Translator’s Prepace

TRANSLATOR’S PREFACE

THIS little volume is intended as a supplement to the admirable translation of the first edition of Professor Böhm-Bawerk’s “Geschichte und Kritik der Capitalzins-Theorien,^,, given to the world by Professor William Smart of Glasgow in 1890. During the twelve years since this notable contribution to the critical literature of economic science has been available to English-speaking students, great progress has been made in the realm of economic theory, and for this Böhm-Bawerk and Professor Smart’s translation are in no slight degree responsible. Whatever may be the final verdict of science regarding the agio theory, no one can doubt that the splendid example of criticism and analysis which is contained in Böhm-Bawerk’s work has raised theoretical discussion to a higher level and has been a constant and powerful stimulus to investigation in this field.

In the United States the appearance of Smart’s translation must be regarded as an event of prime importance in the history of political economy. The work of some of our theorists¹ had already been directed along practically the same line as that of Jevons and the Austrians, and a new generation of young economists had just entered the field. Böhm-Bawerk’s masterly treatise gave support and encouragement to the former, and guidance and stimulus to the latter. It has been discussed over and over again in the courses in economic theory and in the economic seminaries of the country, and it is safe to say that no candidate for the doctorate in economics during the last twelve years has been absolved from the requirement of familiarizing himself with this work.

Abundant proof of Böhm-Bawerk’s influence is furnished by our literature. A glance at the files of the Political Science Quarterly, the Quarterly Journal of Economics, and the Annals indicates that a large proportion of the articles treating of economic theory are either directly upon some phase of Böhm-Bawerk’s work or theories, or have been clearly influenced, if not directly inspired, by them. Of the books on economic theory which have appeared during the last twelve years, not one that I can recall fails to take account of his work, and few, if any, of them fail to show the effects of his influence. It is impossible to say as much as this of any other book or any other man. Great as has been Marshall’s influence, it has not approximated Böhm-Bawerk’s either in scope or intensity.

In 1900 the second edition of the “Geschichte und Kritik der Capitalzins-Theorien” appeared, and the present volume contains in its nine main chapters a translation of the Appendix, in which Böhm-Bawerk reviews the literature on interest which had appeared since 1884, the date to which the first edition translated by Smart brought the subject. In this preface we propose to give a summary of the most important of the other additions contained in the second edition. These are the author’s Preface, chapter XI on John Rae, and a supplement to the chapter on Karl Marx. To the author and the translators it has not seemed necessary or desirable to present a complete translation of these less important additions. A brief summary is sufficient to indicate their general character and scope, and the English-speaking reader who is unfamiliar with German and who desires more may avail himself of Miss Alice M. Macdonald’s translation¹ of Böhm-Bawerk’s criticism of the posthumous volumes of Karl Marx’s “Das Kapital,” of the author’s reply to Walker’s strictures in the Quarterly Journal of Economics,² and of Rae’s book itself.³

The Preface of the second edition treats chiefly of the author’s defence of his method against the strictures of Alfred Marshall and of the late Francis A. Walker. These men had charged Böhm-Bawerk with misinterpreting many of the authors whom he criticised in “Capital and Interest,” claiming that he frequently mistook “blunders of expression” for errors of judgment. Walker was a firm adherent of the productivity theory, and was unable to believe that any really able thinker could have sought for an explanation of interest in any other direction. He, therefore, denied the separate existence of the abstinence and the use theories. He claimed that the authors of these so-called theories intended them only as “a social justification of interest,” and did not themselves mistake them for adequate explanations of the causes of this phenomenon. In this connection he mentioned especially Hermann, Karl Menger, and Senior.

Professor Marshall finds the explanation of interest in the coöperation of what he calls the “productiveness” and the “prospectiveness” of capital, the former determining the demand for that factor of production, and the latter limiting the supply. He believes that most of the writers on interest have had both these elements of the problem in mind, and have differed from each other chiefly in the fact that some have laid more emphasis upon the one element, and others upon the other. He has expressed the opinion that many of the authors criticised by Böhm-Bawerk would not have accepted his statements as fair and complete presentations of their views.¹

In reply, Böhm-Bawerk says that the question at issue between himself and such critics as Walker and Marshall does not so much concern the interpretation and estimation of the views of other authors as the real essence of the interest problem, and the requirements for its solution. Regarding what the authors criticised really meant, he is quite willing to leave the decision to the intelligent readers of his book, for whose benefit he has very often quoted their exact words; but in justification of his view of the nature of the problem of interest, and the conditions necessary for its solution, he submits some characteristic statements of Walker and Marshall to analysis and criticism.

He disposes of Walker in a single paragraph. Referring to his statement regarding the teachings of Hermann, Menger, and Senior that “they thus reached a social justification of interest which no one of them probably ever mistook for a scientific ascertainment of the cause of interest,” and that on account of their “blunders in expression” Böhm-Bawerk ascribed to them independent, deeply thought-out theories which they never held, our author says: “I do not think that I need waste a single word to prove that, on the contrary, it would have been most ungenerous, and for a true historian absolutely impossible, to have simply obliterated the use and abstinence theories from the history of the development of interest theories and to have drawn the old story of the productivity theory from the most widely differing methods of explanation, or, more accurately, to have forced that interpretation upon them.”

The criticism of Marshall bears upon two points chiefly. In Böhm-Bawerk’s opinion he overestimates the explanatory power of the coöperation of “productiveness” and “prospectiveness,” and is deceived regarding the actual relation in which the different groups of theories stand to this coöperation. On the first point Böhm-Bawerk refers to a passage in the chapter on the eclectics, in which he says that no impartial observer could fail to see that interest is in some way connected with the productivity of capital, and with the abstinence required for saving, but such an observation, he says, comes far short of an explanation of interest. It may be compared to the observation that a rainbow appears whenever the sun strikes a rain-cloud at a certain angle. No one would regard this as a scientific explanation of the rainbow. It is the duty of science to point out the exact connection between this apparent cause and its effects, and the explanation would be very different according as the scientist assumed the undulatory or the emission theory of light. In like manner, “productiveness” and “prospectiveness” furnish no explanation of interest. They constitute only the framework of an explanation. The problem is to show the connection between these facts and interest.

The injustice of Marshall’s charges and his evident misunderstanding of Böhm-Bawerk’s real attitude toward the authors he criticises is further shown by reference to certain passages in the first edition in which our author pointed out the affinity between the use and the productivity theories. In one place¹ he called the former an offshoot of the latter, and in another ² he said: “This theory [the use theory] assumes capital to be productive.” Again, on page 187, he said: “The relation of use theories to the productive power of capital will not, however, be found stated so clearly in the writings of their representatives as I have thought necessary to state it. On the contrary, indeed, appeals to the productive power of capital long accompany the development of the use theory proper, and we are very often left in doubt whether the author relies, for his explanations of surplus value, more on the productive power of capital or on the arguments peculiar to the use theory.”

Marshall reproaches our author for having failed to credit some of the naive-productivity theorists with a recognition of the significance of abstinence in the explanation of interest. In reply, Böhm-Bawerk affirms that he noted every express utterance of the most important writers of this group indicative of such recognition; for example, of J. B. Say, Roscher, Rossi, Leroy-Beaulieu, Cauwés, and others. He adds that he classed as eclectics those writers who combine the distinct and explicit recognition of sacrifice and abstinence with positive assertions of the independent value-creating power of capital, but insists that there are writers belonging to the “naive-productivity” group who do not accompany their emphatic assertions of the independent productivity of capital with any allusion to the concurrent influence of sacrifice or “prospectiveness,” and that he would have been unjust to these authors and unfaithful to history if he had assumed that they recognized such an influence. “I believe,” he says, “that a certain tendency of thinking, once rather popular, though at present entirely obsolete, led to the belief that the theoretical problem of interest could be perfectly explained by reference to the independent, value-creating power of capital, and that this tendency occupies a middle position in point of time between the old physiocratic view of the exclusive, value-creating power of land and the more recent socialistic doctrine, now on the road to destruction, of the exclusive, value-creating power of labour, and is allied to both these ideas.” He would, therefore, have been unjust to history if he had failed to point out this tendency. He would have been unjust to the writers he discussed if he had criticised them for views which he assumed, without direct evidence and sometimes even against indirect evidence, that they held. He concludes with the statement that in his opinion Marshall would not have brought against him the charges to which he has been making a reply “had not unfortunately the extraordinary clearness and exactness which is habitual to him in the conception and working out of his theoretical ideas failed him in that part of his most excellent work devoted to the subject of capital.”

Next to the Appendix here translated on the recent literature of interest, the most important addition to the second edition is the chapter on John Rae inserted between the chapters on the labour and the exploitation theories. Rae clearly anticipated some of Böhm-Bawerk’s ideas, though this fact was not known to the latter at the time of the publication of the first edition, and in this chapter, which contains an excellent summary and criticism of Rae’s work, this fact is clearly recognized, and the precise points anticipated explained.

John Rae was a Scotchman who emigrated to Canada, and in 1834 wrote a book which was published in Boston and entitled “Statement of some new principles on the subject of Political Economy, exposing the fallacies of the system of free trade, and some other doctrines maintained in the ‘Wealth of Nations.’” As the title implies, the book was written primarily for the purpose of pointing out the inapplicability of Adam Smith’s free trade doctrines to Canada, and does not seem to have attracted much attention among the economists of that time. John Stuart Mill (Bk. I, Ch. XI) made some quotations from it, and in a note expressed a high opinion of the author and his work. In 1856 this book was translated into Italian and published as Volume XI of the “Biblioteca dell’ Economista,” but Italian economists do not seem to have read it extensively. At any rate, Luigi Cossa in his “Introduzione allo studio dell’ Economia Politica” devotes but five lines to it, in which it becomes evident that his knowledge of it was derived from Mill and not from the book itself. In view of these facts and the scarcity of the book in Germany, it is not surprising that Böhm-Bawerk had not read it at the time of the publication of his first edition. His attention was called to the importance of this work by C. W. Mixter’s article in the Quarterly Journal of Economics for January, 1897, entitled “A Forerunner of Böhm-Bawerk,” and Professor Karl Menger placed a copy of the book at his disposal.

Rae’s book is divided into three parts, the first treating of the lack of identity between the interests of individuals and nations, the second of “the nature of stock and the laws governing its increase and diminution,” and the third, “of the operations of the legislator on natural stock.” Part II contains fifteen of the twenty-two chapters, and two hundred and eighty of the three hundred and eighty-seven pages of the book, and it is to this part that Böhm-Bawerk devotes his analysis and criticism in the chapter here under consideration.

Rae begins his exposition of the nature of stock by describing production as a process of fashioning or manipulating the “materials” of nature into “instruments” which shall produce “events” in the future. The objects of men’s desires, or the means of satisfying their wants, are “mere arrangements of matter,” and all the combinations or manipulations of materials made by men for this purpose he terms “instruments.” “In general, then,” he says on page 87, “all those changes which man makes in the form or arrangement of the parts of material objects, for the purpose of supplying his future wants, and which derive their power of doing this from his knowledge of the course of events, and the changes which his labour, guided by his reason, is hence enabled to make in the issue of these events, may be termed instruments”

This description of the nature and purposes of production bears considerable resemblance to Böhm-Bawerk’s treatment of the subject in the early chapters of the “Positive Theory,” in which he describes “goods,” their “material services,” and the functions of capital. Rae’s conception of “instruments” and Böhm-Bawerk’s conception of capital or “intermediate goods,” however, are not identical, as the latter shows in a footnote on pages 379, 380, but they have much in common.

Rae next describes the common features of these instruments. “They are all,” he says, “directly formed by human labour, or indirectly through the aid of other instruments themselves formed by human labour;” they all “bring to pass, or tend, or help, to bring to pass events supplying some of the wants of man, and are then exhausted;” and a space of time intervenes between their formation and their exhaustion. The power of instruments to bring events to pass, or the amount of goods they can produce, is termed their “capacity.” A proper measure of this, in Rae’s opinion, is the amount of labour for which the returns of the instruments will exchange, this amount being measured by the wages rather than the sacrifices of labour. He adds that a comparison of the capacities of different instruments belonging to the same class, that is, contributing to the satisfaction of the same category of wants, may be made on the basis of their relative physical effects, as, for example, the relative heating power of different woods.

Rae then classifies instruments according to the advantages or profits which may be derived from their ownership. This involves a comparison of the cost of their production in labour, of the amount of their returns or product, and of the length of time intervening between the formation of the instruments and their exhaustion. The relation between these three factors is indicated by arranging the instruments in orders or series “determined by the period of time at which instruments placed in them issue (or would issue if not before exhausted) in events equivalent to double the labour expended in forming them.” Thus instruments belonging to series A will yield a return equal to double their cost in one year, those in series B in two years, in series C in three years, etc.

The most important part of Rae’s exposition now follows, in which he explains the causes and the laws of the increase and decrease of the instruments of a society. The former are said to be four in number: (1) “The quantity and quality of the materials owned by it;” (2) “the strength of the effective desire of accumulation;” (3) “the rate of wages;” and (4) “the progress of the inventive faculty.” Of these the second and fourth receive the major portion of attention, and in their discussion Rae reveals the points of chief importance in his theory of capital and interest. As a preliminary to this discussion he attempts to establish the following proposition: “The capacity which any people can communicate to the materials they possess, by forming them into instruments, cannot be indefinitely increased, while their knowledge of their powers and qualities remains stationary, without moving the instruments formed continually onwards in the series A, B, C, etc; but there is no assignable limit to the extent of the capacity which a people, having attained considerable knowledge of the qualities and powers of the materials they possess, can communicate to them without carrying them out of series A, B, C, etc., even if that knowledge remain stationary.”

The first part of this law is established by the following process of reasoning: The capacity of instruments can be increased by making them more durable or by increasing their efficiency. In the first case a larger amount of labour must be expended in their production, and, even if this new labour adds as much to their productive power as that previously expended, the returns are moved farther off in time, and in consequence the instruments are pushed down to a lower series. To increase the efficiency of an instrument likewise requires the expenditure of more labour, since instruments of greater efficiency can only be obtained by the manipulation of scarcer or more refractory materials. The increased cost thus necessitated forces the instruments into a lower series. In proof of the second part of the law Rae mentions the almost innumerable combinations of productive powers and materials possible in nations whose knowledge of nature and of technique is extensive. Under such circumstances the movement toward the lower series is slow and there is no assignable limit to the quantity of instruments that may be produced with profit. The question of the increase of instruments of production, therefore, becomes one of technique or knowledge of natural forces and materials and the methods of manipulating them on the one hand, and of the extent to which a people will be willing to carry the process of producing instruments of lower and lower series on the other; that is, of what Rae calls “the progress of the inventive faculty,” and the “effective desire of accumulation.” The former increases the number of instruments which may be produced without greatly increasing the number of lower series, and the latter determines the remoteness of the future period for which a people are willing to provide by the sacrifice of present labour or its equivalent.

Rae’s analysis of the circumstances which determine the effective desire for accumulation brings him to the discussion of the relation between present and future enjoyments. Most men, he says, discount future pleasures, partly on account of the uncertainty and shortness of life, and partly on account of their inability to realize the future. Their intellectual qualities and their “social and benevolent affections” are, therefore, elements in the problem. The stronger the former are, the more keenly they appreciate future needs, and the less liable are they to be influenced by the passions of the moment; the stronger is their interest in and their affection for others, the greater their desire to influence events in the future. The growth of family and social ties, the development of the moral powers of a people, and the improvement of all those conditions, social, political, and economic, which increase the probability that we ourselves, or those for whom we care, will be permitted in the future to enjoy the results of our present sacrifices, are calculated to strengthen the effective desire for accumulation.

From this discussion Rae proceeds to the subject of the division of labour and exchange. He sees the advantages of the former in the fact that when a worker devotes himself to one branch of production, instruments are more continuously used and more quickly exhausted, and hence are raised to higher and more productive series. Their increase and accumulation thus become more profitable, and the effective desire for accumulation is increased. This method of viewing the advantages of the division of labour is considered so important by Rae that he devotes a special appendix to its defence, and to a criticism of Adam Smith’s treatment of the subject.

The discussion of the division of labour and of exchange leads to a consideration of value which he explains in accordance with the cost of reproduction theory, to which, however, he makes one important and very significant addition. “When two persons in the same society exchange commodities,” he says (p. 300), “... the exchanges they make are for equal quantities of labour, reckoned according to the time when applied, and the actual order of instruments.”¹ The time element, to which attention is called in this last clause, is considered by Rae of equal importance with labour. Materials, tools, etc., as well as labour, are consumed in production, and they must be represented in the price of the goods. In this connection he shows that not only the labour which produced these instruments must be taken into consideration, but also the length of time that must elapse before that labour is remunerated. The rate of compensation for this element of time will depend upon the effective desire for accumulation. By way of illustration, he assumes the case of a weaver who can weave a certain amount of thread into linen in thirty days with the aid of a loom which cost one hundred days’ labour and which will last seven years. He then proceeds as follows: “Suppose that the effective desire of accumulation of the individual is of strength sufficient to carry him to the order G, doubling in seven years, that the loom cost one hundred days’ labour, and that it will be exhausted in seven years; it would then require to return two hundred days’ labour, or an equivalent, at the end of that period. The return, however, is not delayed so long, but begins to come in daily, immediately after its construction. Calculating then what yearly return is equal to two hundred days at the end of seven years, in the estimation of a man who reckons one day now equal to two then, it will turn out to be nearly twenty days. We may allow that the loom is in employment three hundred days a year; it would, therefore, on these principles, have to return two days’ labour for every thirty days during which it was in operation, and the weaver would consequently have to receive an equivalent to thirty-two days’ labour; at least, had he not a moral certainty of receiving this, he would not have formed the instrument, and were such return to cease, he would not reconstruct it” (pp.169, 170).

Farther on he adds that “even in cases where labour alone seems to be paid for, the time generally also forms one of the items to be taken into account. Thus an individual contracts to fell the trees on a certain piece of forest land in a North American settlement within three months. If then he be paid at the commencement of the three months, he will expect to receive less than if payment be deferred until the expiration of that time, and the difference between the two amounts will be regulated, as in other cases, by the particular orders to which instruments, in that particular situation, are generally wrought up. The same thing holds good in all instances where labour is paid for by the work executed, or, as it is termed, by the piece.”

The same idea appears in another passage in which the difference between the valuation placed upon present and future goods of the same kind and amount is expressed in a striking manner. After stating that all instruments possess a capacity for supplying wants or saving labour, he adds: “But the wants which they supply, and the labour which they save, are in general not immediate, but future. Now we cannot estimate the same amount of labour saved, or wants supplied, to-morrow, and five or fifty years hence, as equivalent, the one to the other. Thus, if we compare together a hundred full-grown trees, and as many saplings, it may be that, estimated in the supply they yield the wants of futurity, they are alike. If the former be cut down to-morrow, they may yield a hundred cords of fire-wood, and if the latter be cut down fifty years hence, they may yield the same. We should not, nevertheless, conceive that they were equal the one to the other. What measure, then, are we to adopt for comparing them and other such instruments together, and thus finding an expression in a quantity of immediate labour for the whole capacity of instruments possessed by any community or for the whole stock of that community? The natural measure would seem to be the relative estimate, which the individuals concerned themselves form of the present and the future, that is, the strength of the effective desire of accumulation of the particular commodity. Thus in a community whose effective desire of accumulation is of a strength sufficient to carry it to the formation of instruments of the order E, doubling in five years, an instrument, which at the expiration of five years yielded a return equivalent to two days’ labour, might fairly be estimated as equivalent to one day’s present labour; if at the expiration of ten years it yielded an equivalent to four days’, labour, it might also now be rated at one day’s labour, and so for other periods” (pp. 171, 172).

In this connection Böhm-Bawerk calls attention to the fact that Rae has given us two methods of measuring the influence of the time element upon value, the one being the strength of the effective desire for accumulation, and the other the productivity of the lowest order of instruments produced by the society in question. That these two measures are not identical is recognized by Rae himself in a statement in which he distinguishes between cases “where the effective desire of accumulation of a community has had opportunity to work up the materials possessed by it into instruments of an order corresponding to its own strength,” and those “where the accumulative principle has not yet had time fully to operate.” (See pp. 172 sq., 194, 264.)

Böhm-Bawerk claims that the latter is the normal condition of things, because certain circumstances, among which are the new discoveries which play so important a role in Rae’s exposition, prevent the complete realization of the effects of the psychological facts referred to in the expression “the effective desire of accumulation.”

The longest chapter in Rae’s book treats “of the causes of the progress of invention and of the effects arising from it.” This subject is treated historically, and in a very interesting manner. The most important points for the student of interest concern the way in which technical progress affects the magnitude of national wealth and the rate of interest.

The effect of discoveries is to reveal new or more suitable materials, or new qualities, or new methods of working in materials. The first effect of progress along this line is, therefore, to render labour more productive, and this effect in turn changes the relation between the capacity of instruments and the costs of their production, and thus transfers them to “more speedily returning orders,” and increases the magnitude of the wealth of the nation. Improvements also raise the rate of profits, even if no change takes place in the effective desire for accumulation, since they increase the productivity of all instruments, and thus the returns of every series.

At the beginning of the critical part of his discussion, Böhm-Bawerk calls attention to the fact that Rae’s chief interest was in the explanation of the causes of the increase of national wealth rather than of the rate of interest, and that in consequence he did not accord full treatment to many topics of importance in a discussion of the latter subject In Rae’s expressions on the interest problem our author discerns two different lines of thought, the one connecting interest with the influence which time exerts upon the estimation of needs and goods, and the other with certain facts connected with the technique of production. The difficulty of the problem, according to Böhm-Bawerk, consists in showing how these two elements coöperate in the determination of the rate of interest, and it is precisely here that Rae, as well as those of his successors who recognized the importance of both these elements, failed. Jevons, for example, did not attempt to combine them in his explanation, but adopted an eclectic method, explaining the external, technical facts connected with the productivity of capital after the manner of the productivity theory, and the psychological facts after the manner of the abstinence theory. Launhardt and Sax did not seem to feel the necessity of employing the former element in their explanation, but contented themselves with the use of the imperfect materials prepared but left unused by Jevons. Rae recognized the importance of both elements, but failed in his explanation of how they coöperate in the determination of interest. His treatment of this part of the subject may be summarized as follows:—

The fact that people estimate present goods more highly than future goods of the same quality and quantity explains the fact of interest. The rate depends upon the effective desire for accumulation on the one hand and certain facts concerning the technique of production on the other. If, for example, accumulation continues, while the state of knowledge remains stationary, the rate of interest must fall, because the use of materials of poorer quality increases the cost of production and thus diminishes the surplus which remains after deducting costs from product. The tendency is to carry accumulation to such a point that the surplus returns will correspond with the effective desire for accumulation. That such correspondence, however, is frequently not realized is explained by the fact that at times the community has not been able to work up the materials possessed by it into instruments corresponding to the strength of the accumulative principle. For this situation the “inventive principle” may be responsible. That is, new discoveries increase the “capacity“ of instruments and raise them to a higher order of series, thus temporarily at least making it possible for people to discontinue the production of instruments of the lower degrees of capacity even when the strength of the effective desire for accumulation is great enough to warrant their production. In this manner Rae pushes the technical facts of production into the foreground of his explanation and the psychological factor into the background. The rate of interest is thus usually determined by the productivity of instruments, and only occasionally does it correspond with the actual strength of the effective desire for accumulation.

At this point Böhm-Bawerk calls attention to the fact that Rae’s explanation is subject to the same criticism as the productivity theory. He confuses physical and value productivity, and the cause of this confusion seems to be the ambiguous use of the terms “capacity” and “returns.” In his formal definitions and illustrations of “capacity” the purely technical conception is employed. For example, the capacity of a good is said to be great or small according as it helps to bring into existence many or few products. The capacity of an instrument can be increased either by lengthening its duration or by increasing the quantity of goods which it can produce in a given period of time. He illustrates the effects of inventions or improvements by the statement (p. 259) that with an improved form of plough, people can plough a larger piece of land with the same expenditure of human and animal labour. Rae then passes over to the conception of value productivity when he attempts to arrange instruments into series on the basis of the surplus they yield over costs. This he accomplishes by a comparison of the labour expended on the production of an instrument with the returns of that instrument, and as a measure of these two magnitudes he takes the value or the wages of the labour. Thus he compares the wages of the labour expended in the production of an instrument with the wages of the labour for which the returns or product of the instrument would exchange. In other words, he compares the value of the cost elements with the value of their product, the instrument, so-called, being the intermediate factor. He assumes that this comparison will reveal a surplus, the magnitude of which as compared with the value of the instrument determines the series to which the latter belongs. He then argues that this surplus is increased or decreased directly by changes in the physical productivity of instruments. For example, improvements or inventions make it possible to secure the same returns with less labour or greater returns with the same labour, and this, he argues, will increase the surplus due to the instrument in question, and will thus raise it to a higher series. The returns of which he speaks in the first part of the argument are concrete goods, but the surplus referred to is a surplus of value, obtained by subtracting the value of the cost elements from the value of these concrete goods. What he proves is that inventions increase the physical productivity of labour, and from that fact he draws the unwarranted conclusion that the value of the product and the value of the labour are farther apart than before. In like manner he explains the fall in the rate of interest due to increasing accumulations. These increasing accumulations, he argues, involve the use of materials of poorer quality or of materials more difficult to procure. Thus costs are increased. A given amount of labour yields a smaller return or a larger amount of labour is required to procure the same return. From this fact he draws the conclusion that the surplus due to the instrument in question must decrease. Thus from a decrease in the physical productivity of an instrument he argues a decreasing difference between the value of the instrument and that of its product.

Böhm-Bawerk also refers to the fact that Rae’s reasoning is contradicted by his own doctrine of value. According to the cost of production theory, the value of the product ought to rise in the same proportion as the costs, and in that case no change in the surplus would be experienced. Rae also assumes throughout that the value of labour remains stationary, and that the sum of value represented by the costs increases and decreases only as the quantity of labour represented by it increases and decreases. He thus commits the fatal error of assuming that the forces which determine value operate upon the goods which constitute the returns, but has no influence whatever upon those which constitute costs.

After summarizing the similarities and the differences between Rae’s theory and his own, Böhm-Bawerk concludes with the statement that in respect to one-half of his doctrine,—that, namely, which treats of the difference in the valuation of present and future goods and the importance of this phenomenon in the explanation of interest,—Rae deserves the credit of originality and of having anticipated him, but regarding the other half he declares that Rae was a follower of the productivity theorists, and especially of his great contemporary, Thünen.

The chapter on the exploitation theory has been considerably enlarged in the second edition by the addition of a section on “The Doctrines of Marx in the Mouths of his Successors,” and by the extension of the critical portion of the section on Marx. The occasion of these additions was the publication in 1894 of the third volume of “Das Kapital,” which existed only in manuscript at the time of the publication of the first edition and the contents of which were at that time unknown to the general public.

In the first two volumes many parts of Marx’s theory were left incomplete, notably that portion of the doctrine of profits and of surplus value in which it became necessary to harmonize the law of the equalization of profits with the labour theory of value. Marx recognized two varieties of capital which he distinguished by the terms “variable” and “constant.” Variable capital is paid to labourers, and by means of their value-creating power reappears with a surplus. Constant capital reappears likewise, but without a surplus. It follows, therefore, that the rate of profits should be higher where the proportion of variable capital is large, and lower where it is small. The fact is, however, that the rate of profits tends toward equality without reference to the composition of the capital, and a consequence of this is that products do not exchange in accordance with the amounts of labour necessary to their production.

In his first volume Marx recognized the apparent discrepancy between his theory of value and the facts, and promised to harmonize the two in a subsequent publication, and the manuscript published in 1894 contained the fulfilment of that promise. Böhm-Bawerk shows, however, that he completely failed to remove this discrepancy. Marx’s argument is that, though the law of the equalization of profits requires that the value of some goods should be too low and that of others too high, the excess of value in the one case exactly offsets the deficit in the other, and that, therefore, total values correspond to the amounts of labour which produced them. In criticism Böhm-Bawerk shows that this argument completely overlooks the problem of value which is to explain the proportions in which goods exchange for each other, and not the relation between the sum of values and their labour costs. Marx’s admission in the third volume, that goods actually do not exchange for each other in proportion to the amounts of labour necessary to their production, is a complete denial of the doctrine of value so elaborately worked out in the first volume. It is impossible to harmonize or to explain away so palpable a contradiction.

In Böhm-Bawerk’s opinion the publication of the third volume of “Das Kapital” marks the beginning of the end of the labour theory of value. Some of Marx’s followers of the present day have attempted to harmonize their master’s contradictory statements, or at least to show that there is still a remnant of truth in the venerable theory, but our author finds little difficulty in exposing the futility of these attempts. The curious reader who does not understand German may examine these arguments and Böhm-Bawerk’s criticisms in Miss MacdonalcTs translation entitled “Karl Marx and the Close of his System.”

Böhm-Bawerk’s review of the literature of interest produced during the fifteen years preceding 1900, is presented herewith in translation, and needs no description or commendation. It speaks for itself. It is the hope and the belief of the translators that the English-speaking world will accord to this little book the same welcome they gave to the translation of the first edition.

WILLIAM A. SCOTT.

UNIVERSITY OF WISCONSIN,

May, 1903.

¹ Notably Professor John B. Clark and Professor Simon N. Patten.

¹ “Karl Marx and the Close of his System.” A Criticism by Eugene v. Böhm-Bawerk. Translated by Alice M. Macdonald, with a preface by James Bonar, M.A., LL.D. London. T. Fisher Unwin, Paternoster Square, 1898.

² “The Positive Theory of Capital and its Critics.” Quarterly Journal of Economics) April, 1895.

³ “Statement of some new principles on the subject of Political Economy, exposing the fallacies of the system of free trade, and of some other doctrines maintained in the ‘Wealth of Nations.” Boston, 1834.

¹ “Principles of Economics,” 3d ed., pp. 142–664.

¹ Smart’s translation, p. 185.

²lbid., p. 186.

¹ The italics are mine.