Chapter IV. The Abstinence Theory

CHAPTER IV

THE ABSTINENCE THEORY

DURING the last fifteen years the abstinence theory has been the subject of lively, I may almost say unexpectedly lively, theoretical discussion. To begin with some details, it has received support of an interesting kind from the fact that it has been vigorously defended by some writers against an objection which has played a very noisy part in the polemic directed against it by socialistic agitators. The objection is that the greatest capitalists have occasion to practise the least abstinence, and that therefore there is an evident lack of harmony between the magnitude of the causes which are supposed to be in operation, that is, the abstinence practised, and their supposed effect, the amount of interest obtained.

By the application of a principle common to the Ricardian and the marginal utility theories, it has been shown that this lack of harmony cannot be regarded as a conclusive argument against the truth of the abstinence theory, since the market price of products by which the sacrifice involved in their production is remunerated tends to equal the greatest of the various sacrifices required. On this account it is not remarkable that the same rate of interest which is adequate to reward the greatest abstinence undergone may give an excessive remuneration to those persons with whom the accumulation and maintenance of capital involves a relatively small sacrifice of abstinence.¹ But this argument answers only one of the most superficial objections to the abstinence theory, and does not touch the more fundamental one, based on logical grounds, upon which I have constructed my criticism of it.¹

A significant change in terminology has been suggested by Macvane, who proposes to substitute for the expression “abstinence,” which has been the occasion of so much opposition, the weaker but more suitable term “waiting.”² This suggestion involves a certain approach to the standpoint of that theory which in the explanation of interest lays chief stress upon the influence of the element of time upon the difference in value between present and future enjoyments and goods, and it is a significant fact that not a few of the most recent representatives of the abstinence theory regard this and the agio theory as substantially identical.³ But there is a real obstacle in the way of the amalgamation of these two theories, namely, that to the “waiting,” which Macvane and his followers suggest as a milder term than abstinence, must be assigned the position of an independent sacrifice which must be paid for in addition to that of labour.

The inclination of the abstinence theorists, which was noticeable in previous periods, to introduce in an eclectic way into their discussions of the interest problem propositions which belong to other types of theories, is also perceptible in the most recent times. Similar to the incorporation of elements of the agio theory, which has just been described, is another combination with elements of the exploitation theory,¹ for which Loria is responsible.

Out of this group of theories, two must be selected for special treatment, one because it is a model exposition of a completely developed, up-to-date abstinence theory, backed by the authority of one of the most distinguished scholars. Endowed with all the gifts essential to an investigator and expositor, Alfred Marshall has furnished us a complete explanation of interest comprehending all the facts which have a bearing upon the question. The second of these theories deserves attention as an original attempt to give an entirely new meaning to the term “sacrifice of abstinence.”

Professor Marshall recognizes the fundamental causes of interest in two circumstances which he describes by the terms, the “prospectiveness” and the “productiveness” of capital. The “prospectiveness” of capital consists in the fact that it yields its uses (nützen) only in the future. In order to accumulate capital, people must act prospectively; they must wait and save; they must sacrifice the present to the future.¹ “Productiveness” is based upon the productive advantages which the assistance of capital furnishes. It makes production easier and more abundant.² The “productivity” of capital makes it an object of demand, but on account of the sacrifice connected with its productiveness, the supply is kept at so low a point that the use of capital brings a price and becomes a source of profit.¹

Further particulars regarding this proposition result from the universal law of exchange, of which Marshall regards interest as merely, a special case. According to that universal law, the “normal” value of commodities tends constantly to adjust itself to that level at which demand is in equilibrium with the cost of production. Marshall lays special emphasis upon the coordinate position of these two factors which mutually influence each other. The real costs of production are made up of the totality of exertions and sacrifices which must be undergone in the production of goods. Besides labour these include also the sacrifice of waiting or of the postponement of enjoyment which is inseparably connected with the accumulation and employment of capital.²The term “abstinence,” which has been widely used since the days of the older economists, Marshall regards as less suitable than waiting, and as the fruitful source of misunderstandings, since the largest accumulations of capital are made by very rich people who experience no abstinence in the sense of privation. It would, therefore, be more correct if, following Mac-vane’s example, we should designate the content of the sacrifice under consideration as a mere postponement of enjoyment. This, however, constitutes a real sacrifice which must be reckoned separately, and in addition to that of labour (p. 668).

Like the sacrifice of labour this one must find its compensation in the average price of commodities according to their marginal rate (p. 607); that is, the payment must be large enough adequately to remunerate even the most unpleasant and the most repulsive part of the sacrifice necessarily put forth in the production of the necessary supply (p. 217). This payment is interest, and is, therefore, fittingly described as the reward of the sacrifice involved in waiting (p. 314). To be sure, many people would save without such a reward, just as many people would work without any wage. Therefore, a considerable capital would be accumulated, even with a lower interest rate than that which controls the market. From this it follows that on account of the general principle that the price must adequately remunerate the greatest sacrifice involved in the production of the supply, the savers of this capital receive a remuneration in excess of the lesser sacrifice which they undergo, a remuneration which Marshall designates as “saver’s” or “waiter’s surplus.” But since few people would make any considerable accumulations of capital without the remuneration involved in interest, it is likewise proper to explain interest as the “reward of waiting” (p. 314). In reply to the socialists who maintain that the value of goods depends simply upon the quantity of labour expended in their production, Marshall maintains with emphasis that the view of the socialists would be correct only on condition that the service rendered by capital be offered as a free good without sacrifice, but that it is incorrect in case the postponement of gratification involves in general a sacrifice on the part of him who postpones (p. 668).

I do not think I am wrong in designating the view held by Marshall as in essentials a cautiously formulated abstinence theory with an improved terminology. In its fundamentals his doctrine is in complete agreement with that of Senior. The formation of capital demands on the part of capitalists a real sacrifice which consists in the postponement of enjoyment and forms an independent element in the cost of production side by side with labour. For this an independent payment must be found in the price of goods after the manner and according to the laws (to be sure, more carefully formulated by Marshall) by which in general costs influence the price of goods.¹ Under these circumstances it is evident that my view of Professor Marshall’s interest theory cannot differ much from that which I expressed regarding the abstinence theory in general in my book on “Capital and Interest.” Though I am in full agreement with him on the point that the “prospectiveness” as well as the “productiveness” of capital have something to do with the explanation of interest, I think that the explanation by which he and other abstinence theorists connect these phenomena with interest, is presented in a form which is not in harmony with the facts and which is in unavoidable conflict with the laws of thought.

In the first place, I regard as incorrect the contention that in the act of postponement which is involved in the employment of labour for the acquisition of a pleasure to be experienced at a remote period of time, we must recognize a separate sacrifice to be reckoned independent of and in addition to that of labour. The grounds¹ for this opinion I have already presented in an exhaustive manner. However, if Professor Marshall, well acquainted with them as he is, still holds fast to his doctrine, which is in essentials identical with the abstinence theory, they do not appear to have been sufficiently convincing. I will, therefore, endeavour to support them by some further explanations, and for this a welcome opportunity is presented to me by some remarks which may be found in Professor Marshall’s exposition of his theory.

Like Jevons,¹ Marshall has included in his theory some psychological elements regarding the estimation of future pains and pleasures. Human nature is actually so formed that most men do not esteem a future pleasure, even though its acquisition is absolutely certain, so highly as a present pleasure of the same sort, but they discount it or make a deduction from it, the magnitude of which varies with different people according to the varying degrees of their patience and self-control.² The present value of future pleasures, and, therefore, also the present marginal utility of a distant source of pleasure, are, therefore, smaller than the value of a like present pleasure or even than the value of the same future pleasure at the time when it actually appears. If, for example, according to his temperament, some one is accustomed to discount future pleasures at the rate of ten per cent, he will to-day esteem at ten the present worth of a pleasure which is still one year distant, and which will then have, roughly estimated,¹ an actual value of eleven. From numerous remarks of Marshall, it appears that the psychological fact that the great mass of mankind gives to present satisfactions the preference over future is precisely the one upon which he founds his claim that waiting involves a sacrifice.² That in general we give present pleasures the preference over equally great future ones, and that in general we feel that waiting for a future enjoyment is a sacrifice which increases the expense of acquisition, are in Marshall’s doctrine only two different methods of expression for one and the same psychological fact. As a matter of fact, however, they are not only different modes of expression, but different modes of conception, and, indeed,—a fact which is of interest for our purpose,—two discordant and incompatible modes of conception, of which the one is right and the other wrong, and which it is impossible to hold at the same time, and side by side with each other. The fact of the matter is as follows:—

It is a common experience, doubted by no one, that the psychological phenomenon whose real meaning is now in question reveals itself in the fact, among others, that for gratifications equal in all respects except in their remoteness from us in time we are inclined to undergo unequally great sacrifices of labour or money. For example, if the amount of the gratification be ten, we will be inclined to devote to its acquisition a labour sacrifice up to the amount ten or an equivalent sacrifice in money, say up to ten florins, if this gratification be attainable at the moment. If, on the other hand, the same gratification be removed from us one year, and if the psychological fact in our special case acts with a force corresponding to a discount rate of ten per cent, we will be inclined to expend upon its acquisition a present amount of labour of, at the most, something more than nine (accurately 9.09) or a money sacrifice of, in the aggregate, something more than nine florins (9 fl. 9 kr.). If the same gratification stood five years distant, our willingness to acquire the same through a present sacrifice of labour or money would find its limits in about six units (accurately 6.21) of labour-pain or about 6 fl. 21 kr. of money.¹

This fact, regarding the reality of which, as I have already said, there is no difference of opinion between Marshall and myself,¹ admits of two explanations. One is that the distance of the gratification from us in time diminishes, in our eyes, its magnitude. Because it is future, we place a lower estimate upon a utility than we would if it were present. It is this explanation which finds expression in the remarks of Marshall mentioned above regarding the estimation of future pleasures. The present value of a future pleasure is less than ten; when removed from us one year it is only about nine, when removed from us five years, only about six; and because the gratification is worth no more to us than nine and six respectively, we are unwilling, for its acquisition, to submit to any greater sacrifice than is indicated by the figures 9 and 6.

It is now evident that, according to this conception, the figures 9 and 6 must indicate and limit not merely the magnitude of a part of the sacrifice of labour and money, but the magnitude of the whole sacrifice which we are inclined to take upon ourselves for the acquisition of a future enjoyment. In other words, according to this explanation there is no room for a sacrifice of “waiting” in addition to that of labour or money, for it is evident that it would be opposed to all the principles of economic action that for a pleasure which we esteemed at only 9 or 6 we should be willing to undergo an amount of sacrifice consisting of labour and waiting, or of money and waiting, in excess of the value of the gratification itself; for example, an amount equal to ten.

The second conceivable explanation leads to the same result. We met this one in the expressions of Marshall regarding the existence of a sacrifice of waiting which must be separately reckoned in addition to and by the side of that of labour. In this instance the facts of the case are explained in the following manner: The prospect of the future gratification which after one or five years shall have a value of ten causes us to take upon ourselves an amount of sacrifice consisting of labour and waiting, which, in view of the degree of painfulness and the supposed continuance of the waiting, is estimated at ten.

It is again evident, I believe, that this explanation of the facts presupposes that the prospect of the gratification to be acquired in the future operates upon our present calculations with the full undiminished magnitude of that gratification. But, if we estimate the future gratification at its undiminished magnitude of ten, we cannot, acting intelligently and economically, decide to take upon ourselves for its acquisition a total sacrifice of the magnitude of ten. The abstinence theory, however, lays especial emphasis upon this thought. It teaches that the value of a future production or consumption good cannot be brought to a lower level than ten (to speak again in terms of our example), because the addition of the sacrifice of waiting raises the amount of the total cost to that sum, and the producer would not consider himself sufficiently remunerated for this sacrifice if the commodity brought a lower price. This process of reasoning expressly presupposes that the value of the future commodity figures in the calculations of the producer with an undiminished magnitude of ten.

In other words, it is evident that we can only employ the second of these explanations if we turn our backs upon the first. We must hold either that the postponement of the gratification expected in the future diminishes its utility in our estimation, or that it increases in our estimation the sacrifice to be undergone by the amount of the waiting; but we cannot hold to both explanations at the same time. It would be economic and mathematical nonsense to hold that, if in the calculations of the producer the future utility should fall from ten to six, while the sacrifice on account of the addition of the element due to waiting should at the same time be increased from six to ten, the production would be found remunerative.¹

If, then, one must choose between the two conceptions which Professor Marshall has brought together in his theory, the choice Cannot be doubtful, I think, even to the distinguished scientist whose opinion I am compelled to oppose. On the one side the experience that people, and even careless people, rate the prospect of a future gratification lower than a present gratification of the same magnitude is very much too pronounced to permit of denial, and on the other side those objections which count against the existence of an independent sacrifice of abstinence or of waiting, and which I have worked out in detail in the ninth chapter of my book, will gain in weight, on account of the necessity of a choice, even in the eyes of those who have up to this time been unimpressed by them. I believe that upon a renewed and careful investigation of the question, the conviction can scarcely be avoided in the long run that non-enjoyment is not suffering, and that an unfruitful piece of work cannot be represented by a limited quantity of labour sacrifice and by an unlimited quantity of sacrifice composed of waiting to all eternity. However, in case that in the minds of especially sceptical readers some remnant of doubt should still remain, I wish in conclusion to submit also the following considerations:—

He who, according to the meaning of the abstinence theorists, regards waiting as an independent sacrifice, must be content with the deduction that even careless persons who take no thought for the future are inclined to make an equally great sacrifice for the acquisition of an enjoyment never so far removed as for one which entices them at the moment. The equally great sums of sacrifice are only made up in different ways; in the case of present gratifications, out of work alone; in the case of future gratifications, out of somewhat less work and an amount of waiting sufficient to bring the total sacrifice up to the same level.

Still further, without any doubt, and even according to Marshall, the psychological phenomenon here under discussion is extended not only to the valuation of future pleasures, but also to that of future pains. Let us suppose that some one is threatened by an ill which, if precautions are not now taken, will come upon him one year hence, and at that time will have a magnitude represented by ten. Certain it is that this person, if he discounts future events at the rate of ten per cent, will not be inclined to undergo a sacrifice represented by a greater figure than 9 for the purpose of warding off that ill. Now, on a pinch, I can conceive that if the preparation in question concerns some sort of positive gratification, the waiting for that gratification might be felt as a sacrifice, which would swell the total sacrifice successively up to ten, but I cannot possibly imagine what sacrifice is involved in my inability to remove a threatened ill which does not yet press upon me. What “painful endurance of want” lies in the fact that in midsummer I am not in possession of the overcoat in process of preparation on the spindles and looms; or in the fact that a young man of thirty, who at the age of fifty expects to need a pair of glasses for long-sightedness, must wait twenty years for the preparation of those glasses, for the production bf which meantime remote preparatory labours in mine and factory have already been begun? To the unprejudiced observer I believe that the connection is as clear as daylight. By a painful waiting for the removal of an evil not yet present the sacrifice side of the scales is not more and more weighed down until it is equal to the full magnitude of a utility of ten, but the balance of both sides of the scales was established in the beginning at the moment, alone decisive, in which the economic calculation and decision was made, and by the fact that the estimation of the threatening future ill was perspectively diminished, and that its removal was therefore looked upon as a correspondingly smaller utility, and that in consequence a sacrifice of labour of correspondingly lesser magnitude would be regarded as its equivalent.¹

The fundamental error of the abstinence theory, therefore, consists in the fact that it puts on the wrong side of the balance those differences which are undoubtedly created by the remoteness of time, and which exert an unfavourable influence upon the balance of our welfare; that it sees a greater sacrifice, where in reality there is a diminution in utility, and that thus it makes a wrong choice between the two conceivable interpretations of the facts. Professor Marshall, however, and with him all those scientists¹ who have considered the psychological fact, introduced into the science by Rae and Jevons, of the smaller estimation of future pleasures and pains as identical with the recognition of the abstinence theory, makes an additional error, in that he fails utterly to see that ä choice must here be made between two conceptions which cannot possibly exist side by side.

This is the most important, but not the only reason why I am unable to regard Professor Marshall’s treatment of the interest problem as a satisfactory solution. As I have had occasion to remark in another place,¹ Professor Marshall is inclined to lay very little stress upon mere differences, or imperfections in the method of expressing a thought, and at the same time is inclined to regard very important differences as mere variations in the form of expression. There can be no doubt, however, that we are not here concerned with merely a less commendable form of expressing a correct thought. We are concerned with an essential and characteristic link in a logical chain of thought which should result in an explanation of interest. That Professor Marshall, himself, regards this critical link as a very essential one, is evident from the fact that he, although, as I think, wrongly, makes the entire decision between his conception and that of the socialists hang upon the question whether waiting is to be construed as an independent sacrifice in addition to that of labour or not.¹ That, in any case, there is a material difference between his view of the matter and mine becomes clear from the fact that, according to his conception, the disappearance of that psychological fact which expresses itself in the preference of present for future goods must also have as its result the disappearance of interest,² while, according to my opinion, in that case only one of several sources of the interest phenomena would be dried up. Interest itself would continue, though with diminished strength, because, even without any underestimation of the future, the fact that more roundabout methods of production are more fruitful must secure¹ to present goods which render possible the undertaking of such roundabout processes a superiority of value over future goods, not merely for the moment, but for periods of time, which, measured by the strictest standard, must be counted as the longest “secular” periods.²

In conclusion, I wish to remark that in Marshall may be found still another class of expressions in which he has established a special connection between interest and the use of capital, and which, if they were the only ones referring to this topic, would furnish grounds for the presumption that he had also adopted the methods of thought peculiar to the use theory.¹ However, in view of the fact that he expresses doubt whether the most outspoken representative of the use theory would wish to teach in all their bearings the principles peculiar to it, I am unable to believe that he himself is inclined to do this, and must rather hold to the presumption that the employment of methods of expression characteristic of the use theory is to be explained by a certain freedom or carelessness of expression which Marshall appears to claim for himself and others on the subject of the theory of interest, notwithstanding the fact that unclearness and ambiguity of expression are responsible for so many mistakes in this field, and notwithstanding the fact that this distinguished scholar is accustomed in other respects to place so great a value upon clearness of conception and fitness of expression of thoughts.

Still another interesting attempt to give a new significance to the old abstinence theory falls within the period under discussion. This was made by an American named Carver,¹ whose discussion shows much discrimination and a remarkable power of combination, but, in my opinion, fails at the critical point on account of a misunderstanding.

His somewhat subtle process of thought, illuminated by a number of geometrical diagrams, may be briefly presented in the following manner.² Carver proceeds from the perfectly correct view, that large quantities of present goods would be saved and devoted to the future even if no interest were received, indeed, even if some expense were involved in their preservation. He also draws the limits of these savings in an entirely correct manner. From his present stock of goods a careful manager will save and devote to the future such a quantity that the marginal utility which the last increment saved,—for example, the last florin,—yields for the future is as great as the utility which the last florin expended for present enjoyment yields. For example, a prudent owner of 100,000 florins of property would certainly not devote the whole or even a very considerable part of this amount to present consumption, even if there were no interest, because in that case he would secure the satisfaction of very unimportant wants, and would reserve no means for satisfying important wants in the future. On the contrary, he would stop his present consumption at the point where, with due regard to the streams of goods maturing in the future and available for that period, the marginal utility of the last florin expended equals the future marginal utility of the last florin saved.

Another very important point is also brought out by Carver and correctly illustrated in his diagrams. According to their intellectual tendencies and temperaments, most men are accustomed to underestimate future pleasures and pains and future utilities. A careless or extravagant man, for example, will be inclined at the moment to estimate at a figure perhaps not higher than 10, an enjoyment or a utility to be expected one year hence, which at the movement of its actual appearance will be represented by the figure 15. Now, since our present economic calculations must be determined by our present estimate of the possible satisfactions between which choice may be made, the above-described limits to saving without interest should be modified, since saving will be extended to that point at which the marginal utility of the last florin expended for present satisfactions equals the present estimate of the future marginal utility of the last florin saved. In our example, this limit will be reached if the marginal utility of the last-expended florin, 10, amounts to the future marginal utility of the last-saved florin, that is, 15, which 15 in the present estimation is only equal to the present utility of 10.

In order to throw a still clearer light upon Carver’s innovation, I will add that all previous representatives of the abstinence theory have expressed or tacitly connected the sacrifice of abstinence with precisely this last difference. The preference for present enjoyments is, in their eyes, the chief ground why the withholding of enjoyments or the waiting for them is felt to be a sacrifice. The greater that preference, the greater are the obstacles to saving and capital-building, and these can only be overcome in the degree that the sacrifice involved in their removal is adequately remunerated by interest. Thus the height of interest is brought into connection with the strength of the preference for present goods. In conformity with the old abstinence theory, there-fore, the difference between the true magnitude of the future utility and its underestimated present amount, represented in our intentionally drastic example by the difference between 15 and 10, appears as the real force which determines interest.

At this point Carver adopts an entirely different line of thought. The existence of the psychological fact which we have just described is recognized and expressly noted by him; but he sees the content of the abstinence which demands remuneration not in it, but in something entirely different. So long as saving has the effect that the present goods transferred to the future yield in the future a utility which in present estimation is more important than that utility which the saved goods could have had in case of their consumption in the present, no sacrifice is connected with it. This part of the accumulation of capital is without cost, and requires, therefore, no interest as a remuneration for sacrifice (p. 49); but real sacrifice begins when the saving should be or must be extended beyond that limit. In our example, for instance, if still more goods should be withdrawn from present enjoyment and transferred to the future, this could only happen on condition that the present satisfaction of those wants which still possess an importance superior to the figure 10 should be discontinued, for example, on condition that the category of wants whose importance lies between the figures 10 and 11 should go unsatisfied. But if the goods withdrawn from the service of the present are added to those provisions for the future which have been accumulated by preceding saving without cost and in the gratification of present wants have already reached the value of 10, this fresh increment can naturally only be applied to the gratification of less important wants, for example, to those the importance of which lies between the figures 10 and 9. The continuance of the process of saving, therefore, leads to the result that a number of goods, which in present use would have yielded a final utility of from 10 to 11, in the future will yield a smaller utility, one estimated according to present calculations between, 10 and 9. The difference represents a pure loss caused by the process of saving, a real sacrifice, due to abstinence from present gratification, which cannot and will not be made without an adequate compensation in the form of interest. “The loss in the subjective valuation of this last increment must be compensated for by an increase in objective goods or interest” (p. 53).

If the needs of production could be satisfied with the goods saved without sacrifice, there would be no interest. But if more capital is needed, that is to say, if more capital than that saved without cost can be invested in the gradual exploitation of remunerative opportunities for investment and “still afford profit at the margin,” then interest must appear; for then, in order to accumulate the additional savings, somebody must make the previously mentioned sacrifice in subjective value, and this sacrifice demands compensation. For the rate of interest, “the marginal sacrifice of saving” is decisive (p. 53); that is, the magnitude of the last and most costly part of the saving (that part which involves the greatest loss in subjective value) which is needed to satisfy the demands of production.

It is easy to see that the substance of the abstinence sacrifice which demands compensation in interest is explained by Carver in a manner entirely different from that of the other abstinence theorists. The latter put the emphasis upon the fact that man, as he is constituted, dislikes waiting for gratifications. Carver, on the Other hand, does not find the sacrifice in a postponement of gratification, but in the further circumstance, conditionally connected therewith, that on account of the disposition to save, the relation between wants and the means for their satisfaction is so disturbed that the same quantity of goods has less final utility and value in the future than in the present. Carver sees the essence of the sacrifice not in the fact that the gratification comes later, but that it is smaller than the present one, its rival. The difference in the essence, of the sacrifice may easily be represented by the figures of our example. Whereas, in the first case, the difference between the real value of a future gratification and the present estimation of it would be registered in our example by the figures 15 and 10, the value of Carver’s sacrifice of abstinence is represented by the difference between 11 and 9, a result wholly different and due to causes other than those which explain the difference between the last use realized in the present and the present value of the last use realized in the future.

But it is further easy to see that Carver has mistaken an effect of interest for its cause. All the facts that he presents are perfectly correct, even the one regarding the decrease of final utility¹ in case a future period should be better endowed with funds than the present; but he confounds cause and effect. Not because and in the same measure as the future is better endowed does interest appear or the rate increase, but just the reverse. Interest must be an actual fact, in order that there may be an economic cause for a better endowment of the future; and the higher interest is, the more this endowment may be increased. If, and because, the rate of interest is 5 per cent, the endowment of the future may reasonably be increased to such an extent that 105 pieces of goods in the following year will yield the same utility as 100 at present; if, and because, interest is at the rate of 20 per cent, the endowment of the future may be increased until 120 pieces in the following year yield the same utility as 100 at present (always referring to the present estimation), and so on.

On the other hand, that other psychological fact in which the abstinence theorists see the essence of the sacrifice of abstinence, has a share in the origin of interest. The disposition of people so much to prefer immediate enjoyment to future gratification that they place a future pleasure of the value of 15 on a par with a present one of the value of 10, is indeed the real cause why the goods produced for the future should obtain and maintain a value in excess of their cost. With that disposition, producers cannot be inclined to incur a greater expense than 10 for the acquisition of a product that will in time have a value of 15, but which in their present estimation is worth only 10. The completion of the process of production will yield, after the expiration of a year, a product of the actual value of 15, against which there are costs of production of the value of 10 only. Hence, a surplus, or an interest of 5, results. Indeed, this surplus will result, even if Carver’s sacrifice of abstinence is not taken into account at all, provided that only such a quantity of goods is devoted to the future as, according to the present estimate, will make a single unit both in the present and the future yield a marginal utility of 10.

And even the removal of that surplus of value by competition would under these circumstances be effectually Opposed by the same motive that produced it, without the necessity of the appearance or of the operation of Carver’s sacrifice of abstinence. If, for example, by a temporary increase of production the objective value of the product should be diminished from 15 to 14, this 14, so long as the coefficient of undervaluation remains the same, would be thought equal to a smaller amount than 10, namely to about 9.3. If, as supposed, goods devoted to present consumption fall to a final utility of 10, their employment for the acquisition of a pleasure valued at 9.3 would evidently appear uneconomical. The category of present wants, the importance of which is under 10 but above 9.3, would be preferred to the less remunerative expenditure for the future; and, in consequence, smaller means would be reserved for future use, the production of future good diminished, and their value finally enhanced until the former relation, indicated by an objective value of 15, equal in present estimation to present final utility of 10, be reestablished, and with it a surplus in value of 5. If interest has once been called into existence by these forces, it will follow as a normal consequence that people will endow the future somewhat more richly than they would have done if there had been no interest, and this will give rise to the phenomenon noticed by Carver of the falling of the present estimate of the future marginal utility of a unit of goods below its present utility, which, of course, is not the same thing as the falling of its real marginal utility. But all this is entirely a consequence of interest. It may be that a secondary reaction on the rate of interest will emanate from it; but it. is to be observed that this reaction will be exerted in the direction of a reduction of interest, and the röle of intermediary cause will doubtless fall to the increased intensity of the motive to saving, but by no means to Carver’s sacrifice of abstinence, which would manifest itself in exactly the opposite direction, namely, in increased saving, which richly endows the future, and therefore presses down the marginal utility of the savings.

This brings me to the point at which, perhaps, Carver’s misconception can be most clearly illustrated. Without any question, interest arises from the scarcity of capital, which means the same thing as the scarcity of means of gratification devoted to the future. Carver, on the contrary, comes to the conclusion that it is the result of the abundance of these gratifications, the consequence of a sort of plethora of saving. The true place which the facts, quite correctly observed by Carver, occupy in the chain of causes is well indicated by the following parallel: Just as a rise in the value of money, caused by a money stringency, is accustomed to bring forth a secondary stream, which tends to weaken the intensity of the stringency, this secondary stream being due to the well-known fact that the high purchasing power of money attracts to the mint quantities of precious metals which had till then been used as jewellery, plate, and so on, and thereby increases the supply of money,—so interest, caused by scarcity of capital, by the very fact of its existence produces a secondary movement which tends to modify its own magnitude by causing an extension of saving beyond the point at which it would otherwise have stopped. Now, one is no more correct in regarding the over-saving caused by the existence of interest and the accompanying fact of diminished final utility as the principal power which produces interest and fixes its rate than he would be in considering the increased output of gold and silver coins as the real cause of the rise in the value of gold.

So far, therefore, as the subject of “abstinence” comes under consideration in the explanation of interest, I think I must give the older interpretation of the abstinence theory, at least relatively, the preference over Carver’s new one. The former at least had in view the correct fundamental phenomenon which really coöperates as a primary force in the causation of interest, though it is mistaken in interpreting and representing the manner of that coöperation. Carver, on the contrary, has been misled by an ingenious but erroneous combination of ideas, and has taken the wrong track, in that he pursues a phenomenon which is merely an accompaniment and a result of interest instead of its real cause.¹

¹ In his apology for the abstinence theory, Macfarlane (“Value and Distribution,” Philadelphia, 1899, pp. 175–177) lays the strongest emphasis upon this line of thought. Substantially in agreement with him are Loria (“La Rendita Fondiaria,” Milan, 1880, p. 619 sq.), and Marshall with his theory of “saver’s surplus” (“Principles,” 3d ed., London, 1895, p. 606); see further Carver, Barone, and indeed in general all investigators who recognize the marginal utility theory of value and who at the same time are inclined to adhere to the abstinence theory; see also p. 277 sq. of Smart’s translation of “Capital and Interest.”

¹ A remark of Macfarlane’s (p. 179) bearing upon my objection does not appear to me to strike the heart of the matter, but to consist of a mere counter-proposition.

² “Analysis of Cost of Production” (Quarterly Journal of Economics) July, 1887). See also above, p. 9.

³ For example, Macfarlane is of the opinion that the “exchange theory,” as he calls it (see also above, p. 10, note 1), of the essential features of which he approves, is only an improved and developed form of the theory of Böhm-Bawerk (“the theory here proposed is after all but an extension of Böhm-Bawerk’s analysis.” “Value and Distribution,” p. 231). For this improved form he also suggests the improved title “normal value theory.” Carver holds a similar opinion regarding the relation between the two theories (see below), and perhaps also Professor Marshall.

¹ I do not believe that I am in error in assigning the ideas of Loria, which in all respects are not perfectly clear to me, in the main to the abstinence theory. At least the clearest passages in his older works (“Rendita Fondiaria,” p. 610 sq., and “Analisi della Proprietà Capitalista,” Turin, 1889) point in this direction, and in agreement therewith is the idea expressed in the most recent comprehensive work of the author (“La Costituzione economica odierna,” Turin, 1899), namely, that the abstinence of capitalists must be regarded as an element which plays an essential role in the distribution of the product (see, for example, pp. 36 sq. and 75). In the same direction also point the expressions of the author regarding the motive and limits of accumulation (for example, “Costituzione,” pp. 73 sq. and 98 sq.). Still, in the works of Loria may be found also expressions which warrant one in concluding that in this author’s opinion the fact of exploitation has an important part in the phenomenon of interest, at least in its present form and extent (for example, “Costituzione,” pp. 34 sq. and 821). A well-known specialty of Loria’s is the doctrine that to the appropriation of land is to be ascribed a decisive and far-reaching influence upon the formation and magnitude of the profits of capital. I regard this opinion as entirely wrong (a more complete exposition and criticism of this may be found in Graziami brilliant “Studi sulla teoria dell’ interesse,” Turin, 1898, pp. 46–50), and I cannot suppress the remark that to me the theoretical speculations of Loria appear much more fantastic than exact, and seem to me frequently to be permeated by very superficial misunderstandings of the opinions of others.

¹ Principles of Economics,” 3d ed., pp. 142, 662. The fourth edition, which has appeared in the meantime, is in all essentials in agreement with the third.

² pp. 142, 622, 751. In this, and in general in all passages in which Professor Marshall explains “productiveness,” he very properly has in mind a technical productivity which shows itself in an addition to the product which could be obtained with the same expenditure of original productive powers. He is, therefore, in entire agreement with the conception of physical or technical productivity which I have employed in my theory of interest. It appears that Professor Marshall is also in agreement with me in that he regards capitalistic production as production by roundabout methods (cf. “Principles,” p. 612, and also the note on p. 664, which indicates a dissenting view).

¹ p. 662.

² pp. 216, 315.

¹ Cf. the exposition of Senior’s theory to be found in my “Capital and Interest,” Smart’s translation, p. 271 sq.

¹ Smart’s translation, Bk. IV.

¹ See Smart’s translation, p. 403 sq.

² “Principles,” pp. 195–197, 794, et passim. In this connection Marshall distinguishes as clearly as is necessary the underestimation of future pleasures from other differences in valuation, which may proceed from a difference in time, but arise from another source. Such, on the one hand, are the lower estimates of future pleasures and goods which spring from the insecurity of their acquisition, and, on the other hand, differences in valuation which arise from the fact that by a change in other circumstances the character or the magnitude of the future pleasure is itself changed. For example, by a prospective change in the capacity for enjoyment (an Alpine tour at an advanced age), or by a change in the abundance of the supply which exerts an influence upon a final utility (eggs which are saved for the winter).

¹ That is, with the omission of compound interest. Marshall himself develops for this an accurate algebraic formula in note 5 of the appendix to his “Principles.”

² pp. 313 sq., 429, n. 1, 662, 663, n. 1, and 668; indirectly also, p. 794, n. 5, in so far as interest, which elsewhere he explains as “the reward of waiting,” is brought into connection with the “discounting” of future pleasures.

¹ For simplicity’s sake, in this and the following cases I assume that the entire sacrifice of labour or money is made at once; that is, at one, and that the present, point of time.

¹ Marshall illustrates this, for example, in the case of the building of a house, the utility of which when finished must cover the efforts required for building in addition to an amount, increasing in geometrical proportions (a sort of compound interest) for the period which would elapse between each effort and the time when the house would be ready for use (p. 429).

¹ In order to forestall every possible misunderstanding, I will at once meet a certain objection which may possibly be urged. A superficial observer may, perhaps, be tempted to explain the matter in the following manner. The future utility of ten, to be acquired only after five years, will, in fact, in our present estimation, be perspectively diminished, and thus estimated at only 6.21, and over against this present value of the gratification stands a present sacrifice in labour or money of 6.21. The sacrifice of waiting, on the other hand, appears first in the future, and will find its compensation in the then full future value of the gratification, in amount, ten. On the one hand, therefore, present value and present sacrifice offset each other, and on the other, the future value is in harmony with the total magnitude of sacrifice, which includes also that of the future. In this process of thought, however, the fact is overlooked that every rational economic calculation must include the sacrifices not yet due as well as those at present experienced. If I propose to myself the problem, whether I shall buy a dwelling house offered me for the payment of twenty annual instalments of 1000 florins each, I may not bring the present value of the house into comparison with the rate of sacrifice at present experienced, that is, with the first instalment of 1000 florins alone, but I must, of course, place over against the value of the house the value of the entire twenty instalments. To be sure, the instalments not yet due will enter the calculation at their reduced present value. In an analogous manner, and according to the abstinence theory, the total sacrifice which must be made for a remote gratification consists of present sacrifice of labour or money, and of a series of further sacrifices of waiting spread over the entire period of time. In our present calculations this latter, like the instalments on the house due at a later period, may enter into the account only after the deduction of a certain discount corresponding to the distance of their removal from us in time. But they must certainly, in some way, be taken into consideration, especially since, as we know, in the case of the abstinence theorists, it is precisely the consideration of these which should hold the producers back from directing production toward less valuable future goals. In our illustration, this conception would be expressed in the following manner: The labour or money sacrifice to be endured amounts to 6.21; the sum of the sacrifices of five years of waiting, through which the total sacrifice is brought up to 10, amounts accordingly to 3.79. Since, however, these sacrifices of waiting belong still to the future, and indeed are to be experienced on the average only after two and a half years, their present value is estimated correspondingly lower; that is, on the basis of a discount rate of 10 per cent, at about 2.96. According to this the present value of the sacrifices to be considered would amount to 6.21 + 2.96 = 9.17. The present value of the gratification to be obtained, however, amounts to only 6.21. The proportion between these aggregates, therefore, precludes any intelligent economic action.

Frankly speaking, I am astonished that Professor Marshall has not felt disturbed in his mathematical treatment of the whole question by such unavoidable numerical incongruities. To be sure, I myself am too little of a mathematician to be able to decide how and why it has been possible for Professor Marshall to conceal from himself or to veil such real and unquestioned errors in the mathematical tables developed by him in which he expresses the progressive diminution in the value of future gratifications as well as the progressive increase of the sacrifice of waiting. (Notes 13 and 14 of his mathematical Appendix.)

¹ If some one should here object that the labour which is expended as a precaution against the future pain might have been expended also in the preparation of a present positive gratification, and that the loss of this other gratification forms the content of the sacrifice of waiting, I should think first of all that by such a method of viewing the situation the fundamental question was only avoided, not solved, and in the second place I should propose that such a method of eluding the question be cut off by considering a concrete situation. Let us assume, for instance, that the subject of our example is a prisoner who has no winter clothing, and who knows that his dismissal will occur in the course of a year, and at the time of the greatest cold of winter, and who, according to the regulations of the prison, is permitted, but not compelled, to earn a sum sufficient to purchase winter clothes by labour which he is not permitted to employ in any other way, or for the securing of any earlier gratifications during the continuance of his incarceration. In this case there is absolutely no room for the sacrifice of waiting in addition to that of labour which would be imposed upon him by the devotion of his labour to the acquisition of warm winter clothes, and he who does not entirely deny the fact that even in the case of a man who finds himself in this condition the regard for the future can be less efficient than that for the present will indeed be forced to declare the second interpretation, recommended also by so many other considerations, as the only one permissible, namely, that the remoteness in time diminishes the magnitude of future pleasures and pains in our present estimation.

¹ As, for example, in former times John Stuart Mill and Jevons, in our day Macfarlane, and indeed also Carver; in reference to the last see farther on.

¹ See my Preface to the second edition.

¹ p. 668 sq.

² Marshall himself regards such a change in our physical and moral disposition as by no means inconceivable, and as a logical result of his explanation of interest as a reward for the sacrifice involved in waiting, he gives us clearly to understand that it is his opinion that in such a case “interest would be negative all along the line.” To be sure, he expects this result also in the case in which, without a complete disappearance of all preference for equally great present enjoyments, the care for old age and family has become so strong in so many people that the sums saved for this purpose are more than adequate for the new openings for the advantageous use of accumulated wealth (p. 663, n. 1). For subtle investigators I may add that by this last clause, referring to advantageous opportunities for production, a complete material agreement of our opinions has not been established, for on the one hand, in my opinion, even in a completely stationary state, and even if opportunities for new investments of capital were entirely wanting, the superior productivity of the roundabout process of production would be sufficient to maintain interest for any length of time (on this point see especially my monograph on “Some Controverted Questions in the Theory of Interest,” Vienna, 1900); and on the other hand, in the passage cited, Professor Marshall apparently regards the frequent appearance of new opportunities for the investment of capital as an obstacle to the complete disappearance of interest only on condition that some difference of estimation between present and future enjoyments otherwise equal still persists. As Professor Marshall has himself explained with unrivalled clearness (p. 197, n. 1), a distinction must be drawn between enjoyments and goods as objects of a different valuation with regard to the present and the future. In the case of goods a very influential role can be played by the circumstance that the same sum yields unequally great objective marginal utilities in different periods of time. Therefore, a person who in and for himself would prefer a present enjoyment to an equally great future one, may nevertheless decide to save, even without the prospect of an increase in interest in case the sum saved and to be transferred to the future, that is, to the point of time of a needy old age, yields at that time a correspondingly greater marginal utility than it would have yielded in case of its consumption at the moment. Evidently Professor Marshall’s argument has reference to this consideration. So long as the need for new investments of capital is met by the saving of those among whom the underestimation of future pleasures is compensated by the increase of the objective marginal utility of the sums of goods transferred to the future, no sacrifice of abstinence needed for such remuneration appears, and interest may be wanting. However, if the amount of capital needed for new investments exceeds this sum, then the underestimation of future enjoyments will not be covered by the increase in the objective utilities of like quantities of goods, and must therefore be remunerated by interest. If this be the real opinion of Professor Marshall, and I doubt not that it is, then in his mind the continued existence of a different estimation of present and future enjoyments as the foundation of the sacrifice of abstinence to be paid for in interest, is a conditio sine qua non for the existence of interest. In my opinion, on the other hand, it is not so, because the different estimates placed upon present and future goods, which in any case is necessary for interest, can be, and would be, brought about by the superior productivity of roundabout processes. (See next note.)

¹ For details see 1st ed. of my “Positive Theory of Capital,” Smart’s translation, p. 260 sq.

² Cf. Marshall, p. 450.

¹ pp. 662, 663, 665 sq., and 666, n. In these expressions Marshall repeatedly designates the use or service of capital as the object for which interest is paid, and expressly states that in this connection no essential difference exists between the rent of a durable good (for example, a horse) and the loan of a perishable and replaceable good, such as a sum of money, and adds that the distinction drawn by older writers between renting and lending, though from an analytical point of view interesting, possesses very little practical significance. An entirely similar mingling of expressions (and one to be judged in a similar manner) in which the abstinence theory is represented by terms of expression which seem to point also to the use theory may be found in Sidgwick (“Principles of Political Economy,” 2d ed., 1887, pp. 245 sq.167 sq., and 264).

¹ The Place of Abstinence in the Theory of Interest” (Quarterly Journal of Economics, October, 1893, pp. 40–61).

² As a careful reader will soon notice, Carver’s process of thought proceeds for a considerable distance parallel with a certain subtle process of reasoning which we have already met in the work of Professor Marshall (sec ante,) p. 44, n. 2). I may, therefore, venture the suggestion that Carver may have received from those expressions of Marshall the first impulse to his theory, which, to be sure, at a certain point takes an entirely different direction.

¹ I have myself drawn attention to this phenomenon (see my “Positive Theory,” 1st ed., p. 446).

¹ It is interesting to observe that Carver, like Macfarlane, regards my own interest theory as in substance an abstinence theory (with elements of the theory of productivity added), agrees with it in substance, and believes that he has presented it in a more intelligible, and in some respects a more correct, way. “With certain corrections, which will be noticed later,” he says, speaking of my theory, “his theory may be regarded as correct; but it is to be hoped that the interest problem can be explained upon principles more easily understood by the average reader” (p. 44). His own and Macfarlane’s example, in addition to the eminently sagacious and yet unsatisfactory explanations of prominent scientists like Jevons and Marshall, furnishes an exceedingly instructive illustration of the manifold ramifications of which the conception of the apparently simple relation of present and future is capable. It also shows that it is no superfluous pedantry on my part if in criticism and in positive theory I do not rest satisfied with mere references to the “prospectiveness” and “productiveness” of capital, but insist that these notions shall receive a perfectly definite meaning, one by which alone they are capable of fitting into a really decisive and essentially and logically correct explanation of our phenomenon.