Chapter VIII

CHAPTER VIII INTEREST IN THE SOCIALIST SOCIETY WHETHER ONE accepts the possibility of interest in the socialist com munity or not is mainly a question of definition not only of interest, but also of such concepts as capital, saving, investment and hoarding. The very fact that these concepts are so differently defined· by the various economists-even differently by the one and the same economist at different times-shows how intricate the question is. Here there is room for nothing but a very cursory survey. It can be said at once that pt!yment of interest is not a necessity in a socialist society where by definition the state is the only entrepreneur and the sole owner of the means of production, but that does not mean that it is unnecessary to include interest as a cost item in the calculations of the central authority. Whether one regards interest as a necessary item of calculation depends on what theory of interest one accepts.

Those who accept the productivity theory and the utility theory will have to admit that the use of produced means of production. is a factor of cost which has to be taken into calculation. If, however, interest is regarded, as in the abstinence theory, as a premium for· individual saving, it is unnecessary to include it in the calculation, since the state has no need to appeal to the willingness to save of the members of the community, as it can arbitrarily decide how much shall be set aside from current consumption for the various purposes. If the Marxist doctrine of interest is accepted, according to which interest is the result of capitalist exploitation, then naturally there will be· no such thing as interest, since private capital has been abolished. 1 According to B6hm-Bawerk's theory of interest which is based on the view that interest is an agio of present goods against future goods, it will also exist· in socialist communities. As a matter of fact, he expressly says so in the chapter on "Das Zins in Sozialistenstaat. 2 There will also be interest in the socialist community, if Professor Cassel is right in his theory that interest is the result of scarcity of capital. Cassel devotes a special chapter to demonstrating this. 3 IThis theory of interest is discussed and criticized in Eugen von Bohm-Bawerk's "Capital und Capitalzins II", Geschichte und Kritik,des Capitalzinstheoriens, Inns bruck, 1900.

2See "Capital und Capitalzins I", Positive Theorie des Capitalr, p. 338-396. Bbhm Bawerk's theory of interest is criticized in Gustav Cassel's Teorctisk Socialokonomi, Stockholm, 1934, p. 202; and in Emil Sax's Dcr Kapitalzins, Berlin, 1916; and his view on the "perspective of future goods" in O. Morgenstern's article "Das Zeitmoment in der Wertlehre" in Zeitschrift fur NationalOk,onomie,1934. 30p. cit., p. 258.

92 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY According to Schumpeter's dynamic theory of interest, l interest arises because entrepreneurs without capital obtain c0ntrol of means of production, for which under existing conditions of ownership they have to pay by handing over to the owners part of the profits from their enterprise. If this theory, which Emil Lederer calls the most flexible and the most explicit of them all,2 is correct, there will be no interest in the socialist community, because it does not allow of either entre preneurs or private ownership of means of production. Schumpeter himself points out that in the communist society3 there is no such thing as interest as a "selbststiindigeWerterscheinung". More recently, J. M. Keynes has defined interest as the "price of hoards in the sense that it measures the pecuniary sacrifice which the holder of a hoard thinks it worth while to suffer in preferring it to other claims and assets having an equal present value". 4 This is amplified on the preceding page: "The function of the rate of interest is to modify the money prices of other capital assets in such a way as to equalize the attraction of holding them and holding cash. This has nothing whatever to do with current saving or new investment."

Now, how are those who accept Keynes' definition to answer the question of whether or not there will be such a thing as interest in the socialist community? Keynes did not himself go into this question, even though he called his book General Theory. As was said in Chapter VI there is nothing to prevent money claims-to-consumption being saved even in the socialist community, and one can even imagine the central authority accepting loans so as to reduce the number of ISee Theorie der wirtschaftlichenEntwick!ung, Leipzig, 19I 2. 2See "Developments in Economic Theory" in American Economic Review, 1936, Supp., p. 156. For a criticism of Schumpeter's theory, see Bohm-Bawerk's "Eine dynamische Theorie des Kapitalzinsen" in Zeitschrift fur Volk,swirtschaftlichen Sozialpolitik" Vol. XXII and Gesammelte Schriften, Vol. II, Vienna and Leipzig, 1926. 30p. cit., p. 348. 4See "Alternative Theories of the Rate of Interest" in Economic Journal, June, 1937, p. 251. It is better to stick to this article, rather than to refer to The Genera!

Theory of Employment, Interest and Afoney, 1936, both because it is clearer and a later interpretation. In his General Theory Keynes wrote at one point that "the rate of interest is a purely monetary phenomenon" (pp. 355-356), and at another that interest "sets a standard to which the marginal efficiency of a capital-asset must attain if it is to be newly produced," (p. 222); and referring to the significance of interest rates for investment, he wrote the following, which can hardly be said to make for clarity: "Our conclusion can be stated in the most general form (taking the propensity to consume as given) as follows. No further increase in the rate of in vestment is possible when the greatest amongst the own-rates of own-interest of all available assets is equal to the greatest amongst the marginal efficiencies of aU assets, measured in terms of the asset whose own-rate of own-interest is greatest"

(P·23 6).

INTEREST IN THE SOCIALIST SOCIETY 93 hoarded claims-to-consumption and to prevent them from being suddenly presented en masse. It is, therefore, very possible to have interest in the socialist community. It is another question, whether such interest can be called a price, seeing that the central authority can arbitrarily regulate not only the distribution of the c1aims-to-con sumption, but also the possibility of there being any alternative use for them at all (by reducing the supply of consumer goods). According to Keynes' definition you can have interest in the socialist community, even payment of interest, but this interest is such that the central authority does not necessarily have to take it into account in its calculations for production, since it "has nothing whatever to do with current saving or new investment". 1 In the EconomicJournal of December, 1932, there is an article by Professor Bertil Ohlin in which, as spokesman of the Stockholm School, he criticises Professor Keynes' GeneralTheory with reference to the theory of interest. He draws attention, however, to the fact that this has been but little. analysed by the Stockholm School. Professor Ohlin answers the question of how the level of interest is determined, thus: "The answer is that the rate of interest is simply the price of credit, and that it is therefore governed by the supply of and demand for credit." 2 This means that interest must not only be payment for keeping cash, but for investment in other "claims", which includes shares and other securities. According to Ohlin's definition one could have interest in a socialist community in so far as one can imagine there being bonds.

On the other hand, if this is so, it brings us back to the question of whether "price" is a suitable term for bond interest, which is essentially fixed by the state in its capacity of monopolistic or, to borrow Mrs. Robinson's terms, monopsonistic buyer of labour and issuer of loans. Ohlin's definition has this advantage that it is more comprehensive than Keynes', but all the same it is not comprehensive enough. In the first. place, it is not much use referring to "supply and demand"· without knowing what creates them, which is just what we want to know. lIn his "Alternative Theories of the Rate of Interest" in EconomitJournal, Septem ber, 1937, D. H. Robertson wrote that acceptance of Keynes' definition did not preclude one from regarding interest as the price of the use of a loan (p. 429) nor as the reward for marginal inconvenience or abstaining from consumption (p. 43 I). One must agree with this view that interest has several functions, but Keynes has expressly stated that according to his definition interest can have nothing to do "with current saving and new investment" (see above) and that is a point of the greatest interest in a discussion of economic calculation in the socialist society.

2See "Some Notes on the Stockholm Theory of Saving and Investment III" in EconomicJournal June, 1937, p. 224.

94 ECONOMIc CALCULATION IN THE SOCIALIS1' SOCIE1'Y There seems no other way of discussing the place of interest in the socialist economy (and its place in the economic calculation of that economy) than by reviewing the place it occupies in the capitalist economy. Though there is much to be said against such a review in a book like this (inter alia that the question is an intricate one and that a short survey of it can easily be superficial and defective) it is natural to go more closely into the question, .if only because it has been asserted that the impossibility of calculating interest in the socialist economy is one of the most serious objections that can be made against socialism (of whiCh more later). It must be emphasized that the object of this review is merely to put forward individual aspects of the mutual interdependence between interest, savings and investment. Professor Ohlin's definition of interest is suitable as a starting point.

Savings can be defined in various ways. The general one is,that they are income minus consumption, but there is a somewhat wider defini tion, or rather, interpretation, which is that savings represent the accumulation of resources through the restriction of immediate con sumption. By investment· is understood the conversion of the saved resources into a relatively, or completely, non-liquid form.! Before we begin this review it is well to remember that we wanted to base the discussion on the assumption that conditions were dynamic. This is particularly desirable when discussing concepts like saving and investment in capitalist communities. In a dynamic community saving is influenced by the constantly changing distribution of income,2 and lIt must be stressed that this interpretation of saving and investment does not agree with that used in the present discussion of interest. There is no essential distinction between the latter and that ofL. M. Fraser in his book EconomicThought and Language, London, 1937, but most to-day make "saving" ex deftnitioneequal to "investment," among them Keynes and also Ohlin on behalf of the Stockholm School. (See EconomicJournal, June, 1937.) Our interpretation is that saving is equivalent to investment, where a firm spends current income for new investment or where a farmer builds a new outhouse in his spare time, but there is a difference -and an interval of time:--when in a monetary economy saved means are (1) hoarded or (2) put in a bank which does not want to lend them out or cannot find acceptable borrowers.

2There are two main forms of alteration in the distribution of income. Generally one thinks of displacements between the various social groups. One forgets that in private capitalist societies the individual person's and family's income is continually altering. This can happen without any change in the income of the group or in the relationship between the incomes of the various groups. In societies with reasonably free competition without fideik,ommisor privileges (allodial rights, etc.) it is seldom that large incomes or fortunes are maintained for many generations. This is not only due to fluctuations in economic activity, wars, unstable currency conditions, heavy taxation, and the decline in the respect for contracts, but to the simple fact that in a society with private capitalist economy and competition, the individual person or family is constantly exposed to the risk of having his income or fortune reduced, unless it renders services or produces products which the other members of the society demand and which they-with tHe given, though constantly changing distribution of income-are able to acquire. This is true, whether the services are intellectual, artistic, manual labour or the provision of capital.

INTEREST IN THE SOCIALIST SOCIETY 95 investment means, by definition, an increase in the community's capital (assuming that the final products are accepted according to the yard stick adopted in that community). On the other hand, the factors which have now to be treated are so intimately interrelated that, taking it all in all, they can only be discussed here on the assumption that, ceteris paribus,conditions are. static. To begin with savings: it is evident that in a capitalist community there are individu,als who are willing to renounce present goods for the sake of future goods. People in the temperate zones have always been forced by the great disparity between summer and winter to accumu late a certain amount of stores from season to season. Even in these days of specialization, when the task of supplying natural foodstuffs has been taken over by definite groups, such individuals are still to be found. In the use they' make of their resources and their income they take into account not only the satisfaction of their immediate needs, but also the needs which their experience tells them will arise over the whole income period. One can say that such an arrangement is evidence of common-sense and foresight, but one cannot overlook the possibility of an individual's willingness to save being to a large extent the result of physiological processes and childhood experiences, as some psychologists maintain.

There is no basis for judging what proportion of saving is made with the object of getting an increased future income. Increased in come is obviously the aim of direct saving in non-monetary form which occurs as well in a monetary economy (draining of land, clearing fresh ground, gathering stones, building houses and fences, increasing the number of plants and animals by not consuming or selling them). Increased income is also the aim of direct, but monetary saving, which takes place when corporations instead of distributing their income in the form of dividends use it to expand their productive equipment. The motives the state may have when it saves by using taxes for investment purposes (see definition on p. 94) or for the repayment of debts, are so manifold that we cannot enter into them here. The tendency is at present towards public and corporate saving, but individual monetary saving still remains an important factor. To what extent this is determined by the possibility of increasing income, it is difficult to say, as conditions change from one phase of the business cycle to another. The general view is that high and rising rates of interest stimulate saving, but on the other hand it has been suggested and not without reason-that a low rate of interest forces those who aim at some definite level of future income from investments to save more.

If it is true, as is always being contended and seems to be borne out 96 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY empirically, l that the extent and rate of saving is determined by those with large incomes, the obvious conclusion is that interest only plays a small part in determining the volume of savings. People with large incomes will normally make their standard of living, which is fixed by custom· and social convention, the constant factor, and let their amount of saving be variable. If that is the way things are, the state of the business cycle will be a more important factor than interest in determining the savings of active capitalists. For passive capitalists a higher rate of interest will mean a higher rate of saving, but only for new savings, since they cannot enjoy the higher rate for what they have already invested (unless they have "invested" in cash or conver tible securities).

If it is correct that the standard of living is the primary concern, then it follows that the volume of saving will also be influenced by changes in the level of prices, since higher or lower prices will require a larger or smaller outlay to maintain that standard. It is possible, even probable, that this larger or smaller outlay will-for the individual-be neutralized by a larger or smaller income resulting from the rise or fall in the level of prices, but there is no certainty that a rising or falling price level means rising or falling incomes (or changes in the distribution of the national income). 2 If, on the other hand, it is the willingness to save which is the con stant factor with most individuals, whether this be due to instinct, childhood experiences, custom or common sense, this still means that the rate of interest is a subordinate factor in determining the extent of saving. 3 Now these considerations are only tenable so long as the rate of interest keeps within certain limits. If there were an opportunity to invest in long-term, gilt-edged securities at 2. 5 per cent. per annum, presumably many would find such an interest rate worth considerable sacrifice in the form of saving.

If one goes to the other extreme and considers interest rates of 2, I and 0 per cent, the matter becomes uncertain. It is more than probable that 0 per cent interest would have a restrictive effect on savings, but it is riot impossible that large sections of the population would continue to save-to ensure their old age or their family's futurelSee America's Capaci~y to Consume, Brooking's Institution, Washington, 1934, and Kapitalbildung by]. Marschak and W. Lederer, London, 1936, etc. 2Reservations of this kind, especially with reference to fluctuations of prices, can be made in respect of most statements in this, necessarily short, survey of the relationship between interest, saving and investment in the capitalist society. 3That an alteration in the interest-rate or in the level of economic activity may cause dislocation of already invested means (what lohan Akerman calls an altera tion in the "quality of the saving quota") does not affect the point discussed here, which is the extent of the savings and the relationship between savings and in vestment.

INTEREST IN THE SOCIALIST SOCIETY 97 even if they did not receive any interest. It is even conceivable that people with· a deep-rooted instinct to save would accept a negative interest rate (- I or - 2 per cent), especially if this gave them absolute certainty that the principal would be paid back. If one accepts the definition of interest as the price of credit,-it must be emphasized that this price occurs in a market where price-formation is most imperfect and which is influenced by a number of factors other than saving and investment. The various types of loans have their own markets, but we shall take as our common index the officiall discount rate which influences most loans. (The exceptions are relatively few. The interest on loans which entail a large risk 2 or which are bound up with a lot of labour as, for example, pawnbroking, are usually little affected by alterations in the official discount rate. The same is true, at any rate periodically, of interest on certain long-term loans.

The discount rate is fixed by the directors of the central bank and the politicians, not, of course, arbitrarily, for it depends on many things, of which the liquidity of the central bank is presumably the most important. This liquidity again depends on a number of factors, chief of which is the position of the private banks. Practically speaking all lending activity is reflected, even though in many cases only indirectly, in the position of the private hanks. Any change in their position, any shifting in the relation between loans and deposits, is a fa.ctor to which great weight is generally given in fixing the discount rate, even in cases where the position of the private banks is so liquid, that they are not borrowers at the central bank. Nevertheless, it is of special interest to our discussion to see that there are a number of other factors than savings, which influence discount policy. If the view is accepted, that the interest rate is an important factor affecting the level of economic activity (and it is a view that can be accepted only with strong reservations and with due reference to the phase of the business cycle), the rate of discount will be altered for reasons of business cycle policy. These reasons differ· in different phases. of the business cycle, from country to country, and even from time to time during the same phase and in the same country; they may have regard to a variety ofindices such as the wholesale price level, or the cost of living, or the index of production, or stock lIn this connection it is of minor importance that official discount rates are not always the same as the effective rates, since banks of issue in some countries (e.g-.

Sweden) give private banks a rebate on re-discounts. 2The imperfection of price formation in the loan markets is also expressed in the fact that respectable financial institutions are content to accept or reject requests for loans and do not as a rule offer a loan at higher rates. (We cannot indulge in further discussion of the risk factor implied in interest rates.) 98 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY exchange speculation, or movements in exchange rates, or a combina tion of these or other factors. The legal cover is a variable factor in that it can be altered, but as a general rule it may be said that the discount rate is altered when the central bank's reserves are approach ing the minimum level in force at the time. This means that in countries on the gold standard or which use gold as an exchange standard, gold or currency holdings, or rather the move ments in them, playa definite part. These movements are determined by the balance of payments, among other things. This, in turn, is deter mined inter alia, by the extent of capital exports and imports (which again are influenced by political factors both at home and abroad) and by the difference in value between. the total quantity of goods and services the community in question buys and sells. This difference in value is influenced both by changes in prices in the various groups of goods and services within the country and by changes in the price levels of the different countries.

We cannot follow the causal chain any further, and shall only mention one more factor: devaluation and revaluation of currencies. This makes it possible for the central bank concerned to write up or down its holdings of metal or foreign currencies, and consequently to contract or expand the credit basis of the central bank and community in question, which can and usually does influence the central bank's interest policy and rate of discount. It may be remarked here that a higher or lower price for gold means higher or lower profits for its producers and so-assuming that costs do not rise or fall correspond ingly-a greater or smaller output. As long as gold serves directly or indirectly as a basis for credit, the writing up or down of gold values will also indirectly influence the level of the interest rate. Psychological considerations may play their part to the extent that an increase in the rate of discount which the rules might demand, is not made because the financial authorities are afraid that it will be regarded as a sign of weakness and defeat its own purpose.

These considerations show that savings are not the only factor which affect the height of the interest rate. In this connection it must be repeated that there are also savings which lie outside the loan market, namely those which involve no money transaction (see P'95) and those which businesses make by expanding, modernizing or making new purchases directly out of current income without having recourse to a loan. Both these forms of investing occur uno acto with saving. The effect on the interest rate of the saving which takes the form of hoarding l will depend on the form and intensity of the hoarding. If lHoarding is not necessarily a consequence of saving. An individuql can spend all his income in a given period and yet increase his cash holdings through sale of capital assets, INTEREST, IN THE SOCIALIST SOCIETY 99 hoarding is more or less constant, -that is both in form and extent, the effect will be small or nil. An increasing tendency to hoard can have a hardening effect on the rate of interest if the money is tucked away in cupboard drawers and money boxes, as this ceteris paribus means that the cash reserves of the private banks will decrease. A -decrease in hoarding will have the opposite effect.

As hoarding and liquidity. preference have_ been thrust very much into the forefront in contemporary discussion of interest and the business cycle, it may not be out of place to mention that this liquidity preference is partly involuntary, at any rate as far as active business is concerned. It is first and foremost lack of sales (or fear of such a lack in the future) which -creates liquidity preference. Liquidity preference is not an end in itself; it is a-regrettable choice which is made merely because there is no alternative and, given the scale of values reigning at the moment, no attractive opportunities for using or investing one's money. The relationship between investment and the intere~t rate is also a very complicated phenomenon. The demand for credit is likewise influenced in many ways and is subject to sudden fluctuations. Invest ment made uno acto with saving has no direct influence on the interest market, any more than has saving of the same kind. However, it should be noted-and this is very important-that saving, even if it takes place uno acto with investment, creates several credit objects, which means greater possibilities (credit basis) for later loan activities (which, besides, vary. greatly with the movement of the business cycle and so with the optimism or pessimism of business-men and bankers).

On the assumption that both the velocity of circulation of cash and deposits, and the tendency to hoard remain constant, an increase in borrowing and lending will mean increased deposits.! This brings us to the question of what is the significance of variations in the amount of money (and credit) for saving and investment. About this there are a variety of opinions, which as a-rule can be traced back to different ways of looking at the quantity theory and the "banking" and "currency" theories. Here we shall merely mention one elemen tary, ~ut very important feature, namely that increased lending activity may have repercussions on the price level. As regards investment not made uno acto with savip.g, the investment IThis. of course, does not mean that an individual bank can increase its loans so as to achieve increased deposits. Where the cash reserve requirements remain con stant (whether they are based on law or custom) the bank concerned will run the risk of deposits going to other banks and of its own liquidity being reduced. That the deposits may return in a different form, e..g. as demand deposits instead of time deposits, which imply higher cash reserves, is a further objection, but not relevant when, as has been assumed, the propensity to hoarding is constant.

100 ECONOMIC CALCULATION. IN THE SOCIALIST SOCIETY will-ceteris paribus-tend to tighten interest rates. Unless it is financed out of hoards, it either means that loans are increased, which means other things still being equal-smaller cash reserves, or it means the withdrawal of deposits which likewise means smaller cash reserves. Here again we come up against the velocity of circulation of cash and deposits-a very important and incalculable factor. Having said that both saving and investment affect interest tates via the cash reserves of the private banks, it is time to mention that these are determined, apart from the legal regulations, by what the banks and the public regard as a reasonable cash reserve for deposits. In this connection one must mention another important factor particularly important in the present day loan market-namely open market operations,by which is understood purchases and sales by the central bank in the home market (usually of gold, foreign exchange and bills) intended to influence the private banks' cash reserves and so their ability to lend, which means that they affect the loan and interest markets.

One of the most interesting problems in the theory of money and practical monetary policy, is that of determining how far a central bank can increase investment (or at any rate the opportunities for lending) by open market operations without having regard to the movements of deposits, and what consequences and repercussions this may have. The answer depends on many factors. First one has to find out whether a broadening of the credit basis also leads to increased lending activity. There is no a priori certainty of that. In a capitalist economy the initiative behind lending activity rests with the business-men and they can not be forced to take up loans. If they do not wish to borrow, the result of the central bank's buying is that the liquidity of the private banks increases and, presumably, also that the interest rates fall, but it cannot lead of itself to an increase in investment. If the increased quantity of money and credit is not used for invest ment, but for consumption, there is danger of inflation (by which is here meant a rise in prices caused by an increase in the media of exchange in relation to the objects of exchange). Here again the velocity· of circulation of money comes in as an important variable.

Whether active open market operations will have an inflationary effect or not, will also depend on the amount of investment made in the same or the previous period outside the money and loan markets. This, again, will depend on whether the results of the investments, both of those made outside and of thQse made via financial institutions, have been accepted by the public and can exercise an influence on the price of goods. If the results (the consumer goods) are not accepted, with the resl!lt that means of production have been produced which are INTEREST IN THE SOCIALIST SOCIETY 101 not wanted, l then purchasing power has been put in circulation which does not find a counterpart in the form of· saleable goods, and this, other things being equal, signifies inflation (but this effect may be counteracted by a lower velocity of circulation for cash and deposits or by hoarding). Whether an increase in the amount of money, whether rising prices and an increase in loans will affect savings, will also depend on whether the savers are engaged in branches of industry which benefit im mediatelyfrom the increased prices through increased incomes (both nominal and real) or whether they are in other branches where higher prices merely lead to an increase in their expenditure without giving them higher incomes.

There is not much point in going closer into this question, as its significance for judging conditi9ns in a socialist society is merely subsidiary. In one respect, however, the conditions are the same: if the .result of an investment is not "approved" by the public, there is a waste of the community's resources. That means there is less chance of satisfying needs, in other words a faulty investment for a society which aims at '''maximum production for needs". As regards the effect of interest rates on investment-and on the demand for credit-one can speak with greater certainty. It is obvious that interest is more important as a factor influencing investment than it is as a factor influencing saving. As a matter of course, the rate of interest will be of considerable importance for projects which depend on large loans (in relation to their entrepreneurs' own capital) and long term loans (e.g. in buying property and house building). The deter mining factor in making a new investment with borrowed capital is, nevertheless, profitability, and profit accrues only after all costs, in cluding interest, have been calculated.

As it is a question of the production of future goods, it really is the expectationof profit which is the determining factor. Expectations are as a rule so complicated that we shall not go closer into the question here (see Appendix A), but they are most largely influenced by the course of the business cycle. If expectations are such that a business man can count on a net profit of 15-20-3° per cent and on being able to pay the loan back quickly, even the possibility of having to pay a very high rate of interest does not have any restrictive effect. But if, on the other hand, the business man is convinced that prices are going to fall, even a zero interest rate may not tempt him. IProfessor Mises writes in Socialism, p. 203: "The fact alone that consumption is restricted for the sake of constructing big plants of different kinds is not evidence that new capital is created. These plants will have to prove in the future whether they will contribute to the better supply of commodities wanted for the improvement of the economic situation of the country." j 102 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY The experience of the 1930'S shows-what could have been pre dicted-that low interest rates do not automatically stimulate invest ment. Low and falling interest rates still seem to have less significance than the retarding influence of high rates of interest. The direction in which interest rates are moving seems to playa larger part than their absolute height. Likewise the rate at which they move, plays its part.

Small alterations, each of which is relatively insignificant and which are made at such long intervals that the public accustoms itself to them, may not have any influence at all. Here one ha;s to take account of factors such as the public's psychological attitude during the period in question and how much faith it has in the desire of the financial authorities to influence the level of economic activity and in the effectiveness of discount policy for this purpose. The influence of the interest rate on investment will also depend on the size of the "social sector" in the community in question (see Appendix A) 'as.this sector is "indifferent to profitability". 1 The above analysis has touched on the mutual interdependence between interest on the one hand and saving and investment on the other, but not on that between saving and investment. Here there are large and difficult problems. It is characteristic of the prevailing un certainty that while Professor Spiethoff thinks that the change from good to bad times in trade is due to investment being too large in relation to saving, Professor Keynes thinks it is because saving is too large in relation to investment, while Professor Hayek is of the opinion that there can be no disparity between saving and investment so long as inflation does not take place. 2 We have said that investment presupposes saving. For this state ment to have any value, we must go into it a little more deeply. It does not mean that a sufficiently large store of consumer goqds and raw materials has' to be saved to cover the investment period. Nor, obviously, does it mean that there will be any conformity either in quantity or in value between saving and investment. As regards the value aspect, the future valuation will always be an unknown quantity, while, as far as the quantity aspect is concerned, investment implies (by definition) the transformation of ~he saved resources into a relatively non-liquid form.

This raises the far-reaching question of how far savings may occur 'lThe phrase is taken from Kapitalbildungwhere the question is gone into more closely in the first "Theoretischer Teil". 2For a more detailed discussion, see "The Theory of Saving" II, by C. Bresciani Torroni in Economica, May, 1936. See also the chapters "The Over-investment Theories" and "The Underconsumption Theories" in Gottfried von Haberler's ProsperityandDepression,Geneva, 1937.

INTEREST IN THE SOCIALIST SOCIETY 103 before investment, or whether they can be made simultaneouslYor even after investment. ~ To judge the importance of savings for investment, one must take into account what has been saved previously and the stage of tech nological development of the, community in question. Also, as has been mentioned, movements in the general level of economic activity are an important factor. In regard to the other relationship, that concerning the importance of investment for the level·of economic activity, it is clear that, if the level of employment is treated as the main criterion of the level of economic activity, the end of a wave of investment (whether of new or re~investment) will bring with it a shift in economic activity, in that it may mean transference of labour. In this connection attention must be drawn to three factors which are of importance in analysing. both the course of the business cycle and the relationship between the interest rate and investment: (I) There is an intimate connection between the trade cycle and activity in the capital goods industries. (2) Firms in the later stages of production have usually a larger burden of interest than those in the earlier stages.

(3) Activity in firms' in the .later stages of production (or, if you like, concerns on the outer circuit of the roundabout process of production) in capitalist societies presupposes confidence in the future. From (I) and (2) we can infer that the interest rate is also a very im portant factor influencing the level of economic activity. This, how ever, is in the author's opinion largely counterbalanced by (3), since the fact that these firms are in the later stages (on the outer circuit) means that their expectationsof the future are of decisive importance. A factor which points in the same direction is that one can wait to order and renew means of production, which is not always the case with consumption goods and the products of firms in the earlier stages. Before we leave this question of "interest in the capitalist society" it must be pointed out that interest, quite apart from its significance for saving and investment and vice versa, is of importance as an elementof cost, as afactor in calculations.If a concern or an entrepreneur is working with borrowed funds, the interest is entered as. expenditure on the debit side of the profit and loss account. Even if the concern works exclusively with its own capital, interest is taken into consideration; in business analyses and comparisons "interest on own capital" is entered as a separate item. In practice it will be possible to find individual concerns where this is not done. One reason for this is that such an entry has little bearing on tax liabilities, in so far as the expense item "interest on own capital" is counterbalanced by a corresponding in come from interest. But that it does not appear among the expense items, does not mean that it has not to be taken into account in 104 ECONOMIC CALCULAJ:ION IN ':tHE SOCIALIST SOCIETY judging whether a concern is fit to survive or not': When it has to be decided whether a business shall be estabilished-or wound up-con sideration is taken of what interest those providing the capital can get, with as much (or little) risk, by employing their capital elsewhere.

Tradition or consideration for his employees may perhaps induce the owner of a business, which is not earning enough to cover its interest on the capital invested, t'o carryon, but it will be clear both to himself and to his competitors that the business is being continued for philan thropic motives and not for economic reasons. In this cursory review of individual aspects of the problem of interest in the capitalist economy questions have been discussed some of which may appear simple, but which are-and this must be emphasized.: very controversial. However, most people will probably accept the following conclusions: (1) In a capitalist society some individuals have a propensity to save. (2) There exist facilities for individual saving and so for satisfying this propensity. (3) Savings are a necessary prerequisite and basis for investment. (4) In the capitalist economy there are data in the shape of rates of interest for various classes of loans and de posits. (5) The rate of interest is determined not only by saving and investment, but also by other factors. (6).Interest figures among the costs that are taken into account when judging whether a business justifies its existence or not.

The question now to be answered is whether and to what extent conditions will be analagous in a socialist society, whether it is neces sary to save and invest in such a community, and in that event, how the necessary data for calculation are to be obtained, when the aim is the satisfaction of the needs of the members of the community. (1) One may presume that there will still be people with the urge to save even in the socialist society. The central authority may say that it is irrational and contrary to reason for the members of their com munity to wish to secure themselves and their dependents, since the socialist society will look after all in the' event of sickness, unemploy ment and old age. The central authority may think that urges to save due to childhood experiences will be eliminated by a different type of childhood experience. It may say that the inclination to save is due to a human instinct and that human instincts will be altered under socialism. Irrespective of what point of view it takes, it cannot get away from the fact that if there is this urge to save, it will have to satisfy it so long as it aims ·at "the satisfaction of the needs of the members of the community".

(2) It is comparatively simple to provide the members of the com munity with facilities for individual saving. In the first place there will always be an opportunity for saving through the purchase of durable INTEREST IN THE SOCIALIST SOCIETY 1°5 consumer goods and non-perishable foodstuffs and luxury goods. This way of saving will, however, scarcely satisfy those individuals who like to hold titles, not to buy. Nor will it satisfy those who desire the greatest degree of liquidity, Le. monetary claims. Saving in the form of monetary claims can create difficulties for the distribution of consumer goods, as they may lead to mass presentation of claims-to-consumption and an uneven rate of sale for goods (see p. 6&). To avoid such an eventuality,Le. in order to eliminatethe possibility of hoarding, the use of money with a limited period of validity has been suggested. What is wanted here, however, is· the opposite, viz: an arrangement to make hoarding possible. It is obvious that if the central authority finds the disadvantages of a possible mass presentation of claims to consumption smaller than the advantages of giving the members of the community facilities for individual saving, it cannot limit the period of validity. On the contrary, in this case the members of the community should be allowed to expect that their money will have a fixed value.

Another way of making money saving possible is th.e issue of bonds. One presumable objection to this is that they make inequality in the distribution of wealth possible, which is just what most friends of socialism say the socialist society will eliminate. However, inequality in the distribution of wealth is a logical consequence of facilities for saving. The .payment of interest in itself implies the possibility of unequal distribution of income. However, the interest on bonds whose one and only object is to provide an outlet for people's urge to save can be low. If, on the other hand, the central authority issues bonds with the object of preventing hoarding, the interest rate will have to be made high and the bonds irredeemable (see Chapter VI, p.69)· The fact that the central authority may give the members of the community facillties for satisfying their urge to save does not mean that it is they who determine what the volume of savings is to be. By being the one and only entrepreneur, the state will be alone in deciding whether there is to be real saving and, if so, how much. It will not be necessary for the members of the community to do the actual real saving. The central authority can decide the production of future goods, hold back supplies and by this or other means make the volume of saving it thinks fit without asking anyone. Thus what the com munity saves will be little or no indication of the individuals' will to save, since their saving to all intents and purposes will be regulated by the central authority, which in its capacity as the one and only employer determines prices and thus the level of real wages, and as the only borrower, or practically so, the rate of interest.

(3) In judging the need for saving and investment in the socialist H 106 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY society, let us first consider one or two simple facts that characterize production of capital goods, whether the form of the community be socialist or private-capitalist. The first is this, that in modern, industrialized societies production involves the use of produced means of production (tools, machinery, factories and means of transport etc.), since their use saves time and effort. The second is that all production, including that of the means of production, requires time in any kind of community. The third, that the roundabout process of production which results from pro ducing and using the produced means of production demands (a) labour, power and raw materials, not only to make the means of production, but also to produce the intermediate products at the various stages of production, and (b) a store, or a continual supply, of consumers'. goods (food and luxuries) for the workers engaged in this roundabout process of production.

This relationship may be obscured in the capitalist society since the savings are not always made by the same individuals who make the investments. In the socialist society it would be clearer, since the central authority will have sovereign power to regulate the extent of both savings and investment. Thus, in the socialist society, it will be obvious that an increase in the production of means of production will imply that the members of the community are relatively less able to satisfy their immediate needs. As the accepted aim is production for needs, this will involve making a choice. What do the members of the community prefer? More goods to-day and fewer in the future, or fewer to-day and more in the future, or a combination of the two and, in that case, which? The answer will depend on how many more goods they will get and on the interval of time, that is to say, on how long it will be before they get them.

Though some individuals rate the thought of future enjoyment higher than present enjoyment and the possession itself, most people con sider a bird in the hand worth two in the bush, and prefer the certain to the uncertain. Thus the central authority will presumably be justified in considering that waiting is a sacrifice and, also, in assuming that the magnitude of this sacrifice will depend on the time it takes to achieve the increased quantity of goods. If the period of waiting is to be so long that it becomes possible that an individual may never get any enjoyment of these future goods because of old age or of his having died in the meantime, he must be expected to prefer immediate goods, though, of course, he might be willing to make the sacrifice to benefit his descendants. This same argument will allow the central authority to maintain that in deter mining the volume of the savings quota, it must not only take the present generation into consideration, but also the following ones. The INTEREST. IN THE SOCIALIST SOCIETY 1°7 central authority may also claim that it is paying prior regard to future generations. This, in theory, provides a justification for expanding the apparatus of production to such an extent as to entail shortages so great that part of the existing population starves to death. This, how ever, would conflict with our hypothesis that it is the needs of the present members of the community which the central authority must satisfy. This means that in considering each expans10n of the apparatus of production the central authority must take into consideration the amount of time the process will require. 1 The value of the future goods will have to be discounted somehow to give their present value and so provide a basis for comparison with the goods "invested". To do this, there must in the first place be what we may call a "coefficient of dis count".2 The determination of this factor, which is only part of the task, creates many and considerable difficulties.

The coefficient of discount we are looking for is an expression of the community's valuation of present goods in relation to a greater quantity of future goods (greater, because an increase in the quantity of goods and/or a reduction in working hours and effort is indirect production's raison d'etre) and it must cover the entire economy and not just be marginal. How can this discount factor be found? To take one simple example: the central authority is in a position to increase the production of bread by employing mechanical baking. The manufacture of the machinery and the erection of the factories will take a certain time and involve certain costs. We assume that these can be expressed in terms of bread. The point of departure is that an increase in the bread ration of the future will entail a reduction of the bread ration during the period of construction. In a socialist society the prices of the means of production and hence the cost data do not exist. For the time being, we will disregard the factor of sacrifice and stick to the first part of the task, that is to· compare a certain greater quantity of bread in the future with the quantity which the consumers receive in the present. This gives us a clearer IThis bears no reference to the time-factor's significance for interest in the capitalist society. That a calculation is made per unit of time does not necessarily mean that time is the decisive factor. It seems to the author unjustifiable to judge the question of interest without taking account of the productivity and scarcity of the capital. One is probably entitled to say that all the main theories of interest are built up on the productivity: Bohm-Bawerk writes of the advantages of "round about production", Schumpeter of "economic development", and Cassel of "the result of the economic activity". With reference to the time factor, see, among others: C. A. ]. v. Gadolin's "Bermerkungen zur Diskussion iiber die Zeitkonzep tion des Kapitals" in Zeitschrift fiirNationalok,onomie, and P. N. Rosenstein-Rodan's "The Role of Time in Economic Theory" in Economica, 1934, where the various problems connected with the time-factor are discussed.

2That interest is used as such a discount-coefficient in the capitalist society does not entitle us to call a possible discount-coefficient in the socialist society interest. In the capitalist society interest has more functions than just that of discount coefficient.

108 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY illustration of the difficulties entailed in determining a discount-factor of this kind. The data required are (1) the size of the increase in quantity, (2) the length of time required before the increased quantity is available, (3) the people's valuation of the present good, and (4) their valuation of the future good. (I) It is assumed that the extent by which the quantity is to be increased has been decided on as an end. This Datum is thus given. (2) On the face of it, it would appear simple to determine the interval of time. If, for example, the production of bread is to be doubled, so and so many factories must be built to produce the machinery the bakeries need; there must be built so and so many bakeries, so and so many new railways and lorries for the carriage of the grain and bread, etc. and the engineers will be able to say that this should take such and such a length of time. Let us assume that all the technical data have been correct and that all the factories are finished on the date given, so that spasmodic increases in the satisfac tion of the future requirements of bread are eliminated. Nevertheless difficulties will occur by reason of· the fact that the interval depends on which means of production are used and in whatcombination.

This is not merely a technical question. For an industrialized society it is in fact not only one good that is produced, but many, and not only one particular means of production is used, but several, which to a greater or lesser extent can be substituted for each other. What has to be ascertained is not simply the combination of the factors of production that is technically the best, but whether or not these factors could have been put to a better use in the same or another combination for another end. Though the object is the "maximum production for needs", the central authority will in practice have to treat each individual capital good. as if it were a production factor of its own and test it out in every conceivable combination in which it might be used. These experiments must be made simultaneously, so as to avoid the various kinds of change that the passage of time introduces. Once the best combination has been found, that is to say, best not merely from the technical point of view but also in relation to the scarcity of the capital good concerned, and to the extent and intensity of the demand for the final product, then, but only then, can the interval of time be deter mined.

(3) To obtain accurate data for judging the people's valuation of the present good, certain hypotheses must be satisfied, which will raise many difficulties in a socialist community. (See Chapter V.) (4) The attempt to determine the "value" of the future good will meet with even greater difficulties. If the central authority puts its INTEREST IN 'tHE SOCIALIST SOCIETY own price on the future good, as it can do in its capacity as the one and only employer and producer in the same way as it does with the present consumer's good, the whole thing becomes arbitrary and there is no point in our investigating it, since it is the people's valuation of the future good in relation to the present good, that we are looking for. Nor is it possible to calculate the value of the future good on the basis of the materials and means of production used. The usual difficulties are met with here: in the socialist community there are, by definition, no markets and therefore no market prices for means of production. It wouldn't even help, if there were. What weare searching for are future prices and, unless forward markets exist, these must be determined on the basis of present prices with interest added.

To attempt to make this addition brings us back to where we started, as it is just a rate of interest, or, rather, a discount factor, at which we are trying to arrive. In view of these difficulties the central authority will have to look for other ways of finding a discount factor that will make the "maximum production for needs" possible over a longer period of time. One can imagine it trying to obtain the necessary material by means of the "interview method" and asking individuals what their attitude would be to a permanent increase in the bread-ration entailing a temporary reduction in it. The size of the increase is determined by the central authority and so is given, as in the previous case. Here, too, the same difficulties will be encountered as in the' previous case in regard to (2) the interval, and (3) the future price. In one respect, however, the interview-method can yield better results than general calculations. Assuming that the central authority has found the interval and the future price of one individual article (the increase in production being given) the individual person will be able to say which he prefers: the larger quantity of goods in the future or the present goods (see p. 141, Chapter XI). He will be able to make a direct comparison between the larger quantity of goads in the future!

(larger than the present quantity) that will result from the. change-over to mechanical baking. In other words, he can make a direct com parison between the reward and the sacrifice. Actually, the sacrifice is already indicated, in as much as we have assumed a future price different from the present price. To make a comparison it is presumably easier to assume the price unchanged and let the sacrifice simply be a smaller ration during the period of conlIt is really inaccurate to use the term "quantity". As we are concerned with a flow of consumer goods, the time factor ought to be taken into consideration here as well. To avoid making the style too involved we have not used the expression "quantity per unit of time", wh~ch would have been the correct one to use.

I 10 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY struction. The most accurate result will be reached, if those inter viewed are presented with varying data (increase in production and sacrifice). We shall return later to some difficulties implied in measuring the sacrifice. The individual person's valuation of future goods against present goods will be influenced by a complex of factors. It will vary not only with his intelligence and emotional make-up, but also with the present level of his income, his expected income and its purchasing power, his present and expected needs and his expectation of life. All the same, after a certain amount of pondering the normal individual will be able to give a direct answer, whether or not he considers an increase of so-and-so many per cent in the bread ration after a certain interval worth a reduction of so many per cent during that interval. Such an answer, however, will not get the central authority very far.

It will, of course, give a certain individual's discount factor ata given moment for a certain article (see p. 38), but this will be of no use to the central authority in its production policy, for the simple reason that people's tastes and valuations change almost incessantly. There is the additional fact that one and the same individual's coefficient of discount will vary for different commodities according to the elasticity of need for the commodity concerned. If an average coefficient of discount were to be calculated for each person, use would have to be made of "weighted coefficients". This would create new problems, quite apart from the fact that such coefficients cannot be added, since they are really incommensurable magnitudes. Account must also be taken of the fact that the individual person's coefficient of discount for a certain good will change with an alteration in the supply of future goods, not only because his valuation is influenced by the total quantity, but because certain goods are complementary and sub stitutional.

That is not the end of the difficulties. What is wanted is a coefficient of discount that will be valid for all members of the community, and not for individual persons only. Even if a coefficient of discount were found for each individual person, it could not give any common coefficient valid for them all, as they cannot be added. It must be pointed out that the difficulties in getting a discount factor are in fact much greater than we have portrayed them here, where we have only gone into the question of the comparison of con sumer goods. If roundabout production was exclusively concerned with the construction of factories, machinery, warehouses and means of transport, which can be us'ed to produce a certain consumer good, such an assumption would have been permissible. In reality, however, roundabout production consists to a large extent in the manufacture of means of production that can be used for the production of different INTEREST IN THE SOCIALIST SOCIETY III consumer goods and also different capital goods (machines, tools, means of transport, power stations are typical examples). It is im possible to fix a coefficient of discount for capital goods on the basis of people's individual subjective valuation of their present and future utility.

As so far we have given little attention to the factor of sacrifice, it must be emphasized that the prerequisite for an increased quantity of goods in the future is a reduction in the flow of present goods. The question of sacrifice raises new difficulties. If it should appear that a quantity of future goods after being discounted down to their present value is worth less than the smaller quantity of present goods, either by reason of the length of the interval of time or of Gossen's laws,! the matter will be clear and the central authority will have a valuable indication that it would be uneconomic to begin production of the good concerned. If, however, it should appear that the discounted value of the. future good was greater than that of the present good, the question of sacrifice would have to be gone into. In the first example given, the discount factor-provided it could. be calculated at all-merely made it possible to compare people's subjective valua tion of future goods with present goods, which gave the central authority no indication of how much of the present goods (or of other present goods' of the same "value") p.eople would sacr:ifice in order to acquire a greater quantity of future goods.

This sacrifice is in an analagous position with utility: each in dividual's assessment of the sacrifice will change with time. Then, too, the sacrifice (reluctance to have the flow of present goods reduced) will increase the more production is switched over to future produc tion. The matter would be a comparatively simple one, if it were merely a question of restricting the current consumption of bread or shoes, so as to get more bread or shoes (in the future), but the sacrifice will increase progressively and become more and more difficult to assess, as more and more such sacrifices are demanded. The sacrifice curve is no more proportional and rectilinear than is that of the satisfaction of needs. There is also the fact that each individual's readiness to accept sacrifices and his sacrifice curve will vary over time, and that it is impossible to add together possible data for arriving at the sacrifices of individual goods he is prepared to make. This means that the central authority will be left without any indication .

of how much of all forms of present goods the members of the com munity are ready to sacrifice in the aggregate, in other words, that it cannot get any picture of the total saving the community is prepared to make. lSee p. 41.

112. ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY (4) Even in the socialist society it is desirable that there should be data in the shape of interest rates, but in such a community these interest rates will reflect the relationship between saving and invest ment even less than in the capitalist society, partly because they do not figure in any market where lender and borrower compete, and partly because the central authority can arbitrarily determine both the extent of saving permissible to the members of the community and the price that shall be paid for loans. (5) and (6) In the socialist society not only interest rates, but also saving and investment, will have to be determined arbitrarily by the central authority. (7) For this reason the interest rate will not have any real significance. The central authority will have no data it can use as a costing factor in judging a concern's right to exist.

There will be two results of the absence of interest rates with which to calculate. The first is what has just been mentioned, that the central authority will lack a measure of the productivity and value of the different concerns. The amount of capital used will vary from one branch of industry to another and from one concern to another. If it does not charge to annual expenses an allowance for the values which these capital goods represent, the central authority will never know whether the greater or lesser output per labour-hour is due to a greater or lesser employment of capital, greater or lesser efficiency (on the part of the management and workers), or to other factors. The principle remains the same, whatever you reckon as capital. If the original factors of production are put in a class of their own, their use must be counted as a cost factor of its own, as a rent. (For reasons which will transpire in the next chapter, this method of procedure is adopted here.) Thus the capital with which the concern will have to be debited, will consist of manufactured means of production: factories, machinery, tools, semi-manufactured goods and raw materials with which they have been supplied. In both cases there will arise the difficulty in calculation, that in the socialist community there are no known prices for means of production. "Interest" expressed as a percentage is of no use as a factor of calculation, where interest must be expressed as a price or an amount commensurate with the other costing factors.

The second and more important consequence of there being. no interest rates with which to calculate, is that the central authority's calculations do not automatically include time as an economic factor in the form of annual debiting of interest. Its aim of maximum production for needs cannot be achieved, when in making its decisions it takes no account of the time it takes to open mines, build factories, produce machinery, plant forests, drain land, etc. If a greater quantity INTEREST IN THE SOCIALIST SOCIETY I I 3 of the society's resources is used for future ends than its members are prepared to sacrifice for those ends, this means reduced welfare for the community. In a socialist society the people will no longer be able to influence the relationship between production of future goods and of present goods. In a capitalist society the people at any rate have some means of in fluencing the level of interest rates (and thus of investment) through their monetary savings, and also by their ability to make non-monetary savings, and also by their ability to make non-monetary investments in natura simultaneously with their savings. Neither of these possibilities will exist in the socialist community, since the state is by definition the one and only producer and the only trader, since it does not allow private individuals to produce or exchange means of production for their own account, nor in any other way permits any private initiative in investment matters. Without an interest rate the central authority will be deprived of a necessary costing factor and datum for cal culation.

To conclude this chapter on interest we shall quote various economists' opinions on interest in the socialist society. As has been mentioned, this has been the subject of special discussion by many economists (Bohm-Bawerk, Marx, Cassel and Schumpeter, among others), and their opinion as to whether interest mayor may not exist, depended on the presence, or absence, of the factor they have stressed as most important in explaining interest on capital. v. Pareto says! that, since loans are forbidden, there really won't exist "d'interet (foyer net de l'epargne)" in the socialist society, but all the same there will be something that represents the sacrifice entailed by foregoing the consumption of economic goods. 2 The example he takes is that of the socialist government sharing out 100 kg. of arti chokes for the removal of the stones from a patch of ground, which will make an increase of 5 kgs. in the crop of artichokes possible. These 5 kg. are called "uneprimepour fe retardde lajouissancede la consommation", but fundamentally it is just "l'interet". He says: "Le gouvernement socialistedevra,pour obtenirIe maximum d'ophelimite,distribuerla partie des marcbandisesqu'il pre/evesur Ie produit total, entre les differentsusages qu'on en peut faire, de sorte que la prime pour Ie retard de la jouissancesoit egale pour chacun de ces usages".3 The question of interest has also been treated, or, at least, touched upon, by many of those who took part in the discussion .of the possibility of calculation in the socialist community. Beginning with lCoursd'EconomiePolitique,II, Lausanne, 1897.

20p. cit., p. 369. 3Ibid., p. 370.

I 14 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY those who believe in such a possibility, there is Mrs. Wootton, who says that: "Interest is ... payment for a real cost: namely, that of waiting for a deferred result or making the (in all probability, normally painful) effort of saving'! ... No planned enterprise, can .' .. be said to cover its costs unless its proceeds provide in full for interest as well as for wages and materials. But here we come up against the unanswerable question: What is 'full interest' in a socialized economy". 2 She writes that in the absence of a capital market "the true cost of abstinence cannot be tested out."3 Mrs. Wootton has a greater respect for the importance of pricing of interest in the capitalist society than has the author of this treatise, but there is no discrepancy between Mrs. Wootton's conclusion and his, when she says: "Where capital goods are collectively owned and their creation made a matter of collective determination, interest remains a real economic cost indeed; but that its measurement in quantitative terms becomes so difficult that current rates of interest cease to be any use as guides to practical policy." 4 H. D .. Dickinson's conception of the socialist. society assumes, as has been mentioned, the continuance of many of the capitalist society's forms of organization, among _others autonomous concerns "similar to limited liability companies in a capitalist corporation". 5 Dickinson is of the opinion that every entrepreneur can submit different alter native plans for his business, assuming interest rates of 6, 5, 4, 3, etc.

per cent and that, on the basis of these plans, it will be possible to construct an aggregate demand schedule for capital. 6 Here it must be objected, in the first place, that demand schedules cannot be simply added together, and, secondly, that there must be a market to provide them with a common denominator. Further, no attention is given to the utility factor, since it is assumed, as Dickinson does in so many words, that there are free markets. He obviously also, by implication, assumes a given amount of capital, for he takes no account of the sacrifice involved in continued saving. The volume of saving in a socialist community must and will be determined arbitrarily by the central authority. (See also Mrs. Wootton's objection to Dickin son's argument.f IPlan or No Plan, p. 96. 20p. cit., p. 98. 3Ibid., p. 98. 4Ibid., p. 100. 5"Price Formation in a Socialist Communiti' in Economic]ournal, 1933.

6Ibid., p. 243. 70p. cit., p. 99, footnote, INTEREST IN THE SOCIALIST SOCIETY I I 5 Dickinson uses "years' purchase" to express interest rates, which is an interesting suggestion. One example he uses is that of a railway, which is to cross a piece of high ground, where the choice is between a tunnel, implying large non-recurrent costs and small running costs, and building it over the top, when the non-recurrent costs will be less and the running costs large. Dickinson is of the opinion that the works proposed can be classified according to the "years' purchase" they involve and that a balance can be arrived at by continuing investinent in all branches of production up to the same number of "years' purchase". Even if we accept Dickinson's assumption-strange as it is for the socialist society-that there is a free market for means of pro duction (and consequently prices to calculate with), his proposal does not get us any further. I-Iis yardstick can only be used when it is a question of comparing the costs of installation with an annual saving in running expenses; it cannot be used for means of production tor the manufacture of new consumers' goods, where the utility factor comes in, nor for means of· production that can be used for a variety of purposes (e.g. a tool factory).

Examples often quoted in discussing interest in the socialist society are those of drainage schemes, clearing of ground, etc. where. the costs are expressed in the same unit as the resulting product (grain, arti chokes, etc.). The use of roo tons of corn for paying the labourers is assumed to give an increase in production of, e.g. five tons, and the question is then raised whether or not the draining shall be undertaken. It may not be out of place to recall that in modern industrialized communities interest calculations cannot be made in natura. The whole problem appears comparatively simple when the resulting product is of the same kind as that which is used to producejt, but in the world of reality the final product is the result of several production factors. If corn or another commodity is to be taken as the unit of measure ment, it must be explained on what principle the value of the various other factors hasheen judged. .

Dr. Clare Tisch has devoted considerable attention to this discussion on interest. 1 In her opinion interest will occur as a "Rechnungsgrijsse" (since present goods have an agio against future goods) but she doesn't indicate in what manner or at what height this "Rechnungsgriisse"is to be fixed. Dr. Oscar Lange assumes without further discussion that the members of the community ,can have no influence on interest or on the extent and rate of incr~ase of savings in a socialist community. He writes that: "a rate of accumulation which does not reflect the preferences of the consumers as to the timeshape of the flow of income lOp. cit., pp. 38-46; 75-84.

I 16 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY may be regarded as a diminution of social welfare".l He is, however, of the opinion, that this deficiency is outweighed by the many advantages of socialism. Dr. A. P. Lerner asserts that interest represents the marginal productivity of waiting, which itself depends on saving and invest ment. 2 Overlooking the fact that interest is determined by other factors than these, this does little to explain what takes place in reality. H. Zassenhaus 3 says that there cannot be such a thing as interest on capital in a socialist society, since the entrepreneurs' remuneration goes to the benefit of the consumer. Later, he says that not even a socialist society can indulge in roundabout production without simultaneously lessening the production of consumer goods. He also points out that if the ministry of production wishes to make use of individual savings, there could be a prize for saving, which would be similar to interest on capital, but he also points out that the ministry could make this prize larger or smaller at the time of distribution, and that the influence this "interest" could have on the apportionment of new investments in the different branches of production would be quite insignificant.

Here it must be mentioned that Zassenhaus fails to point out that the central authority must have a discount factor (and prices for capital goods), if it wishes to make economic calculations. The fact that in a socialist society interest on capital will not exist as a payment for services does not mean that it can be eliminated as a factor of cal culation. Dr. Eduard Heimann has often discussed this question of interest and the frequency with which he has changed his opinion gives a good idea of how tricky the problem is. Originally Dr. Heimann maintained that Professor Cassel was wrong when he wrote in Theore tische Sozialiikonomiethat the laws which governed interest rates in the capitalist society would also hold good in the socialist one. Dr. Heimann objected that the circumstances would be different, since "the formation of a price assumes the existence of a market divided into separate parts" .4 This opinion is very interesting both in this and in another con nection, for it constitutes a very important argument against the attempt made by Dr. Heimann and many other economists to solve the problem of calculation by advocating competition in the socialist society. (We shall revert to this qu~stion in Chapter XIII.) In this conl"On the Economic Theory and Socialist Economy, II" in Review of Economic Studies, February, 1937, p. 127.

2See "Economic Theory and Socialist Economy" in Review of Economic Studies, 1934-35, p. 56. 3See "Uber die okonomische Theorie der Planwirtschaft" in Zeitschrift fur Nationalok,onomte,1934, pp. 521-5 22 • 4Mehrwertund Gemeinwirtschaft,Berlin, 1922, p. 68.

INTEREST IN THE SOCIALIST SOCIETY I 17 nection, too, Dr. Heimann has said that interest will not be "an eternal category in economics . . . but is peculiar to private economy".l He further mentions the necessity of "absolute interest on scarcity", a question that will be discussed in the next chapter. Later, however, he comes to the conclusion that interest is an eternal category, and in his "Zur Kritik des Kapitalismus und der National6konomie"2 he says that it is "right to say, that, for example, interest is an eternal category of all types of economic systems, since a certain value must always be imputed to capital for the part it plays in the production of goods~~. 3 This is correct, but hardly consistent with his previous views. Some of those who are sceptical of the possibility of economic calculation in socialist societies maintain that interest should figure in the calculations of even a socialist society, but that this is impossible because of the lack of a market for capital. For Professor Mises, who has devoted some attention to the question, the chief point is that there won't be any prices on the means of production.

That this question of interest will continue to have practical significance in the socialist. society is shown by a theoretical example constructed by Professor Brutzkus. 4 He assumes that the world con sisted of nothing but socialist societies and. that the Russian workers had asked their English colleagues to lend them locomotives, machinery and tools to enable them to develop their production apparatus more quickly. Brutzkus says that, if the English were not able to ask for interest, it would be quite reasonable for them to reply that they needed these means of production themselves, pointing out that they were aiming at better housing and, in any case, must first attain the level of their American brethren, practically all of whom had their own cars. It would be quite different, if the English workers were to receive interest to compensate them for such an outlay. The payment of interest in such circumstances (Brutzkus ironically calls it "a consequence of exploitation") would be natural and, no doubt, practised.

Professor Pierson 5 has also used the transfer of capital between different countries to illustrate the continued existence of the problem of interest (and exchange) in socialist societies. Professor Georg Halm has concerned himself more than most with this question of interest, to which he attaches great importance. He writes: lOp. cit.~ p. 69. 2Bllitterfur den reJigiosenSozialismus~ 1926. 30p. cit., p. 17. 40p. cit., p. 56. 5CollectivistEconomicPlanning,p. 66.

I 18 ECONOMIC CALCULATION IN THE SOCIALIST SOCIETY "Now it is unfortunate that this allowance for interest, the need for which is· urgently dictated by economic conditions, cannot be adopted in the socialist economy. Perhaps this is the most serious objection that can be maintained against socialism."! Professor Halm bases his contention that the fixing of interest rates is impossible on the same argument as that used by the socialists to show that the calculation of interest is unnecessary in the socialist society, namely, that the society owns all capital goods. This means that the capital is not owned by many individuals and so there cannot be a market with supply and demand, such as is necessary for arriving at a price. Halm builds on Mises' point, which he calls "pioneering", but the most serious point for him is apparently not that the lack of market prices precludes economic calculation and the economic use of capital goods, but that it makes it impossible to calculate interest, since interest is a price that has to be calculated as a certain fraction of a value expressed in money.

One must agree with many of Professor Halm's points, but it is not easy to follow him when he goes so far as to maintain that "allowance for interest . . . cannot be adopted" and that this "is the most serious objection that can be maintained against socialism". As far as the use of interest is concerned, it is not inconceivable that the central authority may choose an arbitrary rate of interest so as to have a discount-factor to prevent present values and future values being calculated alike, irrespective of the interval of time. Professor Halm is perfectly right in saying that such an interest rate will give no indication of the scarcity of capital;'2 right too, when he says that it is merely circular reasoning to use a fictitious rate of interest to find the value of a capital good, which has to be assumed before the rate of interest can be determined. 3 However, it is unlikely that any catastrophe would happen to the socialist_society if its central authority, for the sake of easy comparison of the amount of capital issued to the various concerns, should take an arbitrary rate of interest. After all, interest rates have not fluctuated so violently in industrialized societies during the last hundred years. And Professor Halm will undoubtedly agree that the central authority will be better served with a fictitious rate of interest, than with none, and it was he who showed how economic calculation is impossible without a factor of discount.

lCollectivistEconomicPlanning,p. 161. 2He is reckoning with concrete capital goods and not with the demand for capital, for which he has been rebuked by Dr. Clare Tisch among others. As far as it can be understood, this is a matter of subordinate interest for this discussion. Besides, it can be rightly maintained that there will be no demand for capital in socialist societies, since in'them money is a warrant for consumer goods and does permit the purchase of capital goods. 30p. cit. See, footnote on p. 164.

INTEREST IN THE SOCIALIST SOCIETY It should be recalled that in market economies, too, interest is influenced by factors that have little or nothing to do with the scarcity of capital, saving or investment, and that not even in such a society is interest the only factor influencing the volume of saving and in vestment. I In any event one cannot agree with the second part of Professor Halm's contention: that the absence of interest is the main objection to socialism. The lack of prices for the means of production will occur far'more often and lead to far more dangerous miscalculations than any lack of interest rates. But it is admittedly an objection against the socialist society that it cannot possibly allow the community's willing ness-or unwillingness-to restrict current consumption to have any effect on investment, as the savings quota can only be determined arbitrarily by the central authority.

IOn the other hand it can justifiably be maintained that in the years after the outbreak of the First World War savings and investment had markedly little in fluence on interest rates, and vice versa. The development, both monetary, political and cultural, of many European countries might well have taken a different course, if the state and its financial authorities had allowed interest ~rnore latitude to express the relationship between savings and the lack of savings on the one hand and investment and the destruction of capital on the other. We have not yet seen the consequences of the expanded credit basis and of the controlled fixation of interest which are typical features of the monetary policy of many countries in the last decades.