Chapter II. The Agio Theory

CHAPTER II

THE AGIO THEORY

I HAVE already remarked that in the most recent times some new opinions have been added to the old rivals. The most influential additions of this sort are represented by those theories which explain interest by a difference in value between present and future goods.

Remote allusions to this thought had already been made by Galiani and Turgot. A half-century later John Rae had given to it a very remarkable formulation, in spite of which, however, it was not his fate to exert any influence upon its further literary development. Again, forty years later, Jevons worked out in a masterly way most of the premises upon which that theory rests, but he neglected to develop the lines of thought which connect these premises with the phenomena of interest. In this respect his work is inferior to that of his forgotten predecessor, Rae, whom he about equals in the development of the psychological part of the premises and undoubtedly surpasses in the recognition of those premises which are derived from the technique of production.

In immediate connection with Jevons should be mentioned Launhardt¹ and Emil Sax.² Both of these authors excel Jevons in so far as they clearly express the concept, —involved, but not clearly expressed, in Jevons’s work, and meantime announced in 1884 as the foundation of my interest theory, —that interest springs from the difference in value, resting upon psychological grounds, between present and future goods.³ But these authors merely formulated this principle without carrying it to its final consequences. Their failure to develop it in detail prevented them from testing whether the psychological causes of the lower estimation of future goods are able to furnish a sufficiently broad basis for a complete explanation of the phenomena of interest, or whether in addition certain facts connected with the technique of production, and entirely neglected by them, must not be employed in the explanation.

The works of Launhardt and Sax fall in the period between the appearance of the first (1884) and the second (1889) volumes of my published work upon “Capital and Interest.” The “Positive Theory of Capital” set forth in the second volume contains an attempt to derive all forms of the interest phenomenon from the difference in value between present and future goods, and to explain this difference by means of the coöperation of a series of causes, partly psychological and partly connected with the technique of production. This attempt met with much opposition, but also with agreement and support from many quarters. Cognate ideas were expressed at about the same time by American thinkers, especially by Simon N. Patten,¹ S. N. Macvane,² and J. B. Clark,³ though in a less exhaustive way, and for the time being without any conscious break with the trend of ideas involved in the old abstinence theory. At the same time there was in operation the impulse given by Jevons’s brilliant work, which has steadily grown in the appreciation of the theorists of the various nations. The fact is that on account of one or the other of these stimulating influences, the theory of the difference in value between present and future goods,—to use a short expression, the agio theory,¹ —has taken root in the literature of all civilized nations, and has even acquired a predominant place in that of some of them. Especially it seems to me that cognate views, with this or that shade of difference, have acquired wide acceptance in English-American,² Italian,³ Dutch,⁴ and Scandinavian⁵ literature.⁶

¹ “Mathematische Begründung der Volkswirtschaftlehre,” Leipzig, 1885 (see especially pp. 5–7, 67 sq., and 129).

² “Grundlegung der theoretischen Staatswirtschaft,” Vienna, 1887 (pp. 178 sq., 313 sq.,)

³ “The rate of interest demanded rests upon an estimation of the smaller value possessed by a future enjoyment in comparison with an equally great enjoyment offered in the present.” (Launhardt, p. 129.)

“The value of a production good is derived from that of the consumption good which proceeds from it. Since the need which the production good indirectly satisfies is a future need, this derived value is smaller than that which the economic subject attributes to the consumption good available in the present for rendering the same satisfaction, or what amounts to the same thing, smaller than the value which that concrete consumption good, after it has come into existence, will have for him in view of the need which at that time exists. The value of the future consumption good from which the value of the capital is derived depends upon the future need, which is weaker than the need at present felt.... In the difference of value between the production good and the consumption good derived from it lies the so-called ‘productivity’ of capital.” (Sax, pp. 317 and 321; cf. also p. 178 sq.)

¹ “The Fundamental Idea of Capital,” in the Quarterly Journal of Economics, January, 1889.

² See his short but very noteworthy article entitled “Analysis of Cost of Production,” in the Quarterly Journal of Economics, July, 1887, and later articles in the same periodical for October, 1890, and January, 1892.

³ The extensive series of articles in which this sagacious and indefatigable theorist has during the last decade presented his investigations on the subject of capital and interest begins with his monograph, “Capital and its Earnings,” published in 1888. Most of his later articles may be found in the Quarterly Journal of Economics; some also in the Annals of the American Academy, July, 1890, and in the Yale Review, November, 1893.

¹ Macfarlane (“Value and Distribution,” pp. xxii and 230 sq.) proposes the name “exchange theory,” because according to this theory interest arises from an exchange between present and future goods. But this term does not seem to me to characterize the theory sufficiently. By a strange misunderstanding, Zaleski (“Lehre vom Capital,” Kazan, 1898) regards the title “Positive Theory of Capital,” which I gave to the second part of my work in order to contrast it with the historical first part, as a characteristic attribute of my theory.

² Besides the authors included in the text there are others who hold more or less similar views. For example, J. Bonar (Quarterly Journal of Economics April and October, 1889, and April, 1890); William Smart (“Introduction to the Theory of Value,” London, 1891, “The New Theory of Interest,” Economic Journal, 1891); F. Y. Edgeworth (Economic Journal June, 1892); E. B. Andrews (“Institutes of Economics,” Boston, 1889); Lowrey (Annals of American Academy March, 1892); Ely (“Outlines of Economics,” New York, 1893); Carver (Quarterly Journal of Economics) October, 1893); Taussig (“Wages and Capital,” New York, 1896); Irving Fisher (Economic Journal December, 1896, June and December, 1897); Mixter (“A Forerunner of Böhm-Bawerk,” Quarterly Journal of Economics January, 1897); Macfarlane (“Value and Distribution,” Philadelphia, 1899); and especially also Hobson (“Evolution of Modern Capitalism,” London, 1894); and Hadley (“Economics,” New York, 1896, and Annals of American Academy November, 1893). Giddings has also expressed himself as partially in agreement with this idea, but he believes that in order to complete and extend the theory, it is necessary to make an addition to it, in which he would explain the constant deficiency in the supply of present goods or capital by the fact that the last hours of labour, performed with ever increasing reluctance and pain, contribute to the formation of capital. This increase in the pains of labour constitutes the extra costs of capital building,—in comparison with the cost of the manufacture of goods designed for immediate consumption—which extra costs must find their remuneration in interest. But I am neither able to convince myself of the reality of all the assumptions of fact involved in this theory, nor, if these assumptions be granted, am I able to discover their operation in the process by which interest is produced. See, besides, the exhaustive discussion in the Quarterly Journal of Economics from July, 1889, to April, 1891, in which, besides Giddings and myself, Bonar, David J. Green, and H. Bilgram also took part.

³ Ricca-Salerno (“Teorie del Valore,” Rome, 1894), Monte-martini (“Il Risparmio dell’ Economia pura,” Milan, 1896); Crocini (“Di alcune questioni relative alP utilità finale,” Turin, 1896); Graziani (“Studi sulla teoria delP interesse,” Turin, 1898); further in essentials perhaps, Barone (“Sopra un libro di Wickseil,” Giornale degli Economisti, November, 1895, and “Studi sulla distributione” in the same journal for February and March, 1896); and partly at least, Benini (“Il valore e la sua attribuzione ai beni strumentali,” Bari, 1893).

⁴ Under this head must be mentioned before all others N. G. Piersons classical work, “Leerboek der Staatshuishoudkunde” (2d ed., Harlem, 1896, and an older article in De Economist, March, 1899, p. 193 sq.).

⁵ This subject has been most exhaustively treated by Kunt Wicksell (“Ueber Wert, Capital und Rent,” Jena, 1893, “Finanztheoretische Untersuchungen,” Jena, 1896). Dr. Wicksell was kind enough to supplement my insufficient knowledge of Scandinavian literature by some private communications, in which he mentions as representatives of cognate views the following authors: in Denmark, Professors Westergaard and Folbe-Hansen; in Sweden, Count Hamilton, David Davidson, and John Lefller; in Norway, Professors Aschehoug and Morgenstierne, Dr. Oskar Jaeger and Dr. Einarsen.

⁶ Among the original German works in which similar ideas are expressed, I wish to make special mention of that of Effertz (“Arbeit und Boden,” Berlin, 1889),which appeared almost contemporaneously with my “Positive Theory,” and the profound work of the Swiss author, George Sulzer (“Die wirtschaftlichen Grundgesetze in der Gegenwartsphase ihrer Entwicklung,” Zurich, 1895). Effertz expressed in an original way the thought that interest owes its existence to a difference of time, and that the “age” (“alter”) of labour and of land is an element of exchange value, and that interest is “the payment for the age quality of labour and land” (pp. 190 sq., 198 sq., and 278). The necessity of the additional payment for the “age” of the elements of production is remotely, although perhaps inadequately, explained by the fact that old labour and old land are rarer than present labour and present land (pp. 190, 195, 198; cf. also in addition, pp. 218, 221, 354). The fact that the author on principle avoids literary references makes it impossible to know whether and to what extent the work of Effertz, which appeared in 1889, was influenced by several previous discussions of the same fundamental thought. Sulzer’s treatment of the subject seems to me in general to move upon a middle line between that of Jevons and my own. On the position occupied by Adolf Wagner at the present time, see Chapter V.