and its value to the suitor as upper hmi t. If, i 
 for instance, £100 present money are worth to their owner/ 
 exactly as much as £100 of next year’s money while to thej 
 suitor they are worth, on subjective grounds (say, on account of 
 
 ^ An aaanmpHoii w hich, for the reasons shown on p. 31 5, h olds very widely ; 
 
 — that is to say, among all persons who own more wealth than they can or will 
 spend in their own productive equipment. 
 
376 
 
 THE RA TE IN ISOLATED EXCHANGE book vn 
 
 temporarily pressing circumstances), as much as £200 of next 
 year’s money, the price of £100 present money will be fixed 
 somewhere between £100 and £200 of next year’s money, and 
 the agio at something between nothing and 100°/- The 
 precise figure that is fixed, in the individual case, within these 
 ^ wide limits, depends on the skill and “ staying power ” dis- 
 played by both parties in conducting the negotiations. As 
 a rule, the owner of present goods will be in a position of 
 
 advantage , because he can do without the exchange and yet 
 suffer no loss, while the suitor is often driven to pay any price 
 for present goods. Hence the familiar cases where, in the 
 absence of competition, usuriousiy high rates of 50%, 100%, 
 even 200% and 300%, are extorted. 
 
 Wlien we go farther, and inquire as to the deeper reasons 
 which affect the subjective valuation of the suitors,^ and thus 
 affect the economic upper limit of the agio, we find them a 
 little different in the case of the consn-mptinu Ina.u fr o m what 
 they are in the p rodji rtirm Inau^ tn'wTric.h latter the buying of 
 laboui' is closely allied. 
 
 In the case of the consumption loan the determinants are ; 
 
 I — the urgency of want at the time, the probable provisio n 
 / at the time when the loan is to be paid back, and, finally, the 
 A degree of the suitor’s underestimate of the future. The more 
 \ urgently he requires the loan, the more easily he expects to be 
 V able to replace it and the less he takes thought for the morrow, 
 the higher the agio to which he will, in the worst case, consent 
 and vice versd. 
 
 In the production loan we find different concrete deter- 
 minants. Here the important thins is tbf^ diffp.rp.ucc in pro- 
 1 ductiveness between the methods open to him w ho get.s_-tha. 
 \loan>_aiiiL.thqse_qpen to him who has to do withou t., it. To 
 recur to our old illustration. If the fisher, who has no capital, 
 and can catch only 3 fish a day by hand, gets a loan of 
 90 fish, and is thus put in a position to make a boat and 
 net in the course of a month, and with these to catch 30 fish 
 
 ^ AS regards the sellers of present goods, for simplicity’s sake, we shall, adhere 
 throughout the argument to the assumption that their personal circumstances are 
 such that they value present and future commodities alike. 
 
 * We may take the case, e.g., of a youth standing on the brink of manhood, 
 kept very short of cash at the moment by his tutor, but with the prospect of a 
 great fortune coming into his absolute disposal in a few months. 
 
CH. I DETERMINANTS IN THE PRODUCTIVE LOAN 377 
 
 a day for the remaining eleven montns, the balance stands 
 as follows : — without the loan he catches in a year 3 x 365 = 
 1095 fish; with the loan he catches nothing in the first 
 month, but 30 per day for the other eleven months, that is, 
 335 X 30 = 10,050, or a surplus of 8955 fish. So long, 
 then, as he has to give anything less than 8955 (next year’s) 
 fish for the borrowed 90 (present) fish, he gains by the 
 transaction. 
 
 In this illustration the difference in possible return between 
 the two productive methods, and, with it, the upper limit of 
 the economically possible agio, is absurdly high — 8955 next\^ 
 year’s units for 90 present units is something like 10,000%. 
 But there will always be a very important difference when tlm 
 choice lies between capitalist production and hand-to-mouth 
 
 production, as the latter is, of course, always extremely un- 
 remunerative. The difference, again, will tend to prow less, 
 \ ^hen the choice lies between two different napitalist methods: 
 and -will become more rapidly less in proportion to the length 
 of the process already secured without the loan. This fact is 
 of very great importance as regards the rate of interest, not 
 only in isolated, but also in competitive exchange. If we put 
 it in the clearest possible way now, it will give a good basis 
 for what comes later. 
 
 In an earlier chapter I called attention to the well-attested, 
 fact that the lengthening of the capitalist process always leads 
 to extra returns, but that, beyond a. certain point, these extra 
 returns are of decreasing amount. Take again the case of 
 fishing. If what we might call the one month’s production 
 process of making of a boat and net leads to the return of the 
 day’s labour being increased from 3 to 30, — ie. by 27 fish, — ^it 
 is scarcely likely that tlm lengthening. oLthe proce^ ^ two or 
 ^ree months^vdll _^uWe or treble the return. Certainly the 
 lengthening it to 100 months will ^not Increase the surplus by 
 a hundredfold. The surplus return — for there will always be 
 a surplus return — .will increase by a slower progr^sion than 
 the production _period. We may, thereTore, mth approximate 
 correctness represent the increasing productivity of extending 
 production periods by the following typical scheme. 
 
378 
 
 THE RATE IN ISOLATED EXCHANGE book vii 
 
 Production Period. 
 
 Return per annum. 
 
 Surplus. 
 
 Without Capital 
 
 £15 
 
 — 
 
 1 year 
 
 35 
 
 £20 
 
 2 years 
 
 45 
 
 10 
 
 3 „ 
 
 53 
 
 8 
 
 4 „ 
 
 58 
 
 5 
 
 5 ,, 
 
 62 
 
 4 
 
 6 „ 
 
 65 
 
 3 
 
 7 „ 
 
 67 
 
 2 
 
 8 „ 
 
 68 : 10s. 
 
 1:; 
 
 9 „ 
 
 69 : 10s. 
 
 1 
 
 10 „ 
 
 70 
 
 0;: 
 
 It must be understood that I do not attach any importance 
 to these particular figures. Everybody knows that, in every 
 branch of production and at every stage of techriical know- 
 ledge, the figures will differ. In one branch the fall of surplus 
 return may be slower, in another it may be more rapid. All 
 I lay stress on is the fact that the figures express the genera l 
 tendency of surplus returns to fal l. — Assume, to complete the 
 hypothesis, that a worker needs £30 a year to maintain him 
 in suitable circumstances, and let us try to find out on this 
 basis the limit of the economically possible agio which a suitor 
 for productive credit may, in the worst case, offer for a loan 
 of £30 a year . 
 
 If the suitor has no capital whatever, he can get a return 
 of only £15 without the loan: with the loan, in a one year’s 
 production period he can get a return of £35. In the most 
 extreme case he may therefore, without altering his position 
 for the worse by the transaction, offer an agio of £20 : that is 
 66|-^. If, on the other hand, the suitor already has a 
 capital of .£30 (whence he gets it — whether it is his own or 
 advanced from other quarters — does not affect the case), he 
 can, without borrowing, engage in a one year’s process and 
 obtain a product of £35, and all that dejends on his getting 
 the loan is the extension of the process from one year to two, 
 and the raising of the return from £35 to £45 ; i.e. a yearly 
 surplus of £10.^ Here, then, the suitor can eeonn Tnir.a.n.y 
 
 1 The total surplus return, due to the loan, figures out at £20, since, in each 
 of the two years of the extended production period, the surplus return to labour 
 is £10. But this surplus return is all the same divided over two years , sn that. 
 o nly the amount of £10 is to be reckoned to one Year. In more skilful disposition, 
 however, the bon-ower need not take up, at the beginning of the production 
 
CHAP. I FALLS WITH EXTENSION OF PROCESS 
 
 379 
 
 offer, at the most, an a^o of £10 on £30 : i.e. an interest rate 
 of Similarly, if the suitor, by whatever means, is 
 
 already equipped for a two years’ process, the loan of £30 is 
 now the cause of a surplus return of £8 (£53 — £45) = 
 26|-^. Thus the more ample the suitor’s equipment is 
 already — the more capital he has — the lower fall the surplus 
 returns and the ratio of agio dependent on the loan. Tliat is 
 to say, the surplus falls to £5. £4. £3. £2. 30s.. 2Qs.. 10s.. and 
 the rat^o 16|-, 13;^, 10, 6|-, 5, 3^, 1|- per cent. This fall is 
 bound to emerge unless the returns obtainable in 1, 2, 3, 4, 
 X production periods should run, not, as we have assumed, in 
 the progression of 35, 45, 53, 58, 62, etc., but steadily in the 
 
 much sharper progression of 35, 45, 55, 65, 75 105 
 
 1005, etc. In this latter case, on every one-year extension of 
 the production period made possible by the £30, there would 
 depend a constant surplus return of £10, and the upper limit 
 of the economically possible agio would remain uniform at 
 33-j%. But a ratio of increase like this cannot in any case 
 go beyond a few stages in some few productions it cannot 
 go on permanently and without limit in any production. 
 
 We come, then, to the important proposition that to in- 
 tendmg producers, generally speaking, a present loan has less 
 value in proportion to the length ■'*1 prAflnotion periods 
 
 already provided for from r>i->ipr gnnrpps The proposition 
 directly appHes to the rate of interest in isolated exchange, 
 inasmuch as the valuation of the borrower for productive 
 
 period, the whole amount of the loan from which he defrays his subsistence dur- 
 ing that period : he may raise the' loan by successive instalments,- and this has for 
 result that the loan is outstanding and requires to pay interest only for half the 
 production period. If such a disposition is arranged the yearly surplus return 
 may in the most extreme case be offered as a half-year’s interest on the subsistence 
 loan, and in this case the most extreme interest rate economically possible is 
 double the figures given in the text. The raising of such subsistence loans by 
 instalments thus exerts exactly the same influence on the relation between sub- 
 sistence fund and surplus return, and, at the same time, on the height of the 
 interest rate, as does a suitable “ Staffelung” of production (see above, p. 32.5), with 
 which phenomenon, as may be easily seen, it is closely and intimately connected. 
 
 ^ Up to a certain point the surplus return may now and then increase even 
 in a greater ratio than the duration of the production period. It may, e.g., 
 happen that the transition from rod -fishing to net -fishing shows a greater 
 advance than the transition from primitive modes of fishing to rod-fishing. 
 But beyond a certain point this cannot be maintained, and the surplus returns 
 show a decreasing ratio. 
 
380 
 
 THE RATE IN ISOLATED EXCHANGE book vii 
 
 purposes directly gives the upper limit of the economically 
 possible rate. It also allows us. however, to judge in what direc - 
 tion this proposition must influence the rate of intere&t in 
 competitive exchange, where the price is the resultant of the 
 subjective valuations of individuals, of whom many are intending 
 producers. 
 
 As has been said above, the case of productive credit is 
 closely related to the case of the purchase of labour, the 
 employment of productive labourers by the capitalists them- 
 selves. Here, however, there enter certain complications 
 which may be as easily and briefly stated under competitive 
 exchange. I shall not, therefore, discuss them separately, but 
 shall go on at once to explain the rate of interest in developed 
 competitive exchange. 
 
THE RATE IN MARKET TRANSACTIONS 
 
 The character of the market in which present goods are ex- 
 changed against future goods has already been described.^ We 
 now know the people who appear in that market as buyers and 
 sellers. We know that the supply of present goods is repre- 
 sented by the community’s current stock of wealth — with 
 certain unimportant exceptions — and that the demand for them ^ 
 comes n ) from the suitors for nroductive credit who wish to 
 equip themselves for their own work in production, (2) from the 
 suitors for wage-paid labou r, and (3) from the suitors for con- 
 s umption- credit. - To these three categories we may add, under 
 certain reservations, the maintenance of the landowners. Finally, 
 it will be remembered that the resultant market price must, as 
 a rule, be in favour of present goods, and must lead to an agio 
 on the same. What we have now to do is to _grnnp t ngpthp.r 
 the ca uses which determine the, heigh t nf thig agip in one 
 adequate and typical picture. 
 
 If we were to attempt all at once to draw a picture like this, 
 covering, as it does, the whole area of the varied influences 
 that cross and intersect each other on the market, we 
 should meet with great, indeed insuperable difficulties, in the 
 way of statement. I shall, therefore, act on tlie principle, 
 divide et impera, and first consider how the price is determined 
 xmder the assumption that, confronting the supply of present A 
 
 goods, there is one single branch of demand, though, in present# 
 circumstances, by far the most important branch, viz. the^ 
 demand of the Wagp ,-Ea,mers Once we have drawn in broad 
 clear lines the most important and difficult part of the whole 
 
 ^ See above, p. 319, and particularly p. 330. 
 
382 
 
 THE RATE IN MARKET TRANSACTIONS book vii 
 
 picture, it will be relatively easy to define the kind and measure 
 of the share which all the remaining market factors have in 
 ^forming the resultant, and so gradually to make the picture 
 true to the full complexity of practical life. For good reasons 
 
 ) I also retain provisionally the former assumption, that the 
 whole supply and the whole demand for present goods meet in 
 
 one single market embracing the entire community . And, 
 finally, we shall suppose meanwhile that all branches of pro- 
 duction show the same productiveness, and also the same 
 increment of productiveness on each extension of the production 
 period : that is to say, we shall assume an identical scale of 
 surplus returns. 
 
 Suppose, then, that in our community the stock of wealth 
 in the market, as supply, amounts to £1500,000,000, and that 
 there are 10,000,000 of wage-earners. Following the scheme 
 on p. 378, the annual product of each worker increases in all 
 branches of production, in proportion to the length of the pro- 
 duction period, from £35 (in a one year’s process to £7 0 
 (in a ten years’ process). The question is; — in these circum - 
 ^ stances of the market how high wHI rise th e aghum presenl. 
 goods? 
 
 It is quite certain, as we have already explained, that the 
 agi o will settle at that level where sup ply and demand exactly 
 ^/ balance each other, and this lies between the subjective valua- 
 tions of the last pair who actually exchange. But the fixing 
 of these valuations here encounters a quite exceptional difficulty, 
 and one which does not occur in any other exchange transac- 
 tion, but has its basis in a special peculiarity of the commodity 
 “ labour.” Every other commodity, that is to say, has a pre- 
 determined subjective value to the one who wishes to buy it. 
 Labour has not, and for this reas on. It is valned according 
 
 to its prospective product, while the prospective product varies 
 
 according as that labour is invested in a short or in a long 
 production process. We said above that, in the subjective 
 circumstances of the capitalist, a sum of present goods was, as 
 
 / a rule, worth eis much as the same sum of future goods. The 
 capitalist will, therefore, count the value of labour equal to 
 
 1 Tlia p.aRft nf production carried on entirely without capital, w hich, accordiug 
 to the scheme, would return only £15, w e may leave out of account as practically 
 of no importance. 
 
CH. II VALUE OF LABOUR NOT PREDETERMLNED 383 
 
 just as many present shillings as it will bring him in in 
 the future. But, according as this labour is invested in a 
 short or a roundabout process, it may bring him in £35 or 
 £58 or £70. At which of these figures is the capitalist to 
 value it ? 
 
 It may be answered : According to the product aimed at in 
 entering upon the method of production which is, economically, 
 the most reasonable. He will, therefore, value the year’s labour 
 at £35 if, on reasonable grounds, he meditates adopting a one 
 year’s process; at £70 if he considers a ten years’ period the/^^ 
 most suitable. This would be very well if only it was 
 certain beforehand what period was the most suitable for 
 the undertaker. But this is not certain : on the contrary , 
 the length of the process is itself dependent on the rate 
 
 of wage fived as resultant price on the labour market- 
 
 If the wage, for instance, stands at £25, a one year’s process 
 is the most favourable for the undertaker. At £25 he 
 gains £10 in the year — or, to put it exactly, in the six 
 months, since, on the average, the advance extends over only 
 six months ; ^ that is, 80^ per annum. In a ten years’ pro- 
 cess for the £25 in wages he gets £70, and the surplus 
 return of £45 is, absolutely, much greater, but, when divided 
 as profit over an average of five years,^ gives only £9 for one 
 year, or a profit of 36%. On the other hand, if the year’s 
 wage is £ 50, it is quite clear that it would be as absurd to 
 choose a one year’s process7 with its product of £35 . as it was 
 most reasonable in the previous circumstances, and only those 
 longer production periods which show an annual product over 
 £50 could be thought of. 
 
 The matter, therefore, stands as follows. Elsewhere, in 
 the case of other commodities, th^ pinpInympTif. for which th e 
 buyers wish to acquire them is already determined . It is the / 
 fixed point, — the thing which first of all helps to determine 
 the price offered by the buyers, and then through that the 
 resultant market price. Here, in the case of the comTundity 
 
 / 
 
 ^ OnlY the wages of the first month are outstanding nearly a whole year..: 
 those of the second month are outstanding only eleyen months, and so on ; all 
 wages of the first six months outstanding more than half a year. Against this 
 the wages of the second six months are outstanding for as much less than the 
 half-year. 
 
 ^ The calculation is exactly similar to the foregoing. 
 
384 
 
 THK RATE IN MARKET TRANSACTIONS book vii 
 
 Labour on the contrarY. the employment is an undetermiTiftf^ 
 
 amount, an x, which is first determined by the resultant price. 
 
 In these circumstances it is clear that the fixed point of the 
 price transactions must be got somewhat differently from the 
 ordinary way ; not, of course, according to different principles 
 or laws, but with a certain casuistical modification in detail 
 which we have now to examine.^ 
 
 In place of the fixed point, which is not available because 
 the employment of the labour itself is not fixed, we find a 
 substitute in the fact that another amount, usually indetermined, 
 is here fixed, viz, the quantities sold. It may be taken as 
 certain that all the labour offered. like the whole snTn nf 
 
 p resent goods offered, fin ds a market. The certainty of this 
 is based on a peculiar circumstance. Exactly as, in the " 
 science of money, it is a familiar dogma that, in the long-run, 
 any sum of money, be it great or small, is sufficient to do the 
 work of circulation in a community, so is it true that any 
 
 1 Perhaps one or other of my readers will take exception to my looking upon 
 the production period, in which the work of undertaking is carried on, as not 
 a fixed immovable amount. It will be said that each undertaker haa madp. 
 the arrangements for his production on a quite definite footing , and works in 
 any case in the production period corresponding to and determined hy these 
 given arrangements. This is not the case. Even -where the visible outlines of 
 the arrangements, such as workshops, number and kind of employes, and so 
 on, may be pretty permanent, yet, within these fixed lines, a number of litt.lp 
 noticed alterations are possible, by which the length of the production perind 
 
 might be changed not inconsid etablY, In the simplest shoemaking shop, e.g., 
 the buying of a new machine-made tool, th® wholesale purchase of finished 
 uppers, or, above all, the acquiring of labour-saving instruments such as sewing- 
 machines and the like, involves no unimportant extension of the production 
 period. True, in the shoemaking shop itself one does not notice that the pro- 
 duction of shoes has now become a more lengthy process. But all the more 
 noticeable will it be in those preparatory stages of production where, on account 
 of the shoemaker’s demand — not, of course, the demand of the one shoemaker, 
 but of many, — people jnust now stretch away back in time , as it w ere, and 
 invest original p roductive powers i n machine-making, founding nf factories, and 
 so on. The shoemaker, therefore, according as he covers his demand for the 
 instruments of his business in one way or the other, may as a fact cause a 
 lengthening or shortening of the total production period, and naturally he makes 
 the choice which, in the circumstances, is economically the more advantageous. 
 
 If, e.g., the lev el of wages is very high, he will prefer to buy machine-made 
 uppers, put up a sewing-machine in his own shop, etc. ; that is to say, in entire 
 correspondence with the statement given in the text, he will prolong the p roduc- 
 tion^perisd : while, if the level of wages is low, he will prefer directly to 
 employ the cheap hand labour, — that is to say, so far as in him lies, to keep the 
 production period short. 
 
CHAP. II PRESENT WEALTH BUYS UP LABOUR 
 
 385 
 
 five hundred millions of capital 
 on that account : only, of course, 
 
 a 
 
 sum of present goods, be it great or small, is sufficient to buy 
 up the whole supply of wage labour that exists in the com- 
 munity, and to pay its wages. All that requires to be done 
 is to co n tract or extend the production neriod^. If there are 
 ten million wage workers, and fifteen hundred millions of 
 capital, this stock is just sufficient to pay the ten million 
 workers £30 a year each over a ten years’ production 
 process.^ If there are only 
 no labourers need go idle 
 
 they cannot ha’i'e their maintenance advanced them for 
 ten years’ process, but (at the same wage of £30) only for 
 a three and a third years’ process, and the average duration 
 of the production period must be curtailed accordingly. Sup- 
 pose there are only fifty millions of capital, all the labour 
 covdd still be bought, but now only for a four months’ process. 
 and it must be secured, by a further shortening of the produc- 
 tion period, that the scanty amount of present goods is renewed 
 after every short period by the accession of fresh returns. 
 
 It is, therefore, always possible for the existing stock of 
 wealth to buy all the labour, and there are certain reasons in 
 this case that work very strongly towards always making the 
 possible into the actual. Between capitalists and labourers 
 the economic conditions are — with very few exceptions — ex- 
 tremely favourable to the effecting of exchang e. The labourers 
 urgently need present goods, and cannot, or can scarcely 
 turn their own labour to any account ; they will, therefore, 
 to a man rather sell their labour cheaply than not sell it 
 at all. But very much the same is true of the capitalists. 
 In their peculiar circumstances of want and provision for \ 
 want, theii' present goods — which they, in any case, would j 
 lay up against the future — are not worth more to them ‘ 
 than a similar sum of future goods. T hey will, therefore, 
 prefer any purchase of labour where there is an agio, how- 
 ever little it may be. rather than let their capital lie dead ; 
 and the consequence is that aU capital, like all labour, actually 
 comes to a sale. As a fact we see that, in all economic com- 
 munities, although the quantitative relations between wealth 
 
 ^ On the assumption of a production arranged in the form of stages, whereby 
 (as shown on p. 328, and in Appendix I.) the initial fund need only con tain sub- 
 sistence for half the production period. 
 
 2 C 
 
 y 
 
 
 / 
 
386 
 
 THE RATE IN MARKET TRANSACTIONS book vij 
 
 and number of wage -earners are extremely various, these two 
 amounts exactly buy up each other. There are everywhere 
 a few labourers who have no work, and a few capitals which 
 are not employed, but this is, of course, not in contradiction 
 to what has been said. I need scarcely point out that the 
 presence of such unemployed is never traceable to the pur- 
 
 chasing power of capital be ing insuffi cient to the whole 
 nu mber of the labour ers — in a poorer country, indeed, a 
 capital of half the amount would have to pay the same number 
 of labourers, and actually does pay them — but always to 
 jcertain frictional and temporary disturbances of organisation, 
 ssuch as are inevitable in a mechanism so complicated as the 
 lindustrial division of labour in a great country. 
 
 ' We may, therefore, assume it as certain that the whole 
 /supply of labour, and the whole supply of present goods, come 
 Ito mutual exchange. Tn this fact the lengtk of the produc- 
 tion period, and thus the amount of product which the under- 
 t aker may obtain through the labour be bny.<s, obtains a. certain 
 definiteness . That is to say, we must, in any case, assume 
 such a period of production that, during its continuance, the 
 entire disposable fund of subsistence is required for, and is 
 sufficient to pay for, the entire quantity of labour offering 
 itself If the period were to be shorter than this, some 
 capital would remain unemployed ; if longer, all the workers 
 could not be provided for over the whole period ; the result 
 would always be a supply of unemployed economic elements 
 urgently offering their services, and this could not fail to 
 upset the offending arrangements.^ 
 
 But we are not yet finished with the subject. It is not 
 one single definite production period that harmonises with 
 the above assumption, but a great many different periods. 
 
 ^ If, e.gf., the existing stock of subsistence is so great as to defray four 
 million years’ pay — in which case, as we know, where production is by stages, an 
 initial capital amounting to two millions of wages only would be required — and 
 if there are one million labourers in the country, then it is shown that an 
 average four years’ production period must be taken. For if, say, a three years’ 
 period were taken, the three years’ payment of one million of workers would take 
 up only a capital of one and a half millions of wage, and the r est of the capital 
 would have to pjo idle. In a five years’ production, again, an initial fund of 
 two millions of wages would only defray the subsistence of 800,000 labourers for 
 five years, and the remaining 200,000 would go starving — a position which 
 evidently is as untenable. 
 
CHAP. II 
 
 AT VARIOUS RATES OF WAGE 
 
 387 
 
 Obviously, given the capital and the number of workers, a 
 very varying number of years can be provided for according 
 as the wage of labour is high or low. With a capital of 
 fifteen hundred millions for instance, our ten million workers 
 can be kept in work and wage for ten years at a wage of £30, 
 or for five years at a wage of £60, or for six years at a wage 
 of £50. Now which of these possible cases will be the one , 
 actually adopted ? — This will be determined, by the play of/ 
 the same egoistic motives as rp.giilat.p. t.bp. formation nf pripp. 
 competition generally, in the following way. 
 
 Assume for a moment that the usual wage is £30. A 
 capitalist then with £1000 — for convenience sake we shall 
 take this amount as the unit throughout the following discus- 
 sion — may employ either 6 6 '6 labourers in a one year’s 
 process, or 33’3 labourers in a two years’ process, or 22'2 in a 
 three years’ process.^ Naturally he will choose the process 
 which he finds most advantageous . Which process that is will 
 be seen from the following table, based on the former scheme 
 of productivity on p. 378, showing how many workers can 
 be employed by £1000 in each production period, and how 
 much annual profit may be got from that sum. 
 
 ^ I here assume a well-organised production by stages, where no portion of 
 the capital remains idle, and where, consequently, the initial fund need only 
 contain something like half the amount of subsistence required during the course 
 of the whole production period. I may note, however, that the correctness of 
 the conclusions drawn in the tezt is quite independent of the pure question of 
 fact whether the initial capital must be exactly half, or something more than 
 half, or, perhaps, just so much as the amount of subsistence successively con- 
 sumed by the workers during the production period. According as this is 
 determined the figures put down in the following tables will, of course, va ry — 
 they have no value, indeed, but as illustrative — but not the laws that und erlie 
 these figures. With other figures representing the productiveness and the 
 capital, the calculation would lead to different concrete rates of interest, but to 
 the same laws as regards height of the intetest rate, as will be shown more clearly 
 further on. 
 
388 
 
 THE RATE IN MARKET TRANSACTIONS tjook vii 
 
 TABLE V 
 Wage £30. 
 
 /y \ Production 
 
 Poe. 
 
 y&ziR.i 
 
 / 
 
 X 
 
 3 
 
 Vi' 
 
 Period in 
 years. 
 
 N 
 
 1 
 
 2 
 
 3 
 
 4 
 
 5 
 
 6 
 
 7 
 
 8 
 9 
 
 10 
 
 Annual 
 
 Product. 
 
 p 
 
 £35 0 
 
 45 0 
 
 53 0 
 
 58 0 
 
 62 0 
 65 0 
 
 67 0 
 
 68 10 
 
 69 10 
 
 70 0 
 
 Annual profit 
 per 
 
 labourer. 
 
 G 
 
 £5 0 
 
 15 0 isi 
 
 23 0 ^ 
 
 28 0 
 32 0 
 
 35 0 
 
 37 0 
 
 38 10 
 
 39 10 
 
 40 0 
 
 Number 
 
 of 
 
 employed. 
 
 U3S. 
 
 66-66 
 
 33-33 
 
 22-22 
 
 16-66 
 
 13-33 
 
 llfl 
 
 9-52 
 
 8-33 
 
 7-4 
 
 6-66 
 
 Total annual 
 profit on the 
 £ 1000 . 
 
 £333-30 
 
 500 
 
 511-11 
 
 466-66 
 
 426-66 
 
 388-85 
 
 352-24 
 
 320-82 
 
 292-5 
 
 266-66 
 
 m the given circumstances of all 
 the factors, it is most profitable for the undertakers to dp.votft 
 
 tJ^in.seI vpA to a three years’ p ro duction period . They obtain 
 tliereby the very considerable rate of 51-1%, while both in 
 the longer and in the shorter processes the profit is lower 
 In these circnmstances naturally all u ndertakers will .seek to 
 adopt this l eng th of process^ But to what does this lead? 
 In a three years’ process £1000 can employ 22-2 workers, 
 and therefore to employ all the available capital in the 
 community (viz. £1500,000,000) 33^ million workers would 
 
 ^ To be exact the figures of profit from the larger nerinris nf prndiicHnTi gbnnid 
 be .set down at somewhat, Ips.s. They fall due, of course, all at once at the end 
 of the total production period, and are thus less in value by the amount of the 
 intermediate interest. In a ten years’ production period, e.g., the capital of 
 £1000 realises a total profit of £2666-6, which is less favourable than £266-66 
 for each single year, because in the latter case the interests falling due earlier 
 might increase by compound interest. I consider it, however, less of a mis- 
 take to give up mathematical exactness than to include involved calculations 
 of compound interest, and make the illustration so difficult and circum- 
 stantial that, in the end, it might be perhaps more difficult to understand than 
 the rule which I mean it to illustrate. It is not committing any blunder in 
 principle : the neglect of compound interest leads only to the same result as if.T 
 
 h ad made the progression of the annual returns — which in any case is arbitrary 
 and only given for purposes of illustration — a little more rapid, and then had 
 calculated exactly. 
 
CHAP, n 
 
 AT VARIOUS RATES OF WAGE 
 
 389 
 
 be needed — while there are only ten millions. These ten 
 million workers could be employed by a sum of four and a 
 half million pounds, leaving capital to the amount of ten and a 
 half millions lying idla Of course these ten and a half 
 millions of capital could not and would not remain so : they 
 would compete for employment ; attract labourers by offering 
 higher wages ; and the necessary result would be a rise of the 
 rate of wages. The £30 rate, then, assuming the above 
 position of the factors, cannot possibly be a permanent one. 
 
 Suppose now that the rate of wages is £60, we get the 
 following table. 
 
 TABLE II. 
 
 Wage £60. 
 
 Production 
 Period in 
 years. 
 
 Annual 
 
 Product. 
 
 Annual profit 
 per 
 
 labourer. 
 
 Number 
 
 of 
 
 employed. 
 
 Total profit 
 on the 
 £1000. 
 
 1 
 
 £35 
 
 0 
 
 —£25 
 
 0 
 
 33-33 
 
 Loss 
 
 2 
 
 45 
 
 0 
 
 — 15 
 
 0 
 
 16-66 
 
 
 3 
 
 53 
 
 0 
 
 — 7 
 
 0 
 
 11-11 
 
 )) 
 
 4 
 
 58 
 
 0 
 
 — 2 
 
 0 
 
 8-33 
 
 
 5 
 
 62 
 
 0 
 
 2 
 
 0 
 
 6-66 
 
 £13-33 
 
 6 
 
 65 
 
 0 
 
 5 
 
 0 
 
 5-55 
 
 27-77 
 
 7 
 
 67 
 
 0 
 
 7 
 
 0 
 
 4-76 
 
 33-33 
 
 8 
 
 68 
 
 10 
 
 8 
 
 10 
 
 4-16 
 
 35-41 
 
 9 
 
 69 
 
 10 
 
 9 
 
 10 
 
 3-70 
 
 35-15 
 
 10 
 
 70 
 
 0 
 
 10 
 
 0 
 
 3-33 
 
 33-33 
 
 This table proves that, i.£-wp assnmp £60 as the rate, of 
 wages , production in anything less than a five years’ period shows 
 a positive loss, while, of the longer periods, the eight years ’ 
 process i.s the most prnfitnblp. It yields the modest interest 
 of 3'54^, but, relatively speaking, it is the most favourable 
 rate that can be got. It is easy to see, however, that it is as 
 impossible for a wage of £60, as it was for £30, to be the defin- 
 ite resultant price of labour. Under the assumed circumstances 
 of productivity the eight years’ period is the most profitable 
 length of process at a £60 rate of wage. By adopting it a 
 capital of £1000 can employ only 4'16 labourers; consequently 
 
390 
 
 THE RATE IN MARKET TRANSACTIONS book vn 
 
 tha ^ntire capital of £1500.000.000 can employ only six and 
 a quarter million workers ; and the remaining three and three- 
 quarter millions must starve. This again is impossible ; the 
 unemployed will offer their services in competition with each 
 other ; and wages will be pressed below the rate of £60. 
 
 At what point, then, will this overbidding and under- 
 bidding, which come from unemployed capital when wage is 
 too low and from unemployed labour when wage is too high, 
 /come to an end ? Obviously it will be when the most reasoa - 
 ahle production perio d exact ly absor bs the wage fund^ oji The 
 one side, and the lab o ur offered on the other^ This will be the 
 case, as the following table shows, at a wage of £50. 
 
 TABLE III. 
 
 Wage £50. 
 
 Production 
 Period in 
 years. 
 
 Annual 
 
 Product. 
 
 Annual profit 
 per 
 
 labourer. 
 
 Number 
 
 of 
 
 employed. 
 
 Total profit 
 on the 
 £1000. 
 
 1 
 
 £35 
 
 0 
 
 — £15 
 
 0 
 
 40 
 
 Loss 
 
 2 
 
 45 
 
 0 
 
 — 5 
 
 0 
 
 20 
 
 
 3 
 
 53 
 
 0 
 
 3 
 
 0 
 
 13-33 
 
 £40 
 
 4 
 
 58 
 
 0 
 
 8 
 
 0 
 
 10 
 
 80 
 
 5 
 
 62 
 
 0 
 
 12 
 
 0 
 
 8 
 
 96 
 
 6 
 
 65 
 
 0 
 
 15 
 
 0 
 
 6-66 
 
 100 
 
 T 
 
 67 
 
 0 
 
 17 
 
 0 
 
 5-71 
 
 97-07 
 
 8 
 
 68 
 
 10 
 
 18 
 
 10 
 
 5 
 
 92-5 
 
 9 
 
 69 
 
 10 
 
 19 
 
 10 
 
 4-44 
 
 86-66 
 
 10 
 
 70 
 
 0 
 
 20 
 
 0 
 
 4 
 
 80 
 
 At a wage of £50 the six years’ production period pr oves 
 the most profitable . It gives an interest of 10% on the in- 
 vested capital, whUe a five years’ process would return only 
 9‘6%, and a seven years’, 9'7% Moreover, as at that wage 
 the £1000 employs 6|- labourers, the entire ten million workers 
 and the entire fifteen hundred millions of capital find employ- 
 ment ; a nd the point is reached where the form a ti on _ of pricg 
 may come to rest. AH who have it in their power to disturb 
 the settlement by further over or under bidding have no 
 inducement to do so, and all who might have an inducement 
 
CHAP. II 
 
 EQUILIBRIUM REACHED 
 
 391 
 
 have not the power, as, on economic grounds, they are already 
 excluded from competition. There is no idle capital which 
 might be tempted to seek employment by overbidding, and 
 there are no idle labourers who might be tempted to seek 
 employment by underbidding. And, finally, the undertakers 
 who have placed their production on the footing which makes 
 this favourable position of things possible are rewarded bv thi s 
 arrangement being at the s-giue timp tbp.._jnn.cit pro fitable for 
 them, and they too have no inducement to make any change. 
 
 Those tmdertakers, on the other hand, who might have wished 
 to engage in longer or shorter processes, and would thus have 
 made either capital or labour insufficient, are excluded from 
 any such disturbing competition by the fact that such methods 
 of production show either a loss or a smaller profit. 
 
 The price of labo ur, then, will and must settle at a wag e 
 of £50 7~and this involves, at the same time, an agio of 10% 
 on present goods. I say, it must do so, for, so long as this 
 point is not reached, there are certain tendencies always at 
 work to force the price towards it. If, for example, the wage 
 were only a little higher, say £51, the six years’ process would 
 still be the most profitable, but only 9,800,000 labourers 
 could be employed by the available capital of £1500,000,000; 
 t he unemployed, by the urgency of their circumstances, would 
 exert a pressure on the price of labour,_till such time as they 
 also could be taken in, which would be the case when wage 
 came down to £50. If, on the contrary, the wage were a 
 little lower, say £49, the employment of the ten million workers 
 would take up only £1470,000,000 of capital; the unemployed 
 remainder would attract employment through overbidding ; and 
 the result again would be a rise of wage till such time as the 
 point was reached at which equilibrium all round could take 
 place. 
 
 In the assumed state of all the factors an agio of 10% 
 is therefore the economically necessary result. Why exactly 
 10% ? — The consi derations hithert o presented can only answer 
 v^atively that the necessary equilibrium could haye been 
 
 ^ Leaving out of accoant special disturbing canaes, the influence of which 
 I cannot pursue here : my business just now is to develop the fundamental law 
 of the, interest rate , just as I have already developed the fundamental law of the 
 formation of price. See Conrad’s Jahrbiicher, vol. xiii. p. 480. 
 
392 
 
 THE RATE IN MARKET TRANSACTIONS book vii 
 
 reached at no other rate of interest . But we niay now inquire 
 whether our figures do not bring out some other circumstances 
 which may positively indicate a rate of 10%, and give us 
 matter for a precise positive law of the interest rate. 
 
 To arrive at a position of equilibrium, the capital of the 
 community had to be taken out of shorter processes where 
 full employment could not be found for the existing stock of 
 labour, and employed in gradually extending methods till all the 
 labourers were fully occupied. This was arrived at in the six 
 years’ process. On the other hand, the adoption of still longer 
 processes, for which again the capital is not sufficient, had, 
 economically, to be prevented. In these circumstances the 
 six years’ producers are the last buyers, the “ marginal buyers 
 
 the would-be seven years’ producers are the most capable 
 excluded suitors for means of subsistence ; and, according to 
 our well-known law, the price that results must fall between 
 the subjective valuations of these two. How does it stand 
 with these valuations ? 
 
 What we have to look to simply is : What is the utility 
 which, for those two sets of buyers, depends on the disposal over 
 a definite sum of means- of subsistence ? Here, first of all, it 
 may be put down generally that, nu the dispn.sn.l nypr p.ar.b 
 half year’s wage. — in the present case, £25, — depends one 
 year’s extension of the production period per worker.^ Accord- 
 ingly, with respect to the six years’ producers, it specially 
 depends on their possession or non -possession of the £25 
 whether, as regards one labourer, they can embark on or 
 continue in the six years’ process instead of the shorter five 
 years’ process. But according to our scheme of productivity 
 
 ^ Always assutninp- a complete 'arranp^ement, of production b-y stages, I may 
 add the mathematical proof of this somewhat paradoxical thesis. To employ 30 
 labourers in a 5 years’ period arranged by yearly stages, the 6 labourers of the fiist 
 stage need an advance of wage over full 5 years, that is, in all, 30 annual wages : 
 the 6 labourers of the second stage require an advance over 4 j^ears, that is, 24 
 wages : similai-ly, the labourers of the third stage require 18, those of the fourth 
 12, those of the fifth 6 : a total of 90 wages . To support the same 30 labourers 
 in a S ye.!^Ig’ production , the first stage, now embracing only, 5 labourers, requires 
 the advance for 6 years, that is, 30 wages ; the second stage, 25 ; the third, 
 20 ; the others, respectively, 15, 10, and 5 wages : in all. 105 wages . The 
 extension of the production period for 30 labourers by a whole year requires 
 therefore, as a fact, the augmenting of the wage fund bv the amount of only 
 p5 wages, which gives the case maintained in the text. 
 
CHAP. II THE LAST EXTENSION OF PRODUCTION 
 
 393 
 
 the year’s return of one worker in a five years’ process amounts 
 to only £62, while in a six years’ process it amounts to £65. 
 What, therefore, as regards the marginal buyer, depends on 
 
 his having the cli.sposal over £25. is the obtaining of a yearly 
 
 surplus product of £3 . On the other hand, those would-be 
 producers whcJ are trying to take means of subsistence out of 
 the market in order to extend the production period to a 
 seventh year, could gain by their extension only a surplus 
 return of £2 (£67 — £65). For them, therefore, all that depends 
 on their disposal over the £25 is a surplus of £2, and they are 
 excluded from competition inasmuch as the resultant price has 
 established an agio which exceeds the rate of 2 on 25 (8%). 
 
 If therefore — and this is indispensable to equilibrium 
 being reached — the extension of the production period is to 
 halt at the limit of six years, the agi o establi shed by the fixing 
 of the price must lie between the rate that rppr‘^°onts the 
 valuation of the last buyers (£3 on £25, or 12^) as upper 
 limit, and the rate representing the valuation of the competitors 
 first excluded (8^) as lower limit. And thus our former 
 empirical and circumstantial demonstration of the rate of wage 
 and the rate of interest at which equilibrium may be reached 
 on the market, must point provisionally to the rate of 10^. 
 It must at least point to the zone between 8% and 12^. 
 The fact that, within this zone, the rate of 10^ is exactly 
 brought out, is due, of course, not to the limitations indicated 
 by the valuations of the marginal pair, but, as described on 
 p. 215, simply to the quantitative effect of supply and 
 demand. W''e shall see immediately, however, tliat the wide 
 latitude (8^ to 12^) which our abstract scheme leaves for 
 the narrowing action of supply and demand, looks considerable 
 only on account of the figures accidentally chosen ; in practical 
 life the latitude given is almost always vanishingly small. 
 
 Meanwhile we may put the results at which we have 
 arrived in general form as follows ; — 
 
 The rate of interest — on the assumptions already madcT — 
 is limited and determined by the productiveness of the Iasi 
 extension of process economically permissible, and of the further 
 extension economically not permissible ; m this way tfa» t the 
 unit of capital, which makes this extension of process possible, 
 must always bear an amount of interest less than the surplus 
 
394 
 
 THE RATE IN MARKET TRANSACTIONS book vii 
 
 return of the first-named, and more than the surplus return of 
 /the last-named extension.^ Within thpsp marginal limits the 
 / price may be , mor e exactly d eterminecLJjy the qua ntitative 
 / relation h.etvveen— seage fund and number of workers, according 
 to the law of supply and demand. 
 
 In practical life, however, the latter method of determining 
 price is seldom taken . It is true that in our abstract scheme 
 there was an miusually wide latitude to come and go on, 
 because we had assumed a sudden decrease of the surplus 
 return from £3 to £2 ; that is, a fall of fully one-half. But 
 in practical life sudden differences like this scarcely ever occur. 
 The figures which represent the productiveness of the last 
 permissible and the first non -permissible extension come 
 ii.snally very dose to each other, and, consequently, they are 
 sufficient to limit the variations of t he interest r ate so strictly 
 ^and sharply that the theoretically more exact determination 
 by means of tlie relation of supply and demand is practically 
 unimportant.^ Indeed, assuming that these two marginal 
 limits are very near each other, one of them may even be left, 
 out of account without any serious inaccuracy,® and the law 
 \ be simply formulated thus : — The rate is determined by the 
 surplus return of the last permissible extension of production. 
 
 This coincides almost to a word with Thlinen’s celebrated law 
 which makes the rate of interest depend on the productiveness 
 I of the “ last applied dose of capital.” ^ 
 
 ^ From this formulation U _wi1) be seen why the law now flp.Hnnfiil does 
 jiot depend, and ha.s no nesd to depe nd, for its CQrredaxfi.ss oii_ the^xonereta 
 numeri cal rati o3^tsKeiL_the_„ampui n of t he wag e fund a nd the -length, of-the 
 productiou-pfiimil. (See above, p. 387, note 1.) Suppose, e.g., that not a half 
 but a whole year’s wage were necessary to extend the production period by a 
 year; all the same a capital sufficient to defray the wages of a whole year would 
 require to bear something like the return of the last extension of the production 
 period as interest. The figures may change as they will, but the typical relation 
 holds, that the interest of that unit of capital required for a definite extension 
 of the production period lies between the mrplus return of the last permis- 
 sible and the fiist non-permissible extension. 
 
 ^ See above, p. 217. ® See above, p. 221. 
 
 ■* Bcr isolirte Stoat, second edition; part ii. div. i. p. 100. It is very 
 notable that Thiinen, without knowing the law of marginal utility, without any 
 general price theory based on that law, and, finally, even without any clear 
 insight into the origin of interest, was able to solve the special problem of the 
 rate of interest with almost entire correctness, and in the sense of those general 
 theories of which he had perhaps a dim presentiment. 
 
CHAPTEE III 
 
 THE RATE IN MARKET TRANSACTIONS (continued) 
 
 But our task is not yet finished. Following the same lines as 
 we took in developing the general law of the price of goods, ^ 
 we must attempt to lay down the concrete determinants which 
 decide the degree of productiveness of the last extensioiL 
 
 and from our knowledge of these we must, in particular, try 
 to get an explanation of the variations to which the interest 
 rate is subject in practical life, — sometimes rising, sometimes 
 falling, but with a constant tendency in the latter direction, 
 over the whole field of economical development in historical 
 times. This analysis too will give us a welcome oppor- 
 tunity of verifying our abstract theory bv experience . If we 
 find that our theory, starting with certain assumed conditions 
 of fact, leads us, of internal necessity, to expect just that 
 movement of interest which, in the experience of practical life 
 and history, we see actually and always taking place when 
 these conditions are realised, we shall be justified in taking it 
 as a strong guarantee that our theory, although it uses such 
 abstract machinery in the stating, is no vain imagining, but a 
 theory obtained from the study of practical life. • Moreover 
 in what follows I shall be in much less marked opposition to 
 old doctrines than I have been in the foregoing chapters. For 
 certam connections between the rate of interest on the one 
 
 Ridp. an d definite facts on the other, are so distinctly and 
 imquestionablv given bv experience. T hat it was impossible for 
 the adherents of any interest theory, however erroneous, to 
 overlook them ; and, however different the theoretical points 
 from which they may have started, they find themselves at 
 ^ See above, p. 218. 
 
396 
 
 THE RATE IN MARKET TRANSACTIONS book vii 
 
 one in recognising these.^ All the same I venture to hope 
 that what follows will give more accuracy and definiteness, as 
 well as a new and more adequate explanation, to many a pro- 
 position long accredited by experience. 
 
 Following the line of inquiry already pursued, T shall try 
 to^ mvestigate the concrete determina nts of the rate of interest, 
 and the manner of their working, in such a way that we can 
 s^^ccessively vary the individual assumptions in our illustrative 
 scheme, and then see what result the variation gives us as 
 legards the formation of the interest rate. Lot us look fir.st. 
 then, at the influence of the amount of the national .sub sisten ce 
 f und^ 
 
 Assume that, other circumstances remaining unchanged, 
 the available subsi st ence fun d amounts, not to £1500,000,000 
 but to £2400.000.000. The repetition of the same calcula- 
 tion as made above leads us to the conclusion that the 
 equilibrium of the market cannot now be attained otherwise 
 than .,by an eight years’ production period, a £60 rate of wages . 
 and a co rre sponding interest rate of 3~54°/. We may check 
 this result from Table II. on p. 389, which is calculated 
 on the £60 rate of wage. It shows that, where the rate 
 of wages is £60 — the rate of productivity being given — 
 the undertaker finds an eight years’ production period the 
 most profitable; that 4' 16 labourers may be employed by 
 £1000 of capital, and therefore, 10,000,000 of labourers 
 by £2400,000,000 ; and, finally, that this (relatively) most 
 profitable method of production yields 3‘54^ interest on 
 the undertaker’s capital. 
 
 As compared with the earlier ones this rate shows a 
 
 ^ As. e.q.^ in the familiar proposition that an increase of the, national papUa] 
 t ends to reduns the interest r ate. In tlie points here raised, I am in very thorough 
 agreement with Walras, who, like Thiinen, starts from a theory of interest 
 which, in my opinion, is essentially wrong, and yet is able to arrive at many 
 details correctly and with fine scientific feeling. The coming second edition of his 
 Elements d' hconomie Politique Pure, the proof sheets of which, by the kindness 
 of the author, I was permitted to see, contains many forcible and noteworthy 
 passages on this subject. I can only regret that they are expressed in the 
 troublesome and difficult language of mathematics. The conception of political 
 economy as pre-eminently a m athe matical science is one on which , notwith- 
 standing what the distinguished economist has recently said (p. 191 in new 
 edition), I fear we shall never b e able_to agree,. 
 
CHAP III SUBSISTENCE INCREASING, AGIO FALLS 
 
 397 
 
 considerable decline, the reason of which is very easily ex- 
 plained. ' When the subsistence fund is increased men can- 
 only keep it fully employed by entering on further exten- 
 sions of the production period, which extensions are acconi - 
 ]i anied by steadily decreasing surplus returns. Indeed the 
 surplus return of the last extension of production economic- 
 ally possible (from seven to eight years) is only 30 s., and the 
 surplus return of the first non-permissible extension (from 
 eight to nine years) is only 20 s. And since the rise of the 
 year’s wage from £50 to £60 requires, for the one year’s 
 extension, not a capital of £25, but a capital of £30 per man, 
 the marginal limits for the interest rate are 3 Os. on £30. 
 (i.e. 5'^) as upper limit, and 20s. on £30 (f.e. 3-^'% ) as ^ower 
 As a fact the agio of 3'54^, which we found mnpiric- 
 ally, falls between these determining marginal limits.^ 
 
 TABLE IV. 
 Wage £ 42 . 
 
 Production 
 Period in 
 years. 
 
 Annual 
 
 Product. 
 
 Annual profit 
 per 
 
 labourer. 
 
 Number 
 
 of 
 
 employed. 
 
 Total profit 
 on the 
 £1000. 
 
 1 
 
 £35 
 
 0 
 
 — £7 
 
 0 
 
 47-62 
 
 Loss 
 
 2 
 
 45 
 
 0 
 
 3 
 
 0 
 
 23-81 
 
 £71-43 
 
 3 
 
 53 
 
 0 
 
 11 
 
 0 
 
 15-87 
 
 174-57 
 
 4 
 
 58 
 
 0 
 
 16 
 
 0 
 
 11-905 
 
 190-48 
 
 5 
 
 62 
 
 0 
 
 20 
 
 0 
 
 9-524 
 
 190-48 
 
 6 
 
 65 
 
 0 
 
 23 
 
 0 
 
 7-93 
 
 182-39 
 
 7 
 
 67 
 
 0 
 
 25 
 
 0 
 
 6-8 
 
 170 
 
 8 
 
 68 
 
 10 
 
 26 
 
 10 
 
 5-95 
 
 157-675 
 
 9 
 
 69 
 
 10 
 
 27 
 
 10 
 
 5-29 
 
 145-475 
 
 10 
 
 70 
 
 0 
 
 28 
 
 0 
 
 4-76 
 
 133-28 
 
 Assume, conversely, that the available subsistence fund 
 amounts only to £1000.000.0Q0. the equilihriuni, as will be 
 seen from Table IV., is attained at a rate of wage of £42. and 
 
 ^ In this case it falls considerably nearer the under limit on account of the 
 relative abundance of the capital, which would be almost sufficient for general 
 adoption of a nine years’ production period. 
 
398 
 
 THE RATE IN MARKET TRANSACTIONS book vn 
 
 ail agio of 19 '04 8%. This is accompanied by some interesting 
 circumstances which will repay a moment’s attention, as they 
 may be often enough realised in practical life, although not 
 seen there in their full abstract purity. At a prevailing wage 
 of £42, as it happens, two different production neriods of four. 
 and five years respectively are equally profitabl e, and pay 
 19‘048% interest on the capital invested in them. The result 
 of this is that neither of them economically shuts out the 
 other; b oth may be adopted simultaneously : indeed, not only 
 may, but must, to kc ejx-tli fi. equilib rium. If the four years’ 
 period alone were adopted, only £840,000,000 of capital would 
 find . employment at a wage of £42.^ If, again, the five years’ 
 period were exclusively adopted, the existing capital would 
 employ only 9,524,000 labourers;* and in either case the 
 unemployed elements would, as we know, disturb the equili- 
 brium by overbidding and underbidding. The equilibrium 
 can only be found if the two equally profitable methods of 
 production are engaged in simultaneously, when 7,619,000 
 labourers will be employed by a capital of £800,000,000 in 
 five years’ production and 2,381,000 labourers by a capital of 
 £200,000,000 in four years’ production. 
 
 And, in virtue of this peculiarity, the latitude allowed in 
 fixing the agio by the valuations of the marginal pair will be 
 much more sharply limited in this than in the former examples. 
 The last economically permissible extension of production is 
 from four to five years, which brings in a surplus return of £4, 
 that being a surplus on £21, half the year’s wage. But, as it 
 happens, the first excluded extension of production is also that 
 from four to five years, inasmuch as — as shown above — the 
 existing capital allows only a portion of the producers to take 
 the five years’ production period. Consequently the surplus 
 return of the first excluded process — that which forms the 
 lower limit of the interest — is also fixed at £4. The upper 
 
 ^ That is to say, with £1000 capital, as the table shows, 11 ’905 labourers could 
 be employed in four years’ production. To employ all the existing ten million 
 labourers, therefore, a capital is required which follows this proportion : 
 
 1000 : a;=ll'905 ; 10,000,000. 
 
 The solution of this proportion gives : 
 
 a:=: 10,000,000,000 : 11-905 = 840,000,000. 
 
 ^ With £1000 capital 9-524 labourers are employed in five years’ production ; 
 with 1000 millioihs of capital, therefore, 9-524 millions of labourers. 
 
CHAP. HI SUBSISTENCE DECREASING, AGIO RISES 
 
 399 
 
 and lower limit, therefore, coincide ., and the interest must be 
 determined strictly at the rate of £4 on £21 ; that is, at 
 19'048%, just as actually shown in our former scheme.^ 
 
 Now the agio here is considerably higher than in the 
 former cases. And our theory again explains it quite simply. 
 
 I I may call attention to the fact that now we arrive at the figure 19 ‘048 by 
 
 a quite different waj, by quite different lines of thouglit, and by quite different 
 
 calculations, t han in the above table . There we sought and found empirically 
 the figures of wage and interest at which, under the given assumptions, the equili- 
 brium of Supply and Demand may be established. Now, applying the law of the 
 marginal pair to the concrete case, we have deduced that the interest must lie 
 between the surplus returns of the last extension of production still permissible, 
 and the first excluded, and arrived thereby exactly at tbe same figure 19 '048. 
 In the former case we get our figures immediately by multiplication of the number 
 of employed by the gain made per labourer (11 '905x16 and 9'524x20). Here 
 we get the same figure by dividing the dependent last surplus product by half the 
 wage (4 ; 21). T may, therefore, take this agreement as a proof that our d ed uctive 
 reasoning correctly expressed the resnlts empiricall y established. — Here also it 
 may be the most suitable place to point out the error into which Jevons fell as 
 regards this question. Jevons recognises perfectly c orrectly that the “last 
 surplu s return ” decides the interest rate ; but, owing to an oversight in 
 principle, he makes the mistake of fixing on that other amount to which this 
 surplus return must be put in relation, and deduces the rate of interest, not from 
 the relation of the last surplus return to the sum of subsistence which allows the 
 l^t exte nsion of production, but from the quite different relation in which that 
 surplus return stands to the value of the whole product which might have been 
 obtained without the last extension of production. ‘ ‘ The interest of capital is 
 the rate nf-increase of the produce divided by the whole produce ” {Pol. Econ. second 
 editiOri, p. 267). The seriousness of this oversight will be best seen from a con- 
 crete example, which, for the sake of easier comprehension, I shall take from the 
 case of isolated exchange spoken of above (p. 378). Remembering what was then 
 said, let us suppose the case of an undertaker whose means would allow him to 
 carry through an eight years’ producticfti period -with a yearly return of £68 : 10s., 
 and who, by a loan of £30, which would guarantee him subsistence for a ninth 
 year, is put in a position to go on to a nine years’ production period with a return 
 of £69 : 10s., or a surplus return of 20a. According to Jevons this should show 
 an interest rate of £1 on £68 ; 10s., or 1'46%. But evidently there is no ground 
 whatever why the suitor for the loan should be ready to offer £1 per year and 
 no more as interest for a sum of £68 ; 10s. It is not the amount of £68 : 10s., 
 but that of £30, whose acquisition makes the extension of production possible, calls 
 forth the surplus return of £1, and, consequently, may be paid, in the most extreme 
 case, by £1, but, on the assumption noted on p. 378, note 1, by as much as £2 
 per year. As a fact, then, in the case of this illustration, it is not, as Jevons 
 assumed, an interest of £1 on £68 : 10s., or 1'46%, that is economically possible,- 
 but an interest of £1 on £30. or 3^%. in deed, on the above assumption, a rate 
 of £1 on £15, or 6|%. A certain very modest kernel of truth may be found, 
 all the same, in Jevons’s error ; but to point it out I should require to go still 
 further afield into discussions in which I could not assume that the majority of 
 my readers would find sufficient interest. 
 
400 
 
 THE RATE IN MARKET TRANSACTIONS book vii 
 
 The reason is that the diminished subsistence fund allows only 
 of comparatively short processes on the average, and consequently 
 the “ last extension of production ” — that which decides the 
 interest rate — falls in a sphere where any extension of the pro- 
 duction periods is 
 
 So much for the effect of an alteration in the amount of 
 the subsistence fund : we have still to follow the p.ffftct of a.u 
 alteration in number of workers . Any detailed calculation here, 
 however, should not be necessary. It does not require much 
 consideration to see that ^ change in the number of labour- 
 ers must exert its influence on the rate of interest in exactly 
 
 the opposite direction. Whether, for example, the number 
 of labourers remains steady at 10,000,000, and the subsistence" 
 ftind contracts from £1500,000,000 to £1000,000,000; or 
 whether the subsistence fund remains at £1500,000,000 and 
 the labourers increase from 10,000,000 to 1500,000,00^ ; — in 
 either case the subsistence fund is just sufficient to employ the 
 existing labourers partly in four, partly in five years’ periods, 
 while the “ last ” and decisive surplus return is £4 on £21, and 
 the resulting rate 19 ’04 8^. And it is as clear that, if subsist - 
 ence and laboure rs vary si multaneously in the same direction 
 — s ay that both increase — the variations will weake n thp pffi - 
 ciency of both , and the final movement of the rate will follow 
 that direction taken by the stronger of the varying factors ; and 
 that, on the other hand, if both factors vary not only in the 
 same direction but also in the same ratio, the rate will remain 
 unchanged. Suppose, for instance, that the number of workers 
 and the amount of the subsistence fund both double, it is 
 evident that the doubled fund will be sufficient to provide for 
 the doubled numbers over the same production periods as before, 
 and that the “ last ” and decisive surplus, and with it the 
 interest rate, wiU remain unchanged. If, again, the fund were 
 to double while the numbers increased only by a half, it is 
 obvious that, on the average, a longer production period could 
 be adopted than formerly ; in which case the decisive “ last ” 
 surplus return would be reduced to a lower point on the 
 descending scale of surpluses, and the interest i-ate would 
 also fall. 
 
 rinally, we might inquire, on the same lines, what will be 
 
CHAP. Ill 
 
 ITS THREE FACTORS 
 
 401 
 
 ihe effect of an alteration in a third factor, the state of pro- 
 ducti\4t\ % assuming that subsistence fund and number of 
 labourers remain constant. Here also we may spare ourselves 
 any detailed tabular statement. It does not require any exact 
 calculation to prove that if, other circumstances remaining un 
 changed, the scale of surplus returns constantly shows highe r 
 tigures, the surplus return yielded by the last extension of 
 production that is economically permissible — that which decides 
 the interest rate — must be higher, and vice versd . Say that 
 subsistence fund and number of labourers stand in such a rela- 
 tion as to permit of an average five years’ production period, 
 the interest will be higher if the extension of the production 
 period from four to five years is attended by a surplus return 
 of £6 as against £4, or of £4 against £1. 
 
 We have, then, over the sphere of our investigations so 
 far, to record three elements or factors which act as decisive 
 determinants of the rate of interest : the Amount of the 
 national subsistence fund, the Hu m ber of workers provided for 
 ^v it. and the Degree of productivity in extending production 
 
 p gr iod Sv And the way in which these three factors affect 
 the rate may be put as follows : — 
 
 In a community interest will be high in proportion as the 
 national subsistence fund is low, as the number of labourers 
 employed by the same is great, and as the surplus returns con- 
 nected with any further extension of the production period 
 continue high. ConverselY. interest will be low the greater 
 the subsistence fund, the fewer the 1a,bourers. and the quick er 
 the fall of the surplus returns. 
 
 This is the way in which the interest rate should be 
 formed, and the way in which it should alter, if our theory 
 is correct. How is it in actual life ? — Exactly -ns nnr forirmla 
 predicts, and thus experience gives that formula the most com- 
 plete verification. For, first, it is one of the best accredited and 
 recognised facts of economic history that the increase of the 
 subsistence fund, or, to use an expression not quite so accurate 
 but yet roughly significant, the increase of the community’s 
 capital, has a tendency to depress the rate of interest. 
 
 Second, it is no less familiar and self-evident that here we 
 do not speak of the absolute amount of the national capital, 
 but of the relation between that capital and the numbeis 
 
 2 D 
 
402 
 
 THE RATE IN MARKET TRANSACTIONS book vii 
 
 of the population : in othei words, we mea,n that an increase 
 of popiilation, without a simnltaneo ns inorpasR of capital, has a 
 tendenc y to raise the interest rate. And, tliirdly, it is also an 
 i^nowTedged empirical fact that the discovery of new and more 
 productive methods of production , outlets, business opportuni- 
 ties, etc., which conduce to check the fall of surplus returns, 
 tend to raise the rate of interest , while the closing of former 
 opportunities of production or sale, or other occurrences which 
 end in a reduction of the previous degree of productiveness, 
 tend to lower the interest rate. We find, therefore, that all 
 those factors to which, on the lines of our former inquiry, we 
 were forced to ascribe a decisive influence on the interest rate, 
 do, as a fact, possess and exert that influence. 
 
 And now it is time to give, one by one, the features and 
 forms of actual life to our abstract scheme. 
 
CHAPTER IV 
 
 THE MAKKET FOR CAPITAL IN ITS FULL DEtELOPMENT 
 
 Up till this uoint wr ha,ve assumed that the annual product of 
 
 each worPp.r, n.Tirl alsn the anmial wage, is the same in aU 
 branches of employmeii fc. Of course, in actual life this is not 
 the case. But that does not in the least disturb the normal 
 connections and relations we have laid down, otherwise than 
 by acting as if there were a somewhat different number of un- 
 skilled labourers with ordinary wages and ordinary productivity. 
 For even if the absolute amount of the return to labour on the 
 one hand, and that of the wage of labour on the other, be ever 
 so various in the various branches of employment, still the ratio 
 between these tw o ammints will, i n virtue, of the famihar 
 of ^qua.bsa.tinn of nrofits. remain the same all over, and this 
 is the essential matter in the question of Interest. If, for 
 instance, in one branch of production, the wage of unskilled 
 labour be £50, and the product of a year’s labour £65, in 
 another branch, carried on mostly by skilled labour, the worker’s 
 annual product may, perhaps, be double, say £130. But then 
 the wage of such a worker will also rise to double, say to £100. 
 For, if it did not rise, the undertakers in this branch of busi- 
 ness would obtain an abnormal surplus ; thi s would attract 
 stronger competition ; and competition would either raise wages 
 by creating an active demand for workers, or press down the 
 price of products by increasing supply. But if the wage of 
 the skdled labourer were to rise higher than £100, the under- 
 takers in question would agaui obtain too small a profit, and 
 the consequent limitation of that branch of production would 
 undoubtedly either press down the wage of workers, who would 
 now have become partly superfluous, or raise the price of 
 
404 
 
 THE MARKET FOR CAPITAL 
 
 BOOK VII 
 
 the restricted product, till such time as wage and product, here 
 as everywhere, stand in the ratio of £50 to £65, or £100 to 
 £130. But if this ratio l ipt-yvppn wagos a nd product holds, al l 
 the ratios relating to the formation of interest are exactly as 
 they have been assumed to be in our earlier tabular statement, 
 with the single qualification already mentioned, that the exist- 
 ence of better paid skilled labour has exactly the same effect 
 as a somewhat greater number of normally paid unskilled 
 laliourers. For, obviously, it is all the same as regards the 
 resultant arrived at in the subsistence market, whether two 
 labourers produce £65 each, and claim £50 each of subsistence, 
 or one labourer produces £130 and claims £100. 
 
 Further, we have assumed up tiU now that, in all branches 
 of business, the increment of annual return that accompanies 
 the increasing extension of the production period, moves in the 
 same rate of progression. This also is not the case in real life. 
 On the contrary, each branch of production, in virtue of its 
 
 t echnical circumstances, has a different and— of t en , indeed, a. 
 v ery different scale, of productivity . It is, for instance, quite 
 possible that three different branches of production — call them 
 A, B, and C — which were each turning out in a one year’s 
 process an annual product of £50, might show an exceedingly 
 divergent return (or surplus return) if the process were 
 extended for two to five years more. We might have something 
 like the following : — 
 
 Production 
 
 Period. 
 
 A 
 
 B 
 
 C 
 
 r 
 
 Return. 
 
 Surplus. 
 
 Eetum. 
 
 Surplus. 
 
 r 
 
 Return. 
 
 Surplus. 
 
 1 year 
 
 £50 
 
 0 
 
 
 £50 
 
 0 
 
 _ 
 
 £50 
 
 0 
 
 
 
 2 years 
 
 51 
 
 0 
 
 £1 0 
 
 52 
 
 0 
 
 £2 0 
 
 60 
 
 0 £10 
 
 0 
 
 3 „ 
 
 51 
 
 10 
 
 0 10 
 
 53 
 
 0 
 
 1 0 
 
 65 
 
 0 
 
 5 
 
 0 
 
 4 „ 
 
 51 
 
 16 
 
 0 6 
 
 53 
 
 10 
 
 0 10 
 
 67 
 
 10 
 
 2 
 
 10 
 
 5 „ 
 
 52 
 
 0 
 
 0 4 
 
 53 
 
 16 
 
 0 6 
 
 69 
 
 0 
 
 1 
 
 10 
 
 Naturally this has its practical consequences. It is the 
 producers’ interest to obtain the greatest returns or surplus 
 returns. They will, therefore, invest the available -.eaDitaI 
 where they a.rft tp.Tnptp.d by the greatest returns. If there is 
 
CHAP. IV 
 
 ISOHYPSE OF SURPLUS RETURNS 
 
 405 
 
 capital over, or if new capital is added, they will look out for 
 the next best pa}Tng employments, and so on, in such a way 
 that they will only take a less paying employment when all 
 the more paying chances have been utilised. 
 
 Now if, as we have hitherto assumed, the. progression of 
 surplus returns obtainable from similar extensions of produc- 
 tion were the same in all branches of employment, then, in 
 all branches of employment, the same surplus would be reached 
 by the same length of process, and, consequently, an equally 
 long production period would prevail simultaneously over all^^ 
 employments. As capital increased it would press on, with 
 one united front, from one to two, from two to three years’ 
 production, and so on. But, as we have said, nwjpg tn 
 different technical circumstances in the various brandies oh 
 
 production , we actually meet the same surph i-q rpt.nm in pm^ 
 ductive periods of different lengths. While, then, in the 
 investing of capital we pursue an isohypse — to borrow a 
 geographical term — of surplus returns, we must diverge from 
 an isohypse of extensions of production. Production in its 
 various branches must be ca.rried QjL_in unequally long 
 
 processes ; and, indeed, in those branches where the surplus 
 return sinks rapidly, it must be carried on in shorter periods. 
 
 The above scheme will illustrate this. First of all pro- 
 duction is carried on, in all three branches, in a one year’s 
 process with a return of £50 per labour- year. If the sub- 
 sistence fund increases so much that at least a partial extension 
 over the one year’s period is possible, people will pass first to 
 a two years’ process in branch C. which bears a .surplus returp 
 of £10 for a half-year’s payment. ^ Then the production period 
 will be extended in the same branch C to three years (with a 
 surplus return of £5), and to four years (with a surplus of 
 £2 : 10s.), while the other two branches of production are 
 all the time persisting in the comparatively unremunerative 
 one year’s process. Only where the subsistence fund increases 
 still further will they pass in branch B to two years’ produc- 
 tion (with a surplus return of £2). But in .branch A they 
 will not be able to extend the period of their production 
 (which only gives a surplus return of £1), until all opportunities 
 of production have been utilised up to the isohypse of £1. 
 
 See above, p. 392. 
 
406 
 
 THE MARKET FOR CAPITAL 
 
 BOOK VIl 
 
 This will only be the case when in branch C the production 
 period has been extended to five years, and in branch B to 
 three years. Production, then, will and must be carried on 
 simultaneously in the three different blanches in two, three, 
 
 and five years’ periods- — a conclusion which we see verified in 
 economic practice in the familiar fact that different products 
 are produced with very different degrees of capitalism. Fond, 
 for instance, is a much less capitali stic product than metallic 
 goods , or clothing stuffs, or manufacturing products generally.^ 
 
 How, then, is our law of the rate of interest affected by 
 this complexity of actual circumstances ? — It is not disturbed 
 in the least. Por all the essential circumstances on which it 
 rests remain unchanged. It is still the oase that the existent 
 capital is employed in gradually extending processes till it is 
 fully occupied. It is still the case that there is a certain level 
 of these extensions, yielding a certain surplus return, which 
 is the last economically permissible, and a succeeding level 
 yielding a somewhat less surplus return which is economically 
 not permissible. A nd, finally, it is still the case that the 
 s urplus returns of these “ marginal employments ” also form 
 the marginal limits of the interest rate^ The single difference 
 — and that not an essential one — is that the isohypse of th e 
 su rplus returns, and with it the line of the last permissible 
 extensions of production, is not a straight line , but nms in 
 an undulatory or zigzag fashion through the different branches 
 of production, according as the same surplus return is reached 
 by them in longer or shorter processes. But this modification 
 gives our law a still sharper power of definition. For as, in 
 consequence of the complexity of actual life, the scale of pro- 
 ductivity is much more finely graduated than was our simple 
 typical scheme, the two marginal limits, as a rule, stand much 
 nearer each other, and consequently narrow the zone within 
 which price is determined very much more closely than is 
 shown in our abstract illustration.^ 
 
 To proceed. Hitherto we have assumed that the dema nd 
 for p resent goods comes simplv from the wage-earners, (either 
 directly or through the mediation of undertakers). But this, 
 
 ^ See what was said above on p. 334 : the two passages mutually supplement 
 each other. ^ See above, p. 394. 
 
CHAP. IV 
 
 DEMAND FOR CONSUMPTION 
 
 407 
 
 again, in actual Life is not correct : there are a few other 
 competitors in the market. 
 
 There are, first, the suitors f or rnn sum ption credit . Their 
 demand is graduated and stratified according to the urgency 
 of their need for present goods.^ One class will be in such 
 pressing need that, in the worst case, they will be glad to 
 offer an agio of 100^ : another class will only go the length 
 of 80% : a third will offer 60% ; others 50%, and so on 
 down the scale, perhaps, to 2%. Now these suitors join 
 their claims to the demand which comes from the wage- 
 
 earner s, and each class or layer of them is satisfied con- 
 currently with that layer of productive employments yielding 
 a surplus return that represents the same percentage. If, 
 for instance, the investing of capital reaches the isohypse 
 of a surplus of £4 on £21, all those suitors for loans wiQ 
 be satisfied simultaneously who, in the worst circumstances, 
 are able to offer 19 '048% or more: if it reaches the isohypse 
 of a surplus of £2 : 10s. on £25 all suitors will be served who 
 are willing to offer at least 10%, and so on. 
 
 It would be quite erroneous to understand this as meaning 
 that the rate of loan interest is determined simply bv the rate 
 
 of interest obtained in production. It contributes just as 
 
 much to determine the latter, as it is determined by it. Both 
 classes of demand work in entire co-ordination. The fact that 
 there is a certain class of suitors for consumption loans, and 
 that this class takes a portion of the existent means of sub- 
 sistence out of the market, involves that there are fewer means 
 at the disposal of productive investors ; investment must caU 
 a halt at a higher isohypse of surplus returns ; and this again 
 involves a higher rate of interest in the sphere of production. 
 Conversely the presence of the productive demand results in a 
 considerable portion of the means of subsistence being claimed 
 for productive purposes, and this again has the result that the 
 wants of consumption credit are not satisfied at such low 
 levels as would otherwise have been the case. In the present 
 day, of course, the productive demand is so much the more. 
 important of the two that one is apt to suppose that it alone^ 
 
 niles the rate of interest. But this false impression is now 
 and then sensibly corrected by experience when some great 
 
 ^ See above, p. 376. 
 
408 
 
 THE MARKET FOR CAPITAL 
 
 BOOK VII 
 
 X 
 
 /OtX 
 
 state-loan for consumption purposes — say for a war — makes 
 , the general interest rate fly ufi. even when the demand 
 
 for consumption credit is quite insignificant, it does not fail to 
 exert some influence on the rate ; it may always be contended 
 that, if it were to disappear, the interest rate would be at least 
 a fraction lower than it is now. 
 
 ^ Another competitor in the market for capital is the Land- 
 
 owner. If owners work their own lands, and are content to 
 maintain themselves by the fruits of their labour (whereby 
 they lay past their rent as saving), they are no burden on the 
 subsistence fund of the community. If, however, they live 
 wholly or partiaUy on their rents, their subsistence also must 
 
 be advanced out of the community’s fund, for a length of time 
 proportional to the production periods in which their land is 
 laid down. Suppose, for instance, that the wealthy cotton 
 planter hves in idleness on his rents, and that the total pro- 
 duction process of textiles, including the various stages of 
 spinning, weaving, etc., down to the manufacture of the finished 
 cotton stuffs, takes five years, the maintena nce of the planter. 
 just as much as that of his field-worker, mnat bp Advanced 
 out of the subsistence fund over five vears^ The advance 
 win then, of course, be refunded out of that quota of pro- 
 duct which — according to the law of complementary goods — 
 is due to the co-operation of the uses of land ; but, in the 
 meantime, the landowner lives at the expense of the sub- 
 sistence fund. 
 
 "W hat kind of effect has this on the rate of interest ? — -Its, 
 effe ct is entirely similar to that of consumption credit. The 
 competition of landowners takes a certain amount of subsist- 
 ence out of the market ; it thus curtails the investment of 
 capital in production, and makes it call a halt at a higher 
 isohypse of surplus returns; and this, finally, keeps up the 
 rate of interest. In doing so, however, the claim of the land- 
 owner on subsistence comes under a reflex influence from the 
 I height of the interest rate. This, of course, has no reference 
 \ to the height of the annual rents — for this is fixed by those 
 circumstances which influence the economic value of uses of 
 t land, and need not be mentioned here — but to the numher of 
 [ annual rents for which advances of subsistence are demanded. 
 That is to say ; if interest is high, kngthy peripd_s_.,pi_prDdjiQr 
 
CHAP. IV 
 
 LANDOWNERS AND CAPITALISTS 
 
 409 
 
 tion are not prnfitahip. the uses of land will be invested in 
 comparatively short processes ; and, as consequence, the a.cL 
 vances made to landowners will only be for short periods. If, 
 
 however, the interest I'ate is low, then, concurrently with the 
 increase in production and consumption credit, increases the 
 subsistence advanced to the landowners ; it now extends over 
 a greater number of annual rents according as the uses of 
 their land can now be invested in much longer processes. 
 
 There is one other competing party in the m arke t, the/^ ^ 
 Capitalists themselves. So far as they live, entirely or par- 
 tially, on their interest, their maintenance also will be defrayed 
 from the subsistence fund, and, in so far as the fund available 
 for other purposes is thereby contracted, will the interest rate 
 tend to rise. There is, however, one important difference 
 between the claims of the capitalist on subsistence, and those 
 of the wage-earners, the suitors for loans, and the landowners. 
 
 The claims of the latter are the cause of the agio on present ^ 
 
 goods : the claims of the former are simply its effect . If the 
 claims on subsistence presented by the wage-earners, borrowers, 
 and landowners did not by themselves alone exceed the existent 
 subsistence fund, there would be no agio on present goods, and, 
 as consequence, the capitahsts, as such, could make no valid 
 claim for subsistence on the funds of the community : in_ 
 default of an income from intprpst they would have to support 
 t hemselves by work. It is only because there is an agio, as 
 effect of the other classes of demand, that the capitalists can 
 claim a quota of the product as interest, and claim it indeed in 
 advance. Eeflexly of course, this cl aim of the capitahstSLin-, ^ 
 lluences the rate of inte res t. It is exactly as, for instance, in 
 electrical induction. The chief current first calls out the 
 induction current, and then the latter reflexly influences, and 
 indeed strengthens, the chief current. Just in the same way 
 does the demand of the other competing parties in the market, 
 by_creati ng an agio, first call out, the claims of the capitalists, 
 on subsistence : but, so soo n_as the agio is a fact, it diverts 
 a po rtioEuof the subsistence fund into the income of the 
 capita lists ; it thus contracts the disposable remainder ; deter- 
 mines the “ saturation point,” in the remaining branches, at a 
 
 1 WMcli can be quite easily calculated from our tabular e.xamples. Sec, too, 
 the close connection of what was said on p. 382. 
 
 
 y 
 
BOOK Vll 
 
 410 THE MARKET FOR CAPITAL 
 
 higher marginal utility ; a^i^so, in the las t resort, c auses a 
 rise of the agio. 
 
 Suppose we try now to unite the scattered features into 
 one picture. In its collective stock of wealth every people pos- 
 sesses a greater or less fund of subsistence. This is consumed 
 definitively by uneconomic persons who waste their parent 
 wealth,^ and by the suitors for consumption credit : it is 
 consumed as an advance by landowners, capitalists, and wage- 
 earners during the social pei’iod of production.^ The greater 
 the subsistence fund, the longer can the social period of 
 production be extended, and the more completely can the 
 demands for consumption ciedit be satisfied. The return of 
 the last extensions of production still possible, and, c oncurrentl y, 
 the valuation of the last suitors who obtain loans, determine 
 the height of the agio on present goods. 
 
 . Consequently, on the basis of our completed inquiries, the 
 following factors emerge as the most im portant concrete 
 circumstances or “ determinants ” which influence the rate of 
 
 interest . 
 
 First come the same three factors which from our inquiry 
 into the circumstances of the labour market in its most abstract 
 form we were forced to recognise as decisive : — 
 
 1. The amount of the National Subsistence Fund. 
 
 2. The number of produceua to be provided for out of 
 the same. 
 
 3. The position of the scale of surplus returns, connected 
 with the increasing extensions of process. 
 
 After these come : — < 
 
 4. The extent and the intensity of the desire for -con - 
 sumption loans. 
 
 5. The existence and the height of land renp^ The higher 
 
 1 See above, p. 319. 
 
 2 Members of the community not here mentioned, as women, children, 
 persons who occupy themselves with the performance of personal services, as 
 artists, officials, domestics, must also, of course, get part of the subsistence fund. 
 But they are not to be counted separately, for the reason that they, are not a 
 direct charge on the social subsistence fund, but on the portions secured by the 
 
 economical classes already mentioned in the text. Yiolin-plavers. e.Q.. receive a 
 
 fwrtion of the subsistence obtairfed by concert-goers ; the establishment of a 
 rich landowner is supported and paid out of his rent, and so on. 
 
CHAP. IV 
 
 CONCRETE FACTORS OF THE RATE 
 
 411 
 
 that rent is, the more persons there are who can live on their 
 rents without working, and the higher will be the standard 
 of living by which they regulate their maintenance. Natur- 
 ally, if the amount of subsistence which they take as advances 
 out of the social subsistence fund goes parallel with that 
 standard of comfort, there wiU be the less for other pur- 
 poses, and interest will remain at a higher level. The 
 existence of land rent, therefore, tends to enhance the ra.te 
 
 of interest.^ 
 
 6. The existence of a numerous capitalist class living on 
 their interest — for reasons which apply equally to landowners 
 and capitalists. 
 
 7. FinalLv : the economical habits of the population have 
 a great influence directly and indirectly . Indirectly, inas- 
 much as national thrift gathers together a greater stock of 
 wealth : directly, inasmuch as thrifty living diminishes the 
 claims on subsistence, whereby, if subsistence remains constant, 
 the population is maintained for a longer period, and the 
 investment of ca,pital is extended till there is a lower isohypse 
 of surplus returns. If a nation is thrifty, neither landowners 
 nor capitalists will consume all their rents ; they will either 
 work as undertakers, and live simply by their own labour, or 
 at least they will save a portion of their income. The •portion 
 saved represents, as it were, a certain amount of the subsistence 
 
 fund allotted but not taken up. and the amount is left free 
 for another employment, particularly for a further extension 
 of the production period. The same is true of savings which 
 
 1 I must guard myself against a misunderstanding very apt to occur. What 
 T mainhtiTi is fhat the position of land rent as a form of incoTpi; '.— the absorption 
 of a portion of the national product by landowners who live without working, — 
 tends to raise the rate of interest On the other hand. I do not say that t hn. 
 
 the contrary, the well-known law of Diminishing Returns, according to which 
 (in the absence of technical discoveries or improvements) new additions of 
 capital and labour in agriculture lead to a decreasing surplus return, while it 
 exerts an upward influence on land rent, certainly exerts a depressing influence on 
 interest (see point 3 in the text). The full bearing of my contention is best 
 expressed in this ; — that in event of the taking away of private right to land, or 
 Tipavy and ^r.nfif|catorv taxation of land rent, interest in that community would 
 
 . stand In- n-pr tVia n it would otherwise. The causes of land rent, in themselves, 
 would depress interest, but land rent, as one of the shares in the division, through 
 its efiects on the division, makes up for a portion of these influences. 
 
412 
 
 THE MARKET FOR CAPITAL 
 
 BOOK VII 
 
 the labourers, or such persons as are in possession of a secondary 
 income, are able to make.^ 
 
 If we pursue this line of thought a little further we shall 
 repair an omission in our former analysis. Hitherto we have 
 considered subsistence fund and subsistence claims as some- 
 
 thing actually existing and present : we must now consider 
 them in the act of becoming. Hitherto we have looked at the 
 subsistence fund as standing over against, and disputing the 
 claims which the open market made on it : we have still t o 
 consider th^ nmcolpcg b^i never-cea siTig wa^d on__w ealth. 
 in p.a.ch indibddual ftconm-n y bv the desire of enjoyment. What 
 follows will form both continuation and conclusion of another 
 line of thought on the subject of tbp formation of capital 
 begun on p. 124. 
 
 ' It may, perhaps, have been noticed that the often-mentioned factor of 
 I nsurance or Risk, which plays so great a part in practical life, especially in 
 determining the rate of interest on loans, is missed out in my enumeration. 
 This factor, however, has no place here. For the surplus return which this 
 gives the capitalist, if-to-alLAppe arance it raises the rate of interest, is in truth 
 no real interest. — no net income accruing from the possession of capital, — but 
 only a replacement for a loss of parent stock which shows itself as unavoidable 
 over a great average of cases. — Finally, from the whole course of my research, it 
 will be self-evident that itjwas not my intention to introduce nvbanstiv piy nil, tfie 
 secondary determinants of the rate of interest. I have contented myself inten- 
 tionally with enumerating the most important of those determinants which 
 come into view as typical if the economical interests of the market are followed 
 without let and hindrance. On the other hand, the influence of motives such 
 as generosity, national prejudice, vanity, etc. (see Conrad's Jahrhilcher, vol. xiii. 
 p. 486) I have purposely left out of account here. See also below. 
 
CHAPTEE V 
 
 THE MARKET FOR CAPITAL IN ITS FULL DEVELOPMENT 
 {continued) 
 
 Every man has the power of disposal over a certain amount 
 of goods, small or great, partly deUvered him as “ parent 
 wealth ” by the past, partly obtained by him as “ income ” 
 in the present, and these two together form his " wealth ” 
 {Vermogen). The natural destination of this wealth is to 
 satisfy his wants. It may be said wealth exists for wants. 
 But many wants compete with each other and put in rival 
 claims. On the one hand, wants of different kinds compete 
 at the same point of time ; on the other hand, wants of 
 different times — wants of the present and wants of the future 
 — compete with each other. How are these various claims to 
 be adjusted ? 
 
 In a good economical system they will be adjusted in 
 
 accordance with the principle of “ economical conduct.” which 
 prescribes that the goods available should secure the highest 
 possible personal utility. And since even the richest man’s 
 wealth is not sufficient to satisfy aU his wants and wishes 
 this again demands that he make a wise selection among his 
 wants so that he may procure satisfaction, as his available 
 means will allow, to the most important, and leave the unim- 
 portant unsatisfied. Applied to the competition of different 
 classes of wants, this leads to the principle of harmonious 
 satisfaction ; by which is meant that, in a.h branr.hpg - nf wg nt, 
 satisfaction reaches down to the same level of importance, so 
 that, over the whole field, the unit of goods procure.^ thp. .gamp, 
 marginal utility . For if in one department of want a man were 
 to break off the satisfaction he gets at a high level, in order to 
 
414 
 
 THE MARKET FOR CAPITAL 
 
 BOOK VII 
 
 seek for satisfaction in another department at a lower level, it 
 would mean that he deliberately renounced a greater utility 
 for a less one, and this would be to run counter to economical 
 principles.^ 
 
 But we employ the very same principle of harmonious 
 
 satisfaction, and for the same reasons, to regulate the competiT 
 
 tion between the wants of various times. In the economical 
 furtherance of our life we reach the highest possible point, 
 ^ when we distribute the means of satisfaction, which we, have 
 at our disposal, over the various periods of time in such a way 
 that the last unit of goods procures the sa,mR marginal utility 
 at all points of time. For, so long as this is not the ease, we 
 shall, obviously, be able to increase the amount of our gain 
 by withdrawing units of goods from those times in which 
 they procure a smaller marginal utility, and applying them 
 to the provision of those times in which they are fitted to 
 procure a greater marginal utility.^ 
 
 nationally speaking, therefore, of the presently existing 
 stock of goods we should only consume so much in the present 
 that the satisfaction of present wants is broken off at the 
 same level as the satisfaction of wants will be broken off 
 in future economic periods— considering the then state of 
 wants and satisfactions : everything over that should be 
 preserved for the service of the future. In_term8 of this rule 
 “ parent wealth ” should, economically, almost always be saved. 
 
 For, if it were consumed in the present along with income, 
 the presept would be, relatively, over-provided, and provision 
 
 / ^ The possibility of a complete harmony of satisfaction is only now and then 
 
 I prevented through an imperfect divisibility of wants on the one aide , and o f 
 I units of goods on the other . See my Grundzuge in Conrad’s Jahrbuchtr, vol. xiii. 
 p. 68, and in particular Wieser’s Ursprung und Haupftgesetze, p. 148. 
 
 ^ It must not be thought that this equilibrium of provision is reached if the 
 available sum of goods is divided over the va riou s periods of time in entirely 
 eq ual amounts , so that each period obtains, allotted to its consumption, exactly 
 the same quantity of goods. The position of wants also changes. A bachelor 
 has to provide for fewer wants than the father of a family ; a healthy man has to 
 make much less expenditure on the preservation of his health than an invalid 
 and frail old man, and so on. Now, obviously, any one would make a very 
 unsymmetrical provision for his wants, who proposed to consume mechanically 
 the same amount of goods during all periods of his life, whether as bachelor, 
 father of a family, or old man. To secure anything like harmonious provision 
 a man m ust anticipate a pr obable increase of wants, and meet it by an increa.y 
 of provision. 
 
CHAP. V 
 
 RATIONAL DISPOSAL OF WEALTH 
 
 415 
 
 would be made for unimportant classes of want ; while, in the 
 following years, only the current income, and that in decreased 
 amount, would be available, and the consequence would be a 
 loss of satisfaction affecting even important classes of want. 
 In exceptional cases, on the other hand, it is directli _fm the 
 l ines of rational economic management to lay hands on this 
 parent wealth : at such times, say, as the income of the 
 present is abnormally small, or want is abnormally urgent, 
 while the prospects are that the future will bring a more 
 favourable state of provision. 
 
 As regards the employment of the c urrent the 
 
 standard law of harmonious satisfaction of present and future 
 will lead to a very difierent method of treatment in different 
 cases. People whose future i.^j spcurerl by safe permanent 
 income, and who, at the same time, do not expect any essential 
 increase of their wants, may, quite reasonably, ennsume tbp.iy 
 entire current income in the c.urrp.nt period . — such people, for 
 instance, as rich landowners who have not a very large family, 
 or who have no wish to secure each of their children in a 
 similarly comfortable life. People, again, whose future income 
 is uncertain or decreasing, or people whose future wants — 
 either their own or their families’ — wiU rise while their in- 
 come is likely to remain unchanged, must, economically, retain 
 a portion of their present income against the more poorly 
 provided for wants of the future : they must “ save,” and must 
 save enough to put the present and the future on a level as 
 regards pro\dsion. 
 
 To be exact : something more should be saved, and the 
 
 promsion be made a gradually augmenting one. The reason 
 for this lies indeed in the existence of interest. Interest on 
 capital being a fact, what we have to choose between is not 
 whether £100 worth of wealth gives us more utility according 
 as we consume it to-day, or consume it next year, or consume 
 it in two years. The £100 saved to-day increases in the next 
 year, through interest, to £105 ; in the next again to £110, 
 and so on ; and the choice now is whether it is more useful to 
 ]is to consume £100 to-day, or £105 next y ear, or £110 the 
 next again. And we shall increase the total amount of our 
 utility by withdrawing more and more goods from the 
 present so long as, with £105 in next year, or £110 m next 
 
416 
 
 THE MARKET FOR CAPITAL 
 
 BOOK VII 
 
 again, and so on, we can secure a greater marginal utility than 
 by £100 in the present year. Thus while, if there were no 
 interest, the limit of rational saving would be the point at 
 which the utility obtainable with just £100 now, and with 
 £100 obtainable at various future periods, is exactly the same, 
 that limit, when interest is a fact, is the point where the pro- 
 
 vision for the various periods is so adjusted that £100 to-daw 
 are as ushF uI as £105 next year, £110 in two years, and so 
 on. But if an increasing expenditure in the future only 
 gives the same amount of utility, it presupposes that, as 
 time goes on, wants of less and less urgency are satisfied — in 
 other words, that the provision for future periods is becoming 
 progressively more ample.^ 
 
 Thus it would be if the principle of “ economical conduct ” 
 were followed with mathematical exactitude. But one might 
 almost say that there is no point where it would be so difficult 
 for men to act up to the claims of this principle as here. Ta 
 divide their stock of goods adequately betwe emjf^reaent and 
 future, they, would require to know exactly both the future’s 
 
 want and the future’s provision — the provision which the future 
 periods when they come will make for themselves. But men 
 have merely vague conjectures as to both amounts. Even as 
 to the momentous question of how many future periods should 
 in general be provided for, the uncertainty of human life makes 
 them grope about completely in the da rk — an uncertainty 
 whicli, ifinust be said, has no disUirbing influence f)n the eco- 
 nomical transactions of that very large class who are anxious to 
 provide, not only for themselves, but, with as much or even 
 more devotion, for their heirs. All the more sensibly, how- 
 ever, is economical conduct disturbed by the familiar psycho- 
 logical fact that almost all men, in greater oi' less degree, 
 underestimate the future and its wants. 
 
 Under the influence of the circumstances just described 
 ' the econo mical conduct of human aflairs s uffers a twofo ld 
 deviation from the ideal of economical provision. F irst : men 
 provide for the future, on the average, more insufficiently than 
 they should . They do not distribute their goods between 
 present and future in such a way, that the marginal utility of 
 
 ' That is to say ; — the utility of £105 in the future is equal to the utility of 
 £100 now, only on the condition that the community’s wealth is increasing. , 
 
CHAP. V DEVIATIONS FROM ECONOMIC PROVISION 
 
 417 
 
 the unit of goods allotted to the present is equal to the effective 
 marginal utilities of those units allotted to future periods and 
 increased by the intermediate inter'est. They distribute them 
 in such a way that the marginal utility of the present unit of 
 goods is equal to the marginal utility of the units assigned to 
 the future, ns that marginal utility is perspectivcly reduced . 
 They save something for the future only in so far as it 
 is clear that, if they did not, they would have to do without 
 future satisfactions whose urgency, even as partially under- 
 estimated by them, still appears as great as the urgency 
 of the last present wants which are satisfied, while its 
 real urgency is, to a more or less degree, greater. Since the 
 partial imrlprvabia.tion of the future varies excessively in 
 
 different individuals, classes, and nations., the divergence from 
 the ideal of economic provision caused by it is, naturally, very 
 different in degree. Among prudent and savingly disposed 
 peoples its influence will be almost nil; in others it will show 
 itself only in an insufficient percentage of saving ; in others, 
 again, in the absence of all saving, or even in light-hearted 
 squandering of parent wealth. Second : economical delibera - 
 ting r»n t.ViA of present and future is not often a finely 
 
 worked- out piece of economic calculation . For the most part 
 it is only a rough and ready reckoning of tendencies. For 
 exact action, before deciding whether to “ spend ” or “ save ” a 
 particular sum of goods, one would always have to be making 
 an accurate picture of want, provision, and marginal utility for 
 the current period, and another picture of want, provision, and 
 marginal utility for all future periods. But this is a piece of 
 work which is somewhat difficult, always troublesome, and one 
 that, in spite of all care, offers no guarantee of any correct result; 
 for, in dealin g with the future, one is always comnelled to- work 
 with ver y uncertain and conjectural data . In these circum- 
 stances not only is it easily explained, but, from the point of 
 view of economical conduct, it is even commendable ^ that the 
 majority of men, instead of repeating from one case to another, 
 or from one year to another, the troublesome and yet deceptive 
 calculation of the claims of present and future, should, Oince for 
 all, accept the guidance of an economic tendency which suits 
 their circumstances fairly well, and only make a revision on 
 
 ^ See my Grundziige in Conrad’s Jahrhiicher, vol. xiii. p. 74. 
 
418 
 
 THE MARKET FOR CAPITAL 
 
 BOOK VII 
 
 occasion of great changes in their economical position, such as 
 a marriage, receiving a legacy, and the like. 
 
 Very often this rough and ready way of economic delibera- 
 tion takes this form ; — that persons, to whom the exact 
 application of the principal rules of economical conduct is too 
 troublesome, make a secondary rule for their circimistances, 
 and for the time live up to it. One man, for p.yaTnpIp.^ maVp.g 
 it an inviolable rule to keep his parent wealth intact : another, 
 to leave his cumbered estate free to his children : a third, to 
 put past so much that he may leave each child a farm : a 
 fourth, to save enough to yield himself £500 a year, and so 
 on. Secondary rules like these will gen erally c oincide, more or 
 T ops, for those who adopt them, with the demands of the true 
 principle of economic conduct. Sometimes, however, they do 
 not thus coincide, with the result that the people who 
 faithfully follow their secondary rule sin grievously against 
 the primary law. For instance, it is grossly uneconomic 
 conduct in any one to cling doggedly to his resolution of not 
 breaking on his parent wealth, and refuse the costly treatment 
 necessary to restore his health ; it is uneconomic not to make 
 some sacrifice for the education of one’s children ; and so on. 
 Finally, a great deal of uneconomic conduct arises from the 
 fact that people who have once got into a definite habit_of 
 saving, quite reasonable at the time when it was commenced. 
 
 persist in it. in a wooden s ort of way, when their economic 
 position has entirely altered. How often do we see people on 
 the very brink of the grave, who have become rich through 
 great saving, still grudging everything to themselves and others, 
 and continuing fo scrape and hoard mechanically for love of it. 
 They begin with saving for love, and they end with love for 
 saving 
 
 Of these two deviations from the ideal economic conduct, 
 the first mentioned is the more i mportant .and the more 
 pernicious. The neglect of exact calculations prevents people 
 from following closely the guidance of economic conduct, but 
 it very seldom prevents them from being more or less true 
 to it ; while the psychological undervaluation of the future 
 forces men positively — and often far — off the lines of economic 
 conduct. Tn the undervaluation, of the future, we have 
 thus to noti ce a factor of interest and of the interest ra te. 
 
CHAP. V 
 
 THE WAGE FUND THEORY 
 
 419 
 
 which, economically, is not at all a pleasing one, but, practi- 
 cally, is a very active one. In an earlier chapter we saw 
 that it co-onerates in the origin o f the phenomenon of interest. \ 
 in so iar as it assists to give a^foundation for an undervaluation | 
 of future as against present goods : now we come to recognis e ■ 
 it also as an exceedingly active indirect determinant of the 
 rate of interest . The stronger its action in a community, the 
 higher will interest rise in that community. For the partial 
 undervaluation of the future leads to curtailing the claims of 
 the future as against those of the present ; to assigning too 
 many instruments of satisfaction to present wants and too few 
 to future. But this leads, on the one hand, to an increase of 
 the present claims on subsistence, and, on the other hand, to a 
 wasteful nibbling at the stock, or, at least, to an inadequate 
 renewal and increase of it through saving : and thus em.erges. 
 th e situation favourable to a high rate of interest, y dz. that a 
 (relatively) small subsistence fund is eaten up by (relatively) 
 heavy claims on subsistence, and so suffices only to defray these 
 claims for a relatively short period. 
 
 The theory I have put forward has a certain resemblance 
 to the noted, or perhaps I should say notorious, “ Wage Fund 
 theory ” of the older English school. Like it I maintain tha 
 existence of a certain Subsistence Fund^ from which the wages 
 of labour in any country are defrayed, and, like it, I attribute 
 to the amount of the subsistence fund an important influence 
 on the reciprocal height of wage and interest. But here the 
 resemblance ends. All the other features, and, among them, 
 the most essential features of both theories, are widely divergent. 
 The Wage Fund of English economists, although con.sidered by 
 them a given and fixed amount, is really a fluctuating indefinit e 
 amnnnt • an amount which, consequently, cannot give any 
 secure point of support on which to base any conclusion as to 
 the height of wage. I mean that the “ amount of capita l 
 destined by capitalists to pay wages ” is neither equivalent to 
 
 the total national capital, nor to the total “ circulating capital.” 
 nor yet to any one fixed quota of the national capital. It 
 represents a variable portion of the community’s wealth, and a 
 portion the extent of which varies directly, among other things, 
 with the height of wages : it is greater when and because wages 
 
420 
 
 THE MARKET FOR CAPITAL 
 
 BOOK VII 
 
 have risen, smaller when and because wages have fallen. In 
 explaining, then, the rate of wages by an amount which itself 
 is conditioned by the rate of wages, the Wage Fund tbp.nry 
 desc ribes a circle.^ My Subsistence Fund, on the other hand- 
 starts with a fixed given amount — the stock of wealth accmmi^ 
 
 lated in a community . Of course that amount of goods which 
 specially serves as subsistence for labourers, and which 1 
 might call th e^^Wage Fund,” forms a part of the total subsis t- 
 ence fund. But the amount of this portion does not hang in 
 the air, as it does in the English theory : in exactly analysing 
 what parties share in the total subsistence fund, and according 
 to what laws, my “ wage fund ” becomes — at least relatively- 
 fixed and definite. 
 
 But the most important difference is the following. The 
 English theory has it that the rate of wages is simply got by 
 dividi ng the wage fund by the number of existing workers . 
 This, is entirely wrong. In any case the labourers get the 
 wage fund wholly and entirely as wage : but that does unt say 
 wage for what time ; — for one year, or two years, or three 
 
 years, or more. The increasing of the subsistence fund has not 
 at all the result, assumed by the English school, that, the 
 number of labourers remaining constant, the rate of wage rises 
 in the same proportion as the amount of the fund increases. 
 The increase of the subsistence fund is, in the first instance 
 and principally, used up in lengthening the production period ; 
 and it is only in so far as the lengthening of the production 
 period leads, at the same time, to a decrease of the surplus 
 returns (according to the diminishing scale of surplus returns 
 which accompanies successive extensions of production) that it 
 leads to a curtailment of the capitalist’s share, and to a pro- 
 portionate rise in the wages of labour ; the rise too being in a 
 much weaker ratio than the increase of the subsistence fund. 
 The Engh'sh Wage Fund theory has thus a core of truth, but 
 
 it is wrapped up in a quite overpowering mass of error.^ 
 
 * See the short and clear statement by Mithoff in Schdnberg’s Handbuch. 
 second edition, vol. i. p. 643, particularly note 53. 
 
 ^ I do not at al l pretend, in the somewhat sketchy suggestions which this 
 chapter contain s on the subject of wage, to have given a perfect theory of that 
 matter. In particular, my occasional remarks have only dealt — in a half-com- 
 ^ete sort of way— with one of the sides that comes into consideration as regards 
 wages ; viz. .the relation of wage and interest . On the other hand, I have given 
 
CHAP. V CONSISTS OF MANY PART MARKETS 
 
 421 
 
 And now we may dispense with one last abstraction 
 which has served us as scaffolding in our work of explana- 
 tion. Hitherto we have represented the total supply and 
 the total demand for present goods as concentrated in one 
 single great market. Instead of this, the commerce in pres.g iLt 
 and future commodities is split up into innumerable par t m^- 
 kets . First it is divided into certain great groups, such as the 
 Loan inarket, the Labour market, the Land market, the market 
 for Concrete Capital. And each of these markets is divided up 
 again and again, partly according to branches, partly according 
 to districts of business. There is one market for mortgages, 
 another for business credit in connection with large undertakings, 
 and still another for business credit in connection with small. 
 There are different loan markets for the peasant and for the 
 citizen, for men of position and for the poor artisan or factory 
 hand, and so on. And, again, within each of these subdivisions 
 t here are as many distinct local markets as there are natural 
 or artificial districts devoted to that particular department of 
 economic Life. The Labour market, too, is as much split up as 
 the Loan market ; first, there are as many groups as there are 
 branches of labour, and then each group is divided up into as 
 many part markets as there are local districts. And so on 
 through all the chief groups above named. 
 
 What results from this division and subdivision ? — As 
 there is not one, market only for present goods, neither is there 
 only one price for them, but many and diverging market 
 prices, as these arise directly out of the relation of supply and 
 demand ruling in each of the individual part markets. There 
 are in the community ttip rattip morn cot perhaps a hundred 
 different agios on present goods, and, accordingly, a hundred 
 different rates of interest. But the hundreds or thousands of 
 part markets are not hermetically sealed against one another. 
 They are all in communication, and constantly engaged in 
 
 no express consideration to another side which is at least as important, — the 
 question as to the influence exerted on the rate of wages bv the difficulty that 
 e xists, in consonance with the law of diminishing returns, for an increased 
 number of people to obtain the necessary subsistence from the earth . All the 
 same, the attentive reader may find in this book, if in scattered form yet tolerably 
 completely, the foundation-stones on which the principles of a theory of wage 
 might be built ; partly in the theory of complementary goods (p. 170), partly 
 in my explanation of the law of costs (p. 223), partly in the present chapter. 
 
422 
 
 THE MARKET FOR CAPITAL 
 
 BOOK VII 
 
 arbitrating each other’s prices. If in one part market the 
 agio on present goods is for the time abnormally high, new 
 amounts of capital quickly press into it to get the advantage, 
 and thus reduce the advantage again to zero. If, conversely, 
 in one part market the agio is for the moment abnormally low, 
 the fact is sufficient to prevent any further accession of capital, 
 and even to convey a part of the capital employed in it to 
 other and more favourable part markets, till such time as the 
 unfavourable difference of price again disappears. 
 
 It is, therefore, quite right to say that the price which 
 obtains in each part mar ket is, indeed, first de termined by^the 
 relation of supply and demand as it exists in the special p art 
 n^irkat,, while this local condition of the market itself, and 
 with it the local price also, is determined indirectly by the 
 immensely more powerful pressure exerted by the totality of 
 supply and de mand over the whole community . The vast 
 mais of "the national supply, acting under the influence of those 
 tendencies to equalisation with which we are famihar, forces 
 itself into all part markets in proportional amounts. Part 
 markets, where there is not sufficient capital, it hurries from 
 other quarters to supply : from part markets over -supplied 
 it flows oflp to other communicating part markets. And 
 if there is neither inflowing nor outflowing, and if, there- 
 fore, the local market seems to form its local price purely of 
 its own power, it is then that it is really least independent : it 
 does not require to yield to any foreign market influences at 
 the moment just because it has so completely yielded to them 
 already. It is for the moment at rest only because it is 
 supplied, in exactly the proportion which is required and 
 effected, by the pressure coming from the total relation of 
 supply and demand over the community. 
 
 It.-w as then no empty a bs traction when we spoke of one 
 united gigantic market for present goods, and of the laws of 
 its united market price. The circumstances of the whole 
 decide on the average amount of supply given to the part 
 markets. Local influences may, for long or for short periods, 
 raise the supply above the average level in one place, and 
 depress it below the level in another, but these are only 
 secondary phenomena, showing themselves, as it were, on the 
 surface of the principal onovement, and carried up or down 
 
CHAP. V HINDRANCES TO A LEVEL OF INTEREST 
 
 423 
 
 •with it — ^just as the surface of a great wave is furrowed and 
 ridged by smaller wavelets that rise and fall with it. 
 
 If the mobility of capital were perf ec t, the pa rticular 
 divergences from the normal rate of interest could not have, 
 any considerable strength , and still less any considerable 
 duration. But as matter of fact there are numerous hindrances, 
 little and great, which check the levelling ebb and flow of 
 . capital like weirs on a stream, and these raise or depress local 
 prices. People do not so easily change their employments of 
 capital. If sugar-refining yields one per cent more than cloth- 
 making, a powerloom weaver does not become a refiner on 
 a snap of the fingers, and it may be a pretty long time before 
 so many people have put capital in sugar-refining that the 
 rate of profit is pressed down to the normal level. Indeed, 
 in specially favourable circumstances, one special bra nch 
 industry may retain vermanently an abnormal rate of agio. 
 The disinchnation of a great many affluent people to lend their 
 capital, in small amounts and without security, to necessitp ug 
 persons, from whom it is difiicult to get it back without strong 
 personal effort and supervision — or, it may be, lengthy pro- 
 cesses and processes of distraint which are painful to one’s own 
 feelings, — almost universally keeps the supply in this particular 
 loan market permanently and abnormally low, and the agio 
 permanently and abnormally high — even disregarding the deduc- 
 tion which must, of course, be made in this case for premium 
 against risk. And, similarly, the discount market may enjoy 
 a^ permanently and - abnormally low rate of interest, owing to 
 the frequent inflow of large amounts of capital seeking short 
 temporary employments, and, naturally, not finding such either 
 in the mortgage market, or in agricultural loans, or in industrial 
 investments. The great security of the investment, again, 
 and the prospect of future rise in value, keeps the rate of 
 interest in immovables always low ; and considerations closely 
 akin to this account for the present lower return of interest 
 on state bonds, preferences, etc., payable in gold as compared 
 with those payable in silver or paper. 
 
 It is not my intention to pursue the fate of the rate of 
 interest into all these much -tangled bypaths, where special 
 circumstances and special considerations by the thousand may 
 drive it. The divergences from the normfil rate — temporary 
 
424 
 
 THE MARKET FOR CAPITAL 
 
 BOOK vn 
 
 (livp.r ffp.nofts e yeB-43ioxe-l]ia n permanent — are, in truth, in thei r 
 totol ity a h i ghly important phenomenon. In them lies the 
 soul and the source of the greater part of “ undertakers’ profit”; 
 that profit which falls to the undertakers as fruit of their 
 prosperous arbitrage transactions in present goods. But to 
 work this out in detail is a task by itself ; an important and 
 grateful task, hut one which in importance comes behind the 
 developing of the great law of the rate of interest. In any 
 case it is a task milch too troublesome and much too lengthy 
 to tempt me to a new effort, when I am in sight of home 
 after a long and difficult journey. I have stated the way in 
 which the particular abnormalities are connected with the 
 chief law, and for the moment enough has been done towards 
 understanding the theory of them. 
 
 And nov/ to finish. On a former occasion, at the end of 
 the historical part of my work, I laid down the programme for 
 my positive theory in the following words : — “ To find for the 
 vexed problem a solution which invents nothing and assumes 
 nothing, but simply and truly attempts to deduce the phenomena 
 of the formation of interest from the simplest natural and 
 psychological principles of our science.” I cannot wish more 
 than the recognition that, in the carrying out of the work, I 
 have been true to my programme. For if, through logically 
 developing the elementary theory of value, I have succeeded, in 
 obtaining the explanation of interest, i t will give the stronges t 
 s ecurity that could be wished that we are moving on the r ight 
 l ines with two theories, that of vabie a,nd that of capital . It can 
 be nothing but a support for my theory of capital, if that theory 
 can assert its existence as the legitimate and natural outcome 
 of a value theory which has already given so many fair proofs 
 of its correctness, and which is now receiving adherence among 
 all systematic schools and in all countries that have shared in 
 the advance of economical theory. And for the value theory . 
 again, it w il l be a new proof and, perhaps, the most powerful 
 one, if, by its instrumentality, a problem is solved which all 
 theoretical systems hitherto have attempted in vain. 
 
APPENDIX TO PAGE 327 
 
 AMOUNT OF SUBSISTENCE FUND NECESSARY BEFORE ENTERING 
 ON A PRODUCTION PERIOD OF GIVEN LENGTH 
 
 If one year be the period of the production process and the stage 
 period also be one year, so that no new goods, finished and 
 ready for consumption, are turned out under a year’s time, then, 
 obviously, before beginning sucb a process, there must be on hand 
 a fund of subsistence containing sufficient to cover the entire wants 
 of the workers for one year, and that in a finished state. If we 
 caU the Subsistence Fund S, and the year’s Want Y, then, in this 
 case, S = y. 
 
 If two years be the production period, and the stage period, 
 as before, be annual, it is necessary that, at the beginning of the 
 production period, there should be on hand one year’s supply 
 finished, and a second year’s supply half finished. In each year 
 the finished year’s Supply is consumed by the workers, while the 
 half finished is finished by the workers of the second stage — thus 
 securing the subsistence for the next year — and a fresh year’s 
 supply is put in hands by the workers of the firSt stage, and, in 
 turn, half finished. Here, therefore, if we call the half-finished 
 year’s supply a half year’s supply, S = 1 ^ Y. 
 
 Similarly for a three years’ production process, with annual 
 stages, we require one year’s want entirely covered, another f 
 covered, and another ^ covered : or, one year’s supply finished, 
 another | finished, another ^ finished. In each year, then, the 
 finished year’s supply is consumed, the |- finished is finished by the 
 workers of the third stage, the J finished becomes f finished by 
 the workers of the second stage, and a further year’s supply is 
 newly created by the workers of the first stage, and is finished to 
 the extent of ^ — whereby, at the end of the year, the status quo is 
 restored, and continuous provision is guaranteed. S, therefore, 
 here = lYx|Yx^Y = 2Y. 
 
426 
 
 APPENDIX TO PAGE 327 
 
 Similarly, if the stage is still one year, then in a four years’ 
 process S = (l+f + J + :^)Y = 2jY: 
 
 in a five years’ process S = (l + |- + f + |- + -|^)Y = 3 Y : 
 in a six years’ process S = (l + |- + -B- + -i- + f + i) Y = 3^ Y ; 
 in a seven years’ process S = (l + -f + -f + 4- + T + f + 7 -)^ = 4Y: 
 in a ten years’ process S = (1 + + iV + tV + + tV + tV + 
 
 + T'rr tV) Y = 5-|- Y. 
 
 If we look closely into these figures we shall easily discover the 
 law that underlies them : Every production period requires a fund 
 of subsistence containing sufficient to cover half a year more than 
 half the production period. 
 
 Suppose we continue our inquiry under the assumption of a 
 different stage period, say, half a year. Here it is quite the same 
 whether the stage period occurs under the division of labour or not, 
 the only thing essential being that, every half-year, finished con- 
 sumption goods are turned out from the total process. To enter 
 upon a one year’s process, with half-yearly stages, what we require 
 is a finished supply for one half-year — during which no fresh con- 
 sumption goods are turned out — and half-finished supply for the 
 second half-year. During each six months, then, the finished 
 supply is consumed ; the half-finished is finished by the workers 
 of the second stage j and a new six months’ supply is begun and 
 half finished by the workers of the first stage, whereby the status 
 quo is restored. S here = |Y-eJxiY = |Y-t-:^Y = fY. 
 
 Similarly in a two years’ production process, with half-yearly 
 stages, we require ^Y + |x|Y-i-|x|^Y + ^xiY = (^'+-|-(-;|^-)-J) 
 Y = 1^ Y, while in a three years’ period we require -I- + -J- x -g- + 1 
 
 i f i ^ f + i ^ i + A + tV + + A + iV = If 
 
 Here, again, the underlying laAv is plain : If the stage period 
 be six months the fund necessary contains subsistence for three 
 months longer than half the production period. 
 
 If we were to carry out our inquiry still further we should 
 find, similarly, that, where the stage is three months, the fund must 
 contain six weeks’ more subsistence, where it is one month, must 
 contain two weeks’ more subsistence, than half the production 
 period. And thus we arrive at the general formula of p. 327, that 
 the fund of means of subsistence must be sufficient for half the 
 production period plus half the usual stage period. 
 
INDEX OF AUTHORS MENTIONED 
 
 Bonak, 356. 
 
 Canard, 34. 
 
 Carey, 75, 178. 
 
 Cohn, 23, 100. 
 
 Cossa, 23, 39, 55, 98, 101. 
 
 Dargdn, 53. 
 
 DieU, 169. 
 
 Dietzel, 71. 
 
 Dufresne du Cange, 25. 
 
 Engel, 53. 
 
 Fulda, 98. 
 
 Gide, 39, 71, 76, 98, 100, 123. 
 
 Gossen, 81, 132. 
 
 Gross, 238. 
 
 Hermann, 31, 49, 72, 98, 292, 340, 
 347. 
 
 Hume, 25. 
 
 Jevons, 32, 57, 76, 77, 81, 87, 90, 132, 
 148, 179, 238, 239. 258, 272, 277, 
 399. 
 
 Kleinwachter, 23, 31, 40, 57, 76, 100, 
 119, 120. 
 
 Knies, 23, 24, 32, 34, 36, 40, 44, 46, 
 55, 287, 347. 
 
 Kiihnast, 23, 34, 58, 59. 
 
 Lassalle, 100, 119, 121. 
 
 Lauderdale, 75, 100, 122, 178, 260. 
 
 Launhardt, 33, 238, 278. 
 
 Lexis, 114. 
 
 Loria, 363. 
 
 Lotz, 99. 
 
 Macleod, 33, 58, 179. 
 
 M'Culloch, 34, 50, 52, 54. 
 
 Mangoldt, 87. 
 
 Marx, 23, 32, 57, 100, 123. 
 
 Mataja, 31, 247. 
 
 Menger, Anton, 371. 
 
 Monger, Carl, 9. 17, 31, 77, 132, 148, 
 170, 179, 180, 193, 196, 202, 210, 
 237, 245, 340, 349, 357. 
 
 Meyer, Kobert, 100, 102, 114, 132, 340. 
 Mill, J. S., 13,’ 98, 100,-237. 
 
 MithoflF, 87, 420. 
 
 Neumann, 71. 
 
 Ofner, 53. 
 
 Pierson, 39. 
 
 Rae, 237. 
 
 Eau, 101. 
 
 Ricardo, 356. 
 
 Ricca-Salerno, 23, 24, 39, 50, 55, 101. 
 Rodbertus, 23, 29, 39, 43, 56, 62, 71, 
 81, 83, 87, 100, 119, 121. 
 
 Roscber, 35, 43, 55, 72, 87, 100, 271, 
 296. 
 
 Sax, 39, 50, 71, 132, 210, 238, 240, 
 258, 278, 340. 
 
 Say, 29, 34, 50, 59, 75, 97, 178, 179, 
 260, 292. 
 
428 
 
 INDEX OF A UTHORS 
 
 Schiiffle, 53, 54, 93, 292, 347. 
 Scharling, 137, 160, 221. 
 
 Schmoller, 54, 69. 
 
 Schbn, 98. 
 
 Schonberg, 39, 55. 
 
 Senior, 98, 237. 
 
 Smith, Adam, 26, 34, 39, 49, 50, 75> 
 97, 100, 103, 237. 
 
 Spitzer, 354. 
 
 Strasburger, 75, 178. 
 
 Supino, 23, 39. 
 
 Thunen, 87, 213, 394, 
 
 Turgot, 25, 35, 42, 49. 
 
 Umpfenbach, 23, 25, 50. 
 
 Wagner, 23, 29, 39, 62, 67, 72, 100. 
 119. 
 
 Walker, F., 100. 
 
 Walras, 33, 50, 132, 149, 179, 396. 
 Weiss, 53. 
 
 Wieser, 148, 178, 185, 187, 414. 
 
 THE END 
 
 
I 
 
 331 
 
 B67IP 
 
 (D 
 
 
 Bohm-Bawerk, Eu|en V. 
 
 The Positive Theory of Capital 
 
 
 ^51 3671F 
 
 65538 
 
 
 
 
 
 - m-y 
 
 
 ! 
 
 
 ^ f ^ 
 
 
 ) 
 
 \ 
 
 '}' ’I"'' ■ }': '■ 
 
 - # (' ■ ' 
 ■".V'*' 
 
 
 
 
 
 I ■■ W 
 
 m