rather the same contradictory hesitancy, both in praise and blame
of interest. Sometimes he commends the capitalists as benefactors
of the human race, and as authors of enduring blessing;(5*)
sometimes he represents them as a class who live on deductions
from the produce of other people’s labour, and compares them
significantly with people “who love to reap where they never
sowed.”(6*)
In Adam Smith’s time the relations of theory and practice
still permitted such a neutrality, but it was not long allowed to
his followers. Changed circumstances compelled them to show their
colours on the interest question, and the compulsion was
certainly not to the disadvantage of the science.
The special requirements of economic theory could not any
longer put up with uncertain makeshifts. Adam Smith had spent his
life in laying down the foundations of his system. His followers,
finding the foundations laid, had now time to take up those
questions that had been passed over. The development now reached
by the related problems of land-rent and wages gave a strong
inducement to pursue the interest problem. There was a very
complete theory of land-rent; there was a theory of wages
scarcely less complete. Nothing was more natural than that
systematic thinkers should now begin to ask in earnest about the
third great branch of income the whence and wherefore of the
income that comes from the possession of capital.
But in the end practical life also began to put this
question. Capital had gradually become a power. Machinery had
appeared on the scene and won its great triumphs; and machinery
everywhere helped to extend business on a great scale, and to
give production more and more of a capitalist character. But this
very introduction of machinery had begun to reveal an opposition
which was forced on economic life with the development of
capital, and daily grew in importance,the opposition between
capital and labour.
In the old handicrafts undertaker and wage-earner, master and
apprentice, belonged not so much to different social classes as
simply to different generations. What the one was the other might
be, and would be. If their interests for a time did diverge, yet
in the long run the feeling prevailed that they belonged to one
station of life. It is quite different in great capitalist
industry. The undertaker who contributes the capital has seldom
or never been a workman; the workman who contributes his thews
and sinews will seldom or never become an undertaker. They work
at one trade like master and apprentice; but not only are they of
two different ranks, they are even of different species. They
belong to classes whose interests diverge as widely as their
persons. Now machinery had shown how sharp could be the collision
of interest between capital and labour. Those machines which bore
golden fruit to the capitalist undertaker had, on their
introduction, deprived thousands of workers of their bread. Even
now that the first hardships are over there remains antagonism
enough and to spare. It is true that capitalist and labourer
share in the productiveness of capitalist undertaking, but they
share in this way, that the worker usually receives little –
indeed very little — while the undertaker receives much. The
worker’s discontent with his small share is not lessened, as it
used to be in the case of the handicraft assistant, by the
expectation of himself in time enjoying the lion’s share; for,
under large production, the worker has no such expectation. On
the contrary, his discontent is aggravated by the knowledge that
to him, for his scanty wage, falls the harder work; while to the
undertaker, for his ample share in the product, falls the lighter
exertion-often enough no personal exertion whatever. Looking at
all these contrasts of destiny and of interest, if there ever
came the thought that, at bottom, it is the workers who bring
into existence the products from which the undertaker draws his
profit — and Adam Smith had come wonderfully near to such a
thought in many passages of his widely read book — it was
inevitable that some pleader for the fourth estate should begin
to put the same question with regard to natural interest as had
been put many centuries earlier, by the friends of the debtor,
with regard to Loan interest, Is interest on capital just? Is it
just that the capitalist-undertaker, even if he never moves a
finger, should receive, under the name of profit, a considerable
share of what the workers have produced by their exertions?
Should not the entire product rather fall to the workers?
The question has been before the world since the first
quarter of our century, at first put modestly, then with
increasing assertiveness; and it is this fact that the interest
theory has to thank for its unusual and lasting vitality. So long
as the problem interested theorists alone, and was of importance
only for purposes of theory, it might have slumbered on
undisturbed. But it was now elevated to the rank of a great
social problem which the science neither could nor would
overlook. Thus the inquiries into the nature of Natural interest
were as numerous and solicitous after Adam Smith’s day as they
had been scanty and inadequate before it.
It must be admitted that they were as averse as they were
numerous. Up till Adam Smith the scientific opinion of the time
had been represented by one single theory. After him opinion was
divided into a number of theories conflicting with each other,
and remaining so with rare persistence up till our own day. It is
usually the case that new theories put themselves in the place of
the old, and the old gradually yield the position. But in the
present case each new theory of interest only succeeded in
placing itself by the side of the old, while the old managed to
hold their place with the utmost stubbornness. In these
circumstances the course of development since Adam Smith’s time
presents not so much the picture of a progressive reform as that
of a schismatic accumulation of theories.
The work we have now before us is clearly marked out by the
nature of the subject. It will consist in following the
development of all the diverging systems from their origin down
to the present time, and in trying to form a critical opinion on
the value, or want of value, of each individual system. As the
development from Adam Smith onwards simultaneously pursues
different lines, I think it best to abandon the chronological
order of statement which I have hitherto observed, and to group
together our material according to theories.
To this end I shall try first of all to make a methodical
survey of the whole mass of literature which will occupy our
attention. This will be most easily done by putting the
characteristic and central question of the problem in the
foreground. We shall then see at a glance how the theory
differentiates itself on that central question like light on the
prism.
What we have to explain is the fact that, when capital is
productively employed, there regularly remains over in the hinds
of the undertaker a surplus proportional to the amount of this
capital. This surplus owes its existence to the circumstance that
the value of the goods produced by the assistance of capital is
regularly greater than the value of the goods consumed in their
production. The question accordingly is, Why is there this
constant surplus value?
To this question Turgot had answered, There must be a
surplus, because otherwise the capitalists would employ their
capital in the purchase of land. Adam Smith had answered, There
must be a surplus, because otherwise the capitalist would have no
interest in spending his capital productively.
Both answers we have already pronounced insufficient. What
then are the answers given by later writers?
At the outset they appear to me to follow five different
lines.
One party is content with the answers given by Turgot and
Smith, and stands by them. This line of explanation was still a
favourite one at the beginning of our century, but has been
gradually abandoned since then. I shall group these answers
together under the name of the Colourless theories.
A second party says, Capital produces the surplus. This
school, amply represented in economic literature, may be
conveniently called that of the Productivity theories. I may here
note that in their later development we shall find the
productivity theories splitting up into many varieties; into
Productivity theories in the narrower sense, that assume a direct
production of surplus on the part of capital; and into Use
theories, which explain the origin of interest in the roundabout
way of making the productive use of capital a peculiar element in
cost, which, like every other element of cost, demands
compensation.
A third party answers, Surplus value is the equivalent of a
cost which enters as a constituent into the price, viz.
abstinence. For in devoting his capital to production the
capitalist must give up the present enjoyment of it. This
postponement of enjoyment, this “abstinence,” is a sacrifice, and
as such is a constituent element in the costs of production which
demands compensation. I shall call this the Abstinence theory.
A fourth party sees in surplus value the wage for work
contributed by the capitalist. For this doctrine, which also is
amply represented, I shall use the name Labour theory.
Finally, a fifth party — for the most part belonging to the
socialist side — answers, Surplus value does not correspond to
any natural surplus whatever, but has its origin simply in the
curtailment of the just wage of the workers. I shall call this
the Exploitation theory.
These are the principal lines of explanation. They are
certainly numerous enough, yet they are far from exhibiting all
the many forms which the interest theory has taken. We shall see
rather that many of the principal lines branch off again into a
multitude of essentially different types; that in many cases
elements of sever theories are bound up in a new and peculiar
combination; and that, finally, within one and the same
theoretical type, the different ways in which common fundamental
thoughts are formulated, are often so strongly contrasted and so
characteristic that there would be some justification in
recognising individual shades of difference as separate theories.
That our prominent economic writers have exerted themselves in so
many different ways for the discovery of the truth is an eloquent
witness of its discovery being no less important than it is hard.
We begin with a survey of the Colourless theories.
NOTES:
1. “In exchanging the complete manufacture either for money, for
labour, or for other goods, over and above what may be sufficient
to pay the price of the materials and the wages of the workmen,
something must be given for the profits of the undertaker of the
work, who hazards his stock in the adventure…. He could have no
interest to employ them unless he expected from the sale of their
work something more than what was sufficient to replace his stock
to him; and he could have no interest to employ a great stock
rather than a small one unless his profits were to bear some
proportion to the extent of his stock” (M’Culloch’s edition of
1863, p. 22). The second passage runs: “And who would have no
interest to employ him unless he was to share in the produce of
his labour, or unless his stock was to be replaced to him with a
profit” (p. 30).
2. See also Pierstorff, Lehre vom Unternehmerggwinn, Berlin,
1875, p. 6; and Platter, “Der Kapitalgewinn bei Adam Smith”
(Hildebrand’s Jahrb?cher, vol. xxv. p. 317, etc.)
3. Book ii. chap. i. p. 123, in M’Culloch’s edition.
4. When Plater in the essay above mentioned (p. 71) comes to the
conclusion that, “if Smith’s system be taken strictly, profit on
capital appears unjustifiable,” it could only be by laying all
the weight on the one half of Smith’s expressions, and leaving
the other out of account as contradictory to his other
principles.
5. Book ii. chap. iii.
6. Book i. chap. vi. The sentence was written primarily about
landowners, but in the whole chapter interest on capital and rent
of land are treated as parallel as against wages of labour.
?The Invisible Hand
Adam Smith first described this principle. Since that time it has become the basis of the concept of the free market.
Self Regulating prices Consider glove manufacturers. If a glove manufacturer were to raise his prices on his gloves way above his costs, a competitor with lower prices on gloves would receive all of the orders for gloves. If all of the glove manufacturers were to raise their prices way above their costs, someone else would begin to manufacture gloves and sell them at a price closer to the manufacturing costs. This competiti