Facebook pixel The Intellectual Foundations of Political Economy | Pepperdine School of Public Policy Skip to main content
Pepperdine | School of Public Policy

The Intellectual Foundations of Political Economy

The Austrian School

Natural Value:

BOOK 4, The Natural Value of Land, Capital, and Labour

by Friedrich Von Wieser

Chapter I Chapter VII
Chapter II Chapter VIII
Chapter III Chapter IX
Chapter IV Chapter X
Chapter V Chapter XI
Chapter VI  

Chapter 1


We have now to retrace our steps. Having made clear the principles according to which the return, jointly obtained, may be imputed to the separate productive factors, we have now to return to the question as to the value of these factors. The general law we are already acquainted with: the value of the product determines the value of the production good. The point which we must now take up is the application of this proposition to the special circumstances of land, capital, and labour.

In this by far the greatest difficulties meet us in the case of capital. It seems as if our explanation of its value came into direct collision with the facts of experience. Assume that a capital, employed for one year and thereby completely used up, yields, at the end of the year, a return of the value of 105; experience tells us that the value of the capital will not be estimated at 105, but at a somewhat less amount according to the current rate of interest. At a 5% rate, e.g., the capital will be estimated at 100. The remainder of the return will be regarded as net return of interest. How does this go with our explanation? On what ground is this deduction made? Ought not rather the full value of the gross return to go into the capital value without any deduction whatever? But if that were so, how should we explain the contradiction of experience which interest presents? How is the interest to be explained? Or does natural valuation exclude interest? Is it, perhaps, merely a phenomenon of present-day exchange and price, which would not re-emerge in the communistic state?

One of the most conclusive and brilliant among Bohm-Bawerk's critical examinations is that directed towards the attempts to deduce interest from the productivity of capital. Bohm-Bawerk himself in fact arrives at the conclusion that the attempt is hopeless. To quote his own words: "It was not simply an unfortunate chance that no one found the Open Sesame which had the power to discover the mysterious origination of interest in the productivity of capital. It was rather that on the road to the truth a wrong turning had been taken. From the first it was a hopeless endeavour to explain interest wholly and entirely from a productive power of capital. It would be different if there were a power that could make value grow directly as wheat grows from the field. But there is no such power. What the productive power can do is only to create a quantity of products, and perhaps at the same time to create a quantity of value, but never to create surplus value. Interest is a surplus, a remainder left when product of capital is the minuend and value of consumed capital is the subtrahend. The productive power of capital may find its result in increasing the minuend. But so far as that goes it cannot increase the minuend without at the same tine increasing the subtrahend in the same proportion. For the productive power is undeniably the ground and measure of the value of the capital in which it resides. If with a particular form of capital one can produce nothing, that form of capital is worth nothing. If one can produce little with it, it is worth little; if one can produce much with it, it is worth much, and so on; -- always increasing in value as the value that can be produced by its help increases, i.e. as the value of its product increases. And so, however great the productive power of capital may be, and however greatly it may increase the minuend, yet so far as it does so, the subtrahend is increased in the same proportion, and there is no remainder, no surplus of value" (Capital and Interest, translated by William Smart, page 179).

When we turn to land we find also a striking contrast between the apparent demands of our theory and experience. Land yields returns that stretch away into the farthest future. The value of land, then, should surely be not merely twenty or thirty times the annual rent, as experience tells us it is, but rather an indefinite and incalculable number of times the annual rent; perhaps it should be estimated as an infinite amount (see also on this point Capital and Interest, page 67). But the same line of argument may be applied to capital. Capital also, when well employed, promises to yield its net return on into the indefinite future, so perhaps its value also ought to be estimated as an infinite amount.

It will be seen that the difficulties which meet us are not trifling. If, nevertheless, I believe that they can be overcome, it is because I trust to the support given by the results of our investigation into the imputation of return. None of the writers who tried to derive interest from the productivity of capital had this support, and even in Bohm-Bawerk's critique it is not foreseen. Have we not in fact found a productive power, which, although not capable, as Bohm-Bawerk claims, of creating "more value," can and does create what amounts to the same thing, "more return"; in other words, a surplus?

We shall begin with the most difficult, the theory of the value of capital. After what has been said it is clear that it cannot be taken up without taking up the theory of interest.

Almost everything in this book will find its complement in the discussion upon costs which is to follow.

Back to Top

Chapter 2

The Value of Capital and the Interest on Capital. I -- Discounting

Capital receives its value from its fruits. If, then, we are calculating the final return of any production, and, for that purpose, deduct from the value of these fruits the capital consumed, with its value, the result will be zero, inasmuch as, sooner or later, all capital is consumed in production. The deduction made must always amount to the value of the fruits, -- indeed, that value measures the deduction -- and consequently the value calculation leaves no net return whatever. Not only is interest not explained; it is absolutely excluded. And, if we consider that means of production renew themselves again and again indefinitely, and yield results indefinitely, we come across another contradiction of experience, for experience shows that the value of capital is not infinite but always finite and limited.

These are the problems which lie before us for solution when we now go on to examine the value of capital and the interest on capital.

For their solution we may avail ourselves of the results of our analysis of the physical productivity of capital. All capital transforms itself in the last resort into gross return. In this gross return the capital reproduces itself with a physical surplus, the net return. These two facts, which we have already established, will suffice us to deduce the value-productivity of capital, and to solve all the contradictions with experience.

First: all capital transforms itself in the last resort into gross return; it follows from this that the value of the capital can never exceed the value of the gross return. The value of capital is thus a limited finite amount, although the working of the ever-renewed production extends away into an illimitable future. The materials and apparatus out of which, and with whose help, bread is produced, cannot possibly be worth more than the bread itself. And those things from which the materials and apparatus themselves are produced, and which, consequently, are the producers of bread one stage removed, have, in the prospective gross return -- the perishable bread -- a maximum limit of value. So with all capitals, however far their primary products may be removed from direct employment in the satisfaction of want. To put it into figures, -- if a capital transforms itself sooner or later into a gross return of the value of 105, its own value cannot be put at anything above 105.

Second: in the gross return capital reproduces itself with a physical surplus, the net return. It follows that the capital value cannot be credited with the whole value of the gross return. In the reproduction capital represents only a portion of its own gross return, and can therefore absorb only a portion of the value of that gross return. If, from the value of 105, 5 are set aside as fruits which may be consumed without preventing the full replacement of the capital, only the remainder of 100 can be reckoned as capital value. The prospect of having this residual value of 100 transformed once more, at the close of the next period of production, into the gross return of 105 -- by again employing it productively cannot make any change on this valuation; since the expected return of 105 is always divided in the same way, assuming the same conditions; viz. 100 goes to capital and 5 to the increment on capital.

Gross return and net return are thus the two given amounts from which capital gets its value. The whole difficulty of the problem lies essentially in the recognition of the fact that those two amounts are given. For proof of this we refer to our former disquisition upon imputation in general, and the imputation in the case of capital in particular. If physical productivity of capital involves, as we have maintained, the imputation of gross return and the imputation of net return, we have at once a clear and simple principle for the valuation of capital.

There is in common use a definite name for the method of calculating value required by this principle. To fix the present value of a money claim, carrying no interest, which falls due at a future date, we make use, as every one knows, of the method known as "discounting." That is, we deduct the usual interest from the future sum. Now every capital value, -- not alone the value of a sum of money but of every perishable productive instrument -- is calculated by discounting; that is to say, from the value of the future expected sum of products into which the capital will be transformed, the corresponding net return is deducted. Only that, practically, in discounting money claims, a fixed rate of interest -- i.e. a definite relation between capital value and net return -- is always assumed, and always emerges, while we are explaining the formation of this relation by first discovering the principle for estimating capital value.

Bohm-Bawerk, arguing against Thunen's explanation of interest -- which has much in common with that just given -- asks with what right it can be assumed that the value of the gross return never raises the value of capital to its level, or, inversely, that capital value never depresses that of the gross return to its level? If a return of 105 can be obtained with an outlay of 100, will there not be competition in production, or levelling of the valuations, until either the outlay come to be valued at 105 or the return at 100, or both settle at some figure half-way between the two? Bohm-Bawerk is right in raising the question, seeing that he does not start, as we do, with a physical net return to capital. But assuming this physical net return the question is at once answered and settled. So long as the gross return remains large enough to replace the capital and yield a net return, the value of gross return and the value of capital can never be assimilated: there will always be a difference -- viz. the value of the net return. This difference could only disappear with the disappearance of physical productivity. So long as it exists, so long does physical-productivity guarantee value-productivity to capital, and so long does capital also create more in value than itself; -- to apply again the words of Bohm-Bawerk, it creates "more value." And if, in order to calculate the amount of capital consumed, the capital value be deducted from the gross return, it is not the whole amount of gross return that is deducted; the subtrahend is somewhat less than the minuend, and the required residue of interest must be the result.

If this be so, then, in the communistic state also, capital value must be estimated in such wise that it absorbs only a portion of the gross return to capital; so long at least as capital retains the same efficiency, as an auxiliary of production, which general experience from time immemorial has shown it to do. And for so long, consequently, must it, even in the communistic state, bear interest. Calculation of the net return to capital, and deduction or discount of the same from the gross return, in order to find the value of capital; -- these are natural economic calculations, indispensable in every economy so long as the fundamental conditions of production known to general experience remain in force.

A capital which, in twelve months from the date of possession. yields the same gross return (say 105) and the same net return (say 5), is valued at the date of possession at the same amount (say 100). It is, nevertheless, not a matter of indifference whether the capital comes into our possession now or only at the end of the twelve months, inasmuch as possession now guarantees a return of interest besides. It would, therefore, be incorrect if we were to take the equivalence of valuation put upon capitals in the present and in the future, and argue from that to the full economic equivalence of the present and the future possession. A present sum is always worth more than the same sum at a future date, or, as we may say, the future sum is always worth less, and that in proportion to the futurity of the time when it will come into our possession. If in the course of a year I can make 105 out of 100, the sum of 100 which I shall obtain only at the end of a year, is, to-day, worth only about 95. To reduce future capital values to present value, they must be discounted, just as the values of future gross returns are.

The reader will remember that, in chapter vi of Book I, we defended the proposition that present and future wants, coming into competition with each other, are, as a rule, to be regarded as equal; that is to say, the difference in time does not necessitate any difference in valuation. To this proposition we have now to add a second: -- that, within the sphere of production, the difference in time does necessitate a difference in valuation of the goods employed in production. The two propositions are in perfect accord, and mutually supplement one another. If wants are continuously to find the same satisfaction, equal amounts of return must continuously be produced. And if equal amounts of return are continuously produced, capital must remain continuously the same in substance. But if capital is actually to remain the same in substance, and so is able to yield continuously the same returns, this must find expression in a valuation which ascribes to capital a higher value, the earlier the point of time it comes into our possession. For the earlier the point of time, the earlier, and consequently the greater, the return that may be expected.

The business man who takes note of his own calculations, who tests his recollections and impressions, and asks himself why he calculates interest, and on what principle he graduates the value of his capital, will arrive substantially at the same conclusions as those to which we have just come. The value of goods is derived from their utility; the value of capital goods from their useful returns; interest represents a net increment to or fruit of capital: -- these are the axioms of practical life so much contradicted, even libelled, by theorists. They are axioms which every layman recognises, in his own way, as the motives by which he believes himself guided in his economic operations. A theory which should succeed in vindicating these axioms of ripened experience, which should give a distinct form to the vague impression, and a good and necessary content to opinions not quite conscious of their own raison d'etre, could have no better testimony to its correctness.


1. Compare Menger, p. 135.

Back to Top

Chapter 3

The Value of Capital and the Interest on Capital (continued). II -- The Rate of Interest

Interest is the return to capital when that return, with its value, is considered in relation to capital value. The relation existing between capital value and interest, when considered in the individual case, may be described as the percentage of increment; it becomes the "rate of interest" only when it obtains in a large number of connected cases. The rate of interest is the general percentage of increment to all the capital in the market.

The fact that, in one and the same sphere of production, there emerges a general percentage of increment, or at least a constant tendency toward it, arises from the many-sided connections between various kinds of production. In consequence of the comparatively great freedom of choice in the destination of most capital, land, and labour, it is almost always possible to extend any single production at the cost of some other, or to limit it in favour of some other. Of this possibility people will avail themselves whenever, and according as, any one production shows a particularly favourable or particularly unfavourable percentage of increment. In seeking for the most favourable percentage of increment, and in striving towards the equalising of all differences, a general percentage of increment will be created, or at all events will be aimed at, so far as there is competition between the various productions.

The organisations which at present contribute most to the equalisation of the interest rate are the money markets, where the principal amounts of capital in the shape of money are lent. In the money markets it is, of course, in the first instance only interest on loans that is determined, but the state of the loan market in the last instance affects also the return to production, inasmuch as it influences the extending of industries carried on with borrowed capital. Not only loan capital, however, but also that capital which is the personal property of undertakers, moves perpetually in the direction of the highest percentage of increment. Under a communistic regime all capital would belong to the one single undertaker, the state; capital would no longer be lent for production; and the interest on loans would cease to influence the percentage of increment in production. But this would simply leave capital still more free to shift from one production to another; it would no longer be hindered by those barriers which the circumstances of private ownership at present oppose.

Every one knows that the rate of interest, in spite of the tendencies to equalise it, is never really the same all over. This is chiefly caused by the fact that the unity or organisation of production is by no means perfect. There is no such thing as a united money market, and much less is there any thing like a united way of conducting productive business. The individualism of the present economic order distributes production among individual undertakings. These, of course, under the influence of competition and the desire for gain, are built into one coherent structure, which to some extent realises the economic order that an ideal plan of production would present. Yet at how many points do we find great gaps; how many dislocations through excessive accumulation of means of production at the wrong places; how often things go too quickly, how often not fast enough! And mistakes like these are all the greater the more distant the groups compared are from one another. The separate branches of agricultural production may be, relatively speaking, more in harmony with each other, than, for example, agriculture as a whole with manufacture as a whole. The transferences from agriculture to manufacturing, and vice versa, take place too seldom to allow of the proper balance between them being maintained.

This results, as we have said, in differences of percentage of increment among the individual productive groups. It is scarcely necessary to emphasise the fact that every difference in rate of interest, arising from this cause, is a misfortune. Every such difference implies a violation of the very first principle of employing goods; that they shall first be used in the most favourable employments, and that the less favourable shall be allowed only in so far as there is not enough of the more favourable. In one group people are content with a less percentage of increment, while in others they may be obtaining higher percentages. The hurtful consequences of this are by no means confined to the use of capital; they go further, and misdirect the production of capital. Capitals which yield a trifling interest are produced far more largely, and capitals which might yield a high interest, to a much less extent than they ought to be.

On the other hand, uniformity in the percentages of increment, and a uniform rate of interest, are, where they exist, proofs, economically speaking, of a well-balanced distribution and disposal of capital. They are proofs that the economically indicated limits of the employment of capital are everywhere equally respected; that nowhere is there any falling short, and nowhere any overstepping of them. In the principle which demands that the employment of capital shall be guided by the rate of interest, and that all employments which fail to return the customary interest be left alone, we find the marginal law brought into one common expression as regards all the different forms of capital. The net return is a definite quota of the gross return, and where the quota of net return is controlled, the direction of capital generally is controlled.

In the communistic state, when production is directed from one point and to one end, the differences in percentage of increment, so far as these are occasioned by the inorganic nature of our system of production, would disappear. Of course, even there, certain differences would still remain; all those, namely, which could not be further equalised by transferences from one production to another. In the nature of things, by reason of the variety in the properties of things, no production can be increased at the cost of others beyond a certain point, and, on similar grounds, no production can be limited in favour of others below a certain point. Agricultural capital could never be completely transferred to trade, nor trade capital all transferred to agriculture. But what does observation here show? It shows that those very differences, which it seems quite impossible to remove, are always removed, and that through an instrumentality which is permissible even where transferences of capital are not permissible; by means, that is to say, of calculation.

How this happens and what it means, we shall now try to show.

Back to Top

Chapter 4

The Value of Capital and the Interest on Capital (continued). III -- The Law of the Uniform Calculation of the Interest Rate

A capital which, in a one year's production period, transforms itself into a gross return of £105, will be valued at £100 if the general rate of interest be 5%: the residue £5 is net return. If the gross return should rise suddenly and greatly, say, e.g., to £126, -- the general rate of interest remaining unaltered -- it appears at first sight that the rise must affect the net return, and cause it to be calculated at £26 instead of at £5 as formerly. But, as a matter of fact, is the return so calculated? It is in one particular case; that, namely, where the rise is regarded as a solitary instance. But if it is regarded as permanent the calculation will be different. The owner certainly reckons the entire increase of £26 as gain, but he distributes it by putting £20 to capital and £6 to net return. From this time onward he will reckon his capital, and consequently his consumption of capital, at £120, and his net return at £6; so that he does not assume an increment of 26%, but only of 5%, corresponding to the general rate of interest.(1*) In the same way, should the gross return of a capital sink permanently, while the rate of interest remains unaltered, a portion of the loss will be written off the capital value, in such a manner that the relation between capital value and net return shall again correspond to the general rate of interest.

In this way it comes about that, where transferences from production to production are no longer permissible, the individual percentages of increment on individual capitals are, by calculation, regulated according to the general rate of interest.

The rate of interest which obtains in the particular productive group, or in the particular market to which the capital in question belongs, is the rate that decides.

The meaning of this act of calculation is easy to understand. A capital yielding 26% interest and one yielding 5%, are not equivalent to one another, although both may be expressed in the same figures. Only equal capitals bearing equal interest are equivalent. Capitals, then, can be calculated off-hand -- i.e. without consideration to the interest they bear -- only where the rate of interest is the same. That is the reason why, when the rate of interest cannot be made equal, it is at least calculated as such, by means of shifting the differences to the capital value, and giving them expression there.

A 3% capital and a 6% capital of £100 are not equivalent to one another; they are put into terms fit for comparison by calculating the 3% capital at 6%, and so reducing the capital to £50, or by calculating the 6% capital at 3% and raising capital value to £200.

As a means of simplifying calculation, it might be exceedingly desirable that the rate of interest should be the same in all markets, and in all productive groups. The rate, however, is not the same, and the fact must be reckoned with. If the rate of interest on bonds amount to 4% and the bank rate to 3%, it is a consequence of the fact that the two loan markets are separated from one another, and that demand and supply in the one do not approximate to demand and supply in the other, or, at all events, approximate only in trifling degree. This want of touch, however, which renders impossible the equalisation of rates of interest, also renders it less necessary; it is only when capital is transferred from one market to the other that the difference in rates of interest has any practical importance for the valuation of capital. It is different where one and the same market is concerned. Here capitals are continually valued against each other, and here, therefore, differences in percentage of increment could not be put up with. They are overcome either by regulation of production, or, where that is not practicable, by calculation. In the communistic state, where all capitals would be under a uniform administration, it would be an obvious expedient of calculation to regulate all individual percentages of increment according to the prevailing rate of interest.

We now proceed to further applications of the fundamental proposition that the rate of interest, when possible, should be uniformly calculated.


1. In the above example I assume (1) circulating capital, and (2) circulating capital whose value is not depressed to a lower level by cheaper costs of production; -- say, a scarce raw material. Suppose there is an increased demand for articles made from amber, while amber cannot be obtained in greater quantities; it will rise in value. Those undertakings which work with amber certainly obtain thereby a rise in their gross returns; but there is, on the other hand, a similar rise in the amount deducted for consumption of capital, and this must be taken into consideration in their estimate of gain. In the long run there remains a higher net return, but it is only relatively to the increased outlay of capital.

A much more complicate calculation has to be made as regards fixed capital, as also as regards capital whose value is influenced by the costs of production. I must leave the reader to think out for himself -- in the light of the principles now to be discussed -- the corresponding modifications in the valuation of fixed capital and in the influence of costs.

Back to Top

Chapter 5

The Value of Capital and the Interest on Capital (continued). IV -- Change in the Rate of Interest

It has just been shown that, when the value of the service of any individual form of capital -- e.g. a raw material, or a machine -- rises or falls, the fact expresses itself in a corresponding elevation or depreciation in its capital value. The net return imputed is, of course, altered at the same time, but only in so far as will bring it again into that relation with the capital value which corresponds with the ordinary rate of interest.

In order that the general percentage of increment -- the rate of interest -- may fall or rise, there must be changes of an extensive kind in the return to the great mass of capitals -- brought about through changes in supply, in demand, in technique, in a word, in any of the factors of imputation. A general rise in the gross return to capital, brought about by a great and universally effective invention, would cause a general rise in the net return to capital, and its relation to capital value, -- that is to say, in the rate of interest. The capital value might in this instance remain entirely unaltered. Only those capitals which had no part in the effects of the invention, and were in this respect individually separated from the general mass of capital, must necessity be affected. Where the amount of their services had remained unaltered in the midst of the general increase, in estimating the value of those capitals a greater discount from that amount would require to be made, corresponding to the increased rate of interest. Suppose the rate of interest to rise suddenly from 3% to 6%, the value of all capital whose interest remains unaltered at 3% must be appraised at a correspondingly lower rate.

We have discussed the effect which the individual factors of imputation produce upon the contributions of capital, in sufficient detail to make the derivation of the rules which govern the change in the rate of interest a matter of no difficulty.

One single remark may be added. It is quite a hackneyed proposition that the increase of capital causes a decline in the rate of interest. This proposition is true only with a certain limitation; it holds only when, by increase of capital, is understood increase in amount, without a simultaneous increase in the variety of the forms of capital. Increased variety in capital is synonymous with an advance in technique; it is one of those facts of economic history to which special attention must be drawn, when it is desired to show clearly the difference between primitive and developed production. Thus to it is due what we know to be the effect of every technical advance; namely, a rise in the value of the services of capital, as regards individual businesses, and, when comprehensive enough, a rise in the rate of interest. Not until the qualitative advance has been quantitatively used up, and the stocks of the new varieties of capital been multiplied, without other new varieties coming to the front -- that is, not until production expands and fills out the newly-set limits, -- can the increase of wealth have power, first, to depress the value of the services of capital individually, and, in the long run, should its compass be sufficiently extensive, -- to cause a fall in the rate of interest.

If we look back over the changes in the rate of interest on production over the whole course of economic history, we shall notice an unceasing upward and downward movement, according as advances in production are made, or as the marginal values of the newly-acquired wealth are again depressed by the increment of capital which follows. But through these unceasing fluctuations run great fundamental tendencies, which are, of course, subject to disturbance from opposing tendencies of the rate of interest on consumption loans. Economic history begins at a period when there is almost no capital, -- the zero of property in capital as well as the zero of return from capital. From that time onwards property and return, measured absolutely, go on growing so long as the economic world thrives, and has not yet reached the down grade of the movement of value. And the relation between these two -- i.e. the rate of interest -- rises similarly from the beginning, and only begins to fall when the down grade in the movement of value begins to come in sight.

Back to Top

Chapter 6

The Value of Capital and the Interest on Capital (continued). V -- The Valuation of Fixed Capital

Up to this point we have disregarded the circumstance that many capitals -- all those called "fixed capitals" -- do not exhaust themselves in yielding one single return, but co-operate in several processes of production, and yield several returns before they are finally used up. We were justified in hitherto neglecting this circumstance, as it is of no importance to the principle of the valuation of capital which we had first to establish. Now, however, that the principle has been established, we must go on to this next question. We shall find that the circumstance alluded to does not essentially alter matters, although it certainly renders them much more complicated.

In the case of fixed capital, instead of one single future return there are several returns, and the present value of these several returns must be determined by discounting. If a machine remains capable of work over ten years, the services of all the ten years which are to be imputed to it must be discounted and added up, at their present value, in order to obtain the capital value of the machine. It need scarcely be said that every later service must be estimated at so much less in present value, as the discount must be relative to the terminal point. Further complications are caused by the fact that repairs, and reconstructions, and extensive replacements, frequently take place in fixed capital during the period in which it is wearing out. The outlay which this occasions must be discounted -- taking into account of course the period of time at which this outlay may be anticipated. Still further complications, finally, arise from the uncertainty -- which increases as the period of wear and tear lengthens -- whether the returns expected will actually be received at all. And this also necessitates peculiar deductions, which will be most simply made where people can insure against the danger.

In the case of such fixed capitals as are consumed exceedingly slowly, and, consequently, yield exceptionally many returns, the process of capitalisation frequently takes the place of discounting. Before speaking of this, however, it will be necessary to touch at least upon another somewhat difficult question.

This is the method of calculating the individual percentages of gross return assignable respectively to interest and to wear and tear. If a machine remains serviceable for five years, and yields every year £1000, this yearly income must be divided out between interest and wear and tear (Amortisation) in accordance with a certain law. In order to find this law, it is best to represent the individual rates of return as annuities. The first instalment must yield interest for the first year upon the total capital value, all return beyond that is repayment of capital; the second instalment has to yield interest on the capital value remaining after deduction of this repayment, and the residue, which must now be a larger one, serves toward further repayment; and so on, until finally the entire capital is replaced, and interest obtained upon all the portions of capital according to the period of their employment. The reason for this kind of calculation lies, in the last resort, in the law of the uniform calculation of the interest rate.(1*)


1. Calculated on the figures give above, and assuming a 5% rate of interest, the value of the machine, on putting into present value the five expected annual returns of 1000, with interest and compound interest, may be reckoned at 4329.48. The first return of 1000 pays 216.47, as 5% interest on the capital, while the residue of 783.53 goes to repayment of capital, thus leaving a remaining capital sum of 3545.95. From the second return 117.30 falls to interest, and 822.70 to the sinking fund; from the third, in the same manner, to interest 136.16, and, to replacement, 863.84; from the fourth, 92.97 to interest, 907.03 to capital; and finally, from the fifth, 47.62 to interest, and 952.38 to repayment, whereby the entire capital is replaced.

Back to Top

Chapter 7

The Value of Capital and the Interest on Capital (continued). VI -- Capitalization

Interest is always an aliquot part of capital value, and capital value is always a multiple of interest. Where interest is 5%, for example, the interest is 1/20 of the capital value, and the capital value is equal to 20 times the interest. It is this fact which renders it possible to determine the value of capital, not by deducting interest from gross return, but by another method which leads to precisely the same result -- namely, by means of a corresponding multiplication of interest, or, to use the ordinary term, by capitalisation. Whether discounting or capitalisation is preferred will depend upon circumstances. With circulating capital discounting is the usual method, as the gross return in this case forms the nearest and clearest basis. With fixed capital, if the wearing out is comparatively rapid, and the gross returns are few in number, discounting will be the preferable method in this case also; but if a long series of gross returns is to be taken into account, capitalisation will be preferred.

Capitalisation is easiest where the gross return contains no quota for wear and tear, and is therefore entirely net return. This would be the case with a capital which never wore out, which promised rent to all eternity, and a rent, moreover, absolutely secure. To carry through the process of discounting here would be laborious in the highest degree; the rent of each separate year would have to be separately calculated, until that rent was reached whose present value was zero; and not till then could the calculation be finished. How much simpler in such a case to multiply the year's rent in accordance with the rate of interest! The result obtained in this fashion agrees with that given by the former and more laborious method, not merely approximately, but with mathematical exactitude, as any text-book of mathematics will confirm. The mathematical formula for the discounting of an eternal rent is simply the formula of capitalisation.

The calculation is a little more complicated when the gross returns contain quotas for wear and tear, and when repairs and the like must be covered and insurance premiums or premiums against risk retained out of these gross returns. In such cases all necessary deductions must first be made from the gross return before we get the net return which is to be capitalised, and this is very often exceedingly difficult in the individual case. The premiums just mentioned are frequently not deducted, but the amount of risk finds instead its expression simply in the rate of interest. The return, for example, of a business regarded as of doubtful solidity will be capitalised at a higher rate of interest, i.e. as a smaller multiple.(1*)


1. All the separate principles here deduced for the calculating of capital value and interest are followed in practical life and are practically familiar to us. The theory of them, too, is often given. But they are always followed and taught under the assumption that the fact of interest and a fixed ratio of interest are given. Nothing is simpler, under such an assumption, than to capitalise a rent, or to show the method of capitalisation. But the duty of the theorist is to discover these laws, and, at the same time, to explain why such assumptions may be made. Whence comes interest? whence the rate of interest? These are our fundamental questions. All the single laws which we have laid down are confirmed theoretically only if we have succeeded in explaining also the assumption on which they are based, i.e. the existence of interest and the rate of interest.

The analysis of the value of land which follows will once more give the reader occasion to notice how difficult it is with the matter in hand to escape arguing in a circle, and to prevent the entrance of any assumption which is itself in need of explanation.

Back to Top

Chapter 8

Interest on the Consumption Loan. House Rent

The natural principles hitherto laid down for estimating capital value and interest refer only to production. It must now be asked whether there is also a natural interest which corresponds to the interest given on a loan for consumption purposes, or interest derived from letting of dwelling-houses and the like.(1*)

The motives of a debtor who borrows with the view of spending the loan on himself are different from those of an undertaker who borrows to increase his business capital. The undertaker hopes to obtain both repayment of capital and interest out of the return on the borrowed sum. The mere debtor cannot hope for this, but must trust that it will be possible for him to repay his debt of capital and interest out of some other income. He borrows because he needs goods now, and has not got them, while he expects in the future to have them and not to need them to the same degree -- at least he deludes himself with some such hope. Thus in a certain sense interest on production and interest on consumption have a common source. Both of them relate to a difference in the valuation of present and of future goods, only that the causes which produce this difference are distinct. In the case of the productive outlay of capital it is the productivity of capital which causes the difference between present and future; in the case of the consumption loan, it is accidental and personal circumstances, -- accidental accumulation of present wants and expenditure, accidental disturbance of income, and so forth. One who finds himself in a situation of urgent necessity is acting quite rationally when he promises -- at some future time when he hopes to be more favourably situated -- to pay to the person who assists him by an advance of money out of his present difficulty, not only the amount advanced, but an extra, an interest. A sum of £l05 at the end of a year may be worth less to him than £100 is at the present moment; he might even promise £150, £200, or more, and yet not be acting irrationally. But if he is to find a person willing to lend him the money, it is essential that every one should not be in the same circumstances of present need and future affluence as himself. It is essential that there should be people who, at the moment, have means which they can do without. And thus it follows that, in an entirely organic economy, such as would exist in the communistic state, the necessary conditions for consumption interest are wanting, inasmuch as all the citizens together would form only one economic subject, and would participate continually, either in the same condition of want, or in the same improved condition of economic well-being.

The interest obtained from the letting of dwelling-houses, and such like objects of consumption wealth, amounts, on an average, to a sum which allows the owner to enjoy -- during the period for which the building lasts -- interest upon the capital expended in building, and, besides, to provide what the Germans conveniently call "amortisation" of the same; so that, when the dwelling is worn out, he is in a position to replace it. In short, there is assured him, on the average, a permanent net return corresponding in amount to the general rate of interest upon property of this kind. During all the long period of time when contract interest on Loans was forbidden by law, and violently combated by all theorists, no one thought of objecting to the interest on consumption-wealth. This was always held equitable; and an owner who made over his property to another in perpetuity was regarded as having a right to claim in return a permanent remuneration. If, however, we look carefully, it will be seen that the theoretical arguments employed against interest on loans apply equally to interest on house property, in so far as it brings in more than enough to repay the costs of building. If money be "unfruitful," so are buildings; and to this extent it is impossible to see why they should bring to their owners a net income lasting beyond the physical duration of the house. Were the owner to retain the house for his own use he would, by the time it tumbled to ruins, possess nothing more of it than, possibly, the value of the materials; -- is it not rather a hard condition that the person who hires the house must rebuild it for him?

To justify the usual amount of rent on house property, we must go somewhat further back, viz. to the fact that the objects of use which are let must be produced. But if they are to be produced, there must be the prospect that their value will include the full and permanent maintenance of the undertaker's capital, along with the customary return to capital, whether this value be realised through selling or through letting the property. No houses would be built for letting if the prospects of this kind of undertaking were poorer than those of any other; the interest of hire or let must, therefore, stand at the usual amount of interest on capital. It is an application of the law of costs (see below, Book V), according to which the customary interest on capital is reckoned among costs. As in all cases, so in this, does the calculation of costs assure the fullest economic distribution of the employments of goods. The more exactly the net income received from the letting of dwelling-houses corresponds with the rate of interest general over the country, the more exactly will the building of houses, and the satisfaction of the need which this meets, correspond with the general condition of production and of the satisfaction of wants. If people were to be contented, e.g., with an exceptionally low return from houses, it would imply a disproportionately ample satisfaction of the want for dwellings. This would stand out from the general economic plane; and would necessarily be balanced and compensated by limitations in some other direction.

Even in an entirely organic economy, in which the opposition between owner and tenant was abolished, it would be as needful as it now is to take care that building of houses corresponded with the general position of production and of satisfaction. And to this extent we might draw analogies between the interest of house rent and a calculation, in terms of value, of the satisfaction given by houses, which would result in a control of expenditure quite as complete as that given by house rent.(2*)


1. A further form of interest will be discussed in Book V. chap. ii.

2. That is to say: -- In the present state the due provision of houses for the people is guaranteed by the consideration that capitalists, investing their money in house property, will get the ordinary return of interest on capital generally. Rent must cover replacement as well as interest. In a communistic state, where the government provided everything, the building of houses would be controlled by considerations of wants and satisfactions which placed the demand for houses very much in the same relative position to other satisfactions as now. No socialist state, for instance, could provide houses in such quantities that their value was reduced to the mere expenses of building, without disturbing the marginal plane, and diminishing the total sum of satisfaction obtainable by the employment of the national capital. -- W.S.

Back to Top

Chapter 9

The Value of Land

The value of land is calculated -- according to the same principles as the value of a permanent rent -- by capitalising the rent of land. This is a proposition which is held nowadays as self-evident. It was not always so, however, and, indeed could not always be so. In order to capitalise, a given rate of interest is necessary; and that an interest rate may be given, we need capital. To capitalise rent means to multiply it according to principles which are derived, as the name itself shows, from the valuation of capital.

Imagine an ideal condition of agriculture where no capital whatever is employed. The land yields produce of all kinds and in great quantity. In these circumstances the value of each product can be estimated exactly; the value of each harvest can be estimated exactly; rent can be fixed exactly; -- but there is no means by which to determine with certainty how many rents would be required to give the value of the land.

Why is there no such means in the case of land as there is in the case of capital? The answer is simple. Capital reproduces itself in the gross return as a part of that gross return. Thus there is a fixed relation between the two "known" quantities, gross return and net return, and the "unknown" quantity, capital value; and this relation gives the measure for capitalisation. Land has not the same double position as productive factor and as product. It produces without being reproduced; and thus, to determine the value of land, it becomes necessary to bring to our aid the standard for capitalisation which we find in capital.

From this consideration it follows that, so long as capital was scarce, it was impossible to obtain a fixed valuation of land. Every owner of land might estimate its value differently, inasmuch as he might take, as basis of calculation either a greater or smaller number of yearly rentals, according to varying external circumstances, and according as his judgment was influenced by recklessness or by forethought. An egoist pure and simple, who calculated only with regard to his own lifetime, and to whom his land was of importance only because it secured him a rent for life, would estimate its value according to the probable duration of his life, and would thereby obtain a kind of fixed valuation; at all events, his land would represent to him a finite sum of value and not an infinite one. But one who thought of his children, and of succeeding generations, and took their interests into consideration in estimating the value of his land would of necessity regard it as an infinite amount. As inconsiderate egoism may be counted exceptional, the value of land must, as a rule, have been estimated as infinite, or, at all events, as an amount incapable of being measured.

As a matter of fact, this probably was the case with primitive economy. In the beginning, where land had any value at all ascribed to it -- as, e.g., the pasture lands of nomadic tribes when there was no superfluous amount of such lands, the opinion must have arisen that here man had to do with an indispensable condition of existence; a condition which required to be kept up permanently; and a condition whose importance could not in any way be compared with that of rapidly changing, coming and going, movable goods. The possession of pasture land was a matter of life and death, and the tribe, recognising that its continued existence depended upon the possession, would risk its uttermost to retain it. Even in present times a similar mode of thought may be met with in distant mountainous regions, where the peasant farms his solitary patch of land. His croft is inalienable from him, and its value indeterminable as against other goods. What should the peasant do if he ceased to be a peasant? No sum of money that a buyer might offer could be any temptation to him, unless just then an occasion presented itself to exchange it for another and better piece of land -- an unlikely possibility in the circumstances. The peasant's croft is and remains for him a good by itself, the value of it impossible of expression in goods of any other kind, -- in fact, indeterminable.

This conception alters only when capital has become more plentiful, and when the landowner has become more familiar with its use and its value. There are two circumstances which bring this about. The one is that land and capital begin to be exchanged for each other, according to the amount of the rents they yield, and thus people use the value of capital to express the value of land. The other, and more important, is that the land becomes more intensively cultivated, and itself employs, much capital. Consequently, in every act of cultivation, the question has to be considered, how land and capital should be employed relatively to each other, so as to give the best returns of rent. The same return in crops may be produced by taking more or less land into cultivation, or by employing more or fewer doses of capital, and agriculturists have to decide on these points. Thus land and capital become commensurable in their products; and, when ever civilisation has got this length, it is impossible longer to avoid valuing land according to the fundamental laws of valuing capital. To do otherwise would be to renounce the only possible measure for calculation and economic decisions. Just as capitals can be rightly compared with each other only when calculated at the same rate of interest, so can land and capital be rightly compared only when the valuation of land assumes the rate of interest on capital.

In the communistic state, it is true, the connection between land and capital, brought about by exchange of the one for the other, disappears, but the connection arising from their common co-operation in production remains. The capitalising of land value, accordingly, would remain as now.

Back to Top

Chapter 10

The Value of Labour

To his master the slave is a capital, and his value, like that of an animal, a machine, or any piece of fixed capital, is determined by summing up and discounting all the services which may be expected from him, or, as we may say, by capitalising his net return.

The capital value of free labour, the value of the free labourer, is no object for valuation, any more than his person is an object of economical disposal, or a "good." On the other hand, the individual acts of labour are always objects of economical disposal, and so objects of value, even in the freest community, -- even in a community where the labourer himself governs and makes, the laws. No economy could be conducted without men recognising not only which labour, in general, is the best and which the worst, but which, in the circumstances, is the more and which the less important, which must be used sparingly and which may be used with most freedom.

The method by which labour is valued is exceedingly simple. The ordinary principles of imputation decide what share of the return may be ascribed to each individual service, and the value of this share obtains directly as the value of the service which produces it. Thus every kind and quality of labour shows a different result according to the available supply, the demand, the support revived from complementary goods, and the technical possibilities. At the top of the tree stand the "monopoly" services, when the general economic conditions of the time aid them with technical support and general demand at the bottom stand the over-congested branches of labour, particularly unskilled manual labour. Wherever labour power is available in great quantity it is valued as a "cost-good," and suffers from all the disadvantages of this valuation. The marginal employment is always the decisive one, -- that employment of the labour in question which brings the smallest result economically permissible.

The socialists would have us believe that the value of every kind of labour should be estimated simply according to time; that is to say, the duration of the service should alone decide its value relative to other labour, -- which assumes, of course, that slovenly labour is reduced to earnest labour, unskilled to skilled labour. This is the extent to which the quality of the labour would be taken into consideration, but no further. Those differences of quality which reside in the task set before the labourer are left quite out of consideration. Common manual labour, higher artisan labour, superior mental labour, are all to be regarded as equal. Does it require any special proof that this is contrary to the natural laws of valuation, and that no economy could last which treated its division of labour in this way?

The socialists continually overlook the fact -- although, indeed, they only follow in the footsteps of most of the economists -- that value, in our present condition of society, has two services to perform. The one is to act as title to personal income. In the great round game of income-winning, every one is to receive in the end as much as the value of his stake amounts to; and in the game the stakes may be wealth as well as personal labour. The man who has much wealth to stake receives, as a rule, much income, even without personal labour, and the man who has little wealth to stake, as a rule receives little, even with the most strenuous expenditure of labour.

The other service of value, -- and one usually quite overlooked, -- concerns the economical balancing or weighing of goods against goods, and of employment of goods against employment, without regard to distribution among persons, and simply with a view to reach the greatest possible economic results. To this service of value belong e.g, those principles which are absolutely indispensable to any economy; -- that every production should be directed so as to obtain the greatest possible return, that no more be spent upon any product than can be made good by its value, that in consumption the good suited to satisfy urgent wants, and therefore the more valuable, should not be spent on a trifling satisfaction, that, generally speaking, the limits of supply and demand, as given in marginal value, should be observed, and so on.

What would the socialists have? They wish a related economy, in no way worse, and possibly better regulated than that of to-day; but with this peculiarity that labour shall be the only source of personal income. The value of land and capital -- or the value of the rents of land and capital -- shall no longer be imputed to any individual as his outlay or stake; shall no longer serve any one individual as a title to personal income. Is there in this claim -- the justice of which we shall not here discuss -- any force which can abrogate the economical service of value as well as the personal service? Because land and capital are no longer to belong to individuals but to the state, must they therefore be regarded by the state as valueless, and be employed in production without regard to the principles of value? Because labour is to be the only basis of personal income -- measured possibly by the length of time which each man has worked -- is labour alone to be considered in production, and is the only measure of its value to be its duration? Because there is to be a new order in the distribution of goods among persons, must there be a complete disorganisation in the whole industrial conduct of goods?

Of course socialists are very far from desiring such a result. They wish to have a related economy, but they expect at the same time to secure that goods are used and employed according to their usefulness. Does this mean that the usefulness of goods is really the only thing to be considered -- not quantity and its changes, not demand with its rise and fall, not the mutual connection of means of production, with all the vicissitudes of favourable and unfavourable coincidence? But if usefulness, supply, demand, complementarity are combined, what is this but to value goods according to the utility imputable to them in the given case, instead of according to their general usefulness -- in other words, to estimate them according to their value?

The natural principles of valuation are indispensable, because they serve indispensable economic purposes. Consequently where these principles are observed, they serve these purposes, and are, in so far, good. In so far as exchange value corresponds with natural value, it is right that it should regulate the economic conduct and disposal of goods, and that in every department, whether as regards land, capital, or even labour. And although the labourer may suffer severely under this law of value, although society generally may suffer with him, although the recompense of the labourer may require to be adjusted, in his own interest and that of society, by a different law; -- still labour cannot be valued according to any other law where its employment is concerned. When it comes to employ labour, the communistic state must retain the same law in force, or its economy will become chaos.

Not only the question of payment, but, beyond that, the question of labour in the future, must be kept distinct from its employment. Wherever common labour power is disproportionally abundant, it can, and must, be employed only in producing returns of very trifling value. None the less will it be regarded as an evil that there should be available labour power of such trifling productive capacity, and all efforts towards increasing the services of labour and thus securing it a higher value, are worthy of praise; all the more so if the small capacity brings a small payment, and thus results, over wide circles of workers, in insufficient satisfactions of wants and wretched conditions.

Back to Top

Chapter 11

The Value of Production Goods, With Reference to the Competition Between Present and Future Interests

To distribute a supply of means of subsistence, or other consumption goods, over a considerable period of time, and to value it with regard to the competition between present and future wants, is, at bottom, a very simple task. One would select the highest satisfactions which can be reached on the whole, and these would form the basis for the valuation of the goods, the marginal satisfaction deciding the value of the unit. At what point of time the marginal satisfaction will occur cannot be stated generally. It may be at the beginning that the highest satisfactions are possible, as in the case of stocks which are large and liable to spoil, and cannot well be preserved for any length of time. It may be that the greatest amount of satisfaction can be attained only at the end of the period; as when forethought demands that a certain restraint be observed at the earlier dates in case of possible accidents.

Not infrequently this task is complicated by the fact that there is a question between the productive employment of goods, and their direct employment in the satisfaction of wants. Coal, for instance, exerts its power of heating equally well in the dwelling and in the factory, and so with many other material goods which may be employed either for consumption or as capital. The same will be observed in the case of land; a field may either be employed in producing a return, or be laid out as a park. And, finally, it is the same with labour. It may either be employed as personal service -- domestic service in a house for instance -- or used for productive ends. As all production provides for consumption sooner or later, the choice between immediate consumption and productive employment is always a choice between present or proximate consumption and future or more distant consumption. The principle which governs this choice is the one just given; that employment which, in a consideration of the whole ground, is found to be the marginal one, decides the value. And here again it is impossible to state generally at what point of time the marginal employment will occur. It may occur in the present, the period of immediate consumption; it may occur in the future, the period of productive employment. The marginal value of coal might be decided equally well, either by its service in heating the dwelling or by its service in the factory.

This consideration may be carried further within the sphere of production. Production may be made to yield its fruits to consumption sooner or later, according to the manner in which it is directed. It is possible either to limit production principally to objects of direct consumption, -- by which means the end that is nearest in point of desire is more speedily reached, -- or to direct it on and on, devoting it to the making of production goods themselves, and to ensuring the conditions of great and lasting "rentability" -- by which present enjoyment is postponed for the sake of a greater degree of enjoyment in the future. Not only does the choice of objects of production come into consideration, but many other circumstances also. Almost every kind of production -- with the exception possibly of those strictly dependent upon seasons of the year -- permits of a shorter or longer process; almost every production -- with still more trifling exceptions -- may be carried out "extensively" or "intensively," with slighter means and more temporary results, or with stronger means and more durable results. In all such cases it has to be decided whether the present, the nearer enjoyment, or the future, the more distant, be preferable. And finally there is still another peculiar circumstance, which contributes to the competition between present and future interests. The accomplishment of almost every undertaking demands personal exertion; it thus demands the overcoming of the resistance offered by the natural desire for rest and comfort. In this connection also the considerations of present and future welfare come into collision.

The principle which must guide one's choice in this respect is in all cases the same, although the difficulty of applying it increases with the complication of the case. That scheme for the employment of goods which promises the greatest advance on the whole, must be the one chosen, and valuation -- so far as is practicable, marginal valuation -- must be adapted to this scheme.

In general, indeed, labour and capital are more concerned in what has just been said than is land. The motives which make for labour always, or almost always, encounter in the pleasure of the moment a certain resistance which must be overcome. And capital, as it must continually be reproduced, continually raises the question whether the means necessary for its re-creation could not be employed elsewhere to more advantage. In this have originated two celebrated theories, intimately related to one another, although they have emerged separately: the one relating to the value of labour, the other to the value of capital. The former derives the value of labour from the "sacrifices" of labour; this theory we shall discuss later. The other derives the value of capital, or, rather, interest, from the "sacrifice" which, as it asserts, is made by the capitalist in devoting his capital to production instead of directly consuming it. This is the well-known Abstinence Theory, which regards interest as a wage for the abstinence of the capitalist. A few words upon this theory may not be out of place here. After what has just been said there should be no difficulty in forming an opinion upon it.

It is true that, in all cases of the formation of capital, capital might have had another destination than the one actually chosen, -- for production is a very Proteus in its capability of taking various shapes; but it is not true -- as will now be generally acknowledged -- that every capital permits also of being immediately consumed. Since Lassalle's criticism it is unnecessary to waste another word on this point. But even supposing it were true, supposing that every concrete form of capital might be immediately consumed, the abstinence theory would none the less be false. In no way is it possible that a consumption, from which it is economical to refrain, can serve as a measure of value. What kind of sense would there be in this? Goods are of value to us because of what we can obtain from them, and those destinations of goods which are chosen as the economically permissible ones, furnish the basis of value. The consumable nature of capital goods can influence their value only in so far as capital goods are actually devoted to consumption; if capital be consumed the productive stock will be diminished; if much capital be consumed it will be sensibly diminished, and productive value will rise. But even this effect must not be regarded as a one-sided one. The productive employment of capital and the personal consumption of it mutually determine one another. Moreover they determine one another only in consideration of the amount of value employed at the time. On the other hand, neither of them can be basis for the other. The circumstance that capital is consumable can no more give value to a foolish employment of it in production, than the circumstance that capital is capable of productive employment can make it consumable, if it be not so in its own nature. The value of an employment must be founded on itself: productive value can be derived only from production, and consumption value only from consumption. The amounts of value gained in the various employments of capital are, of course, compared with each other, so far as is practicable, in the effort to attain to the greatest possible result on the whole: and, moreover, even where they are not compared, they are still put at an equal value with one another in virtue of the particular form of valuation which the marginal law bring with it. As a matter of fact abstinence from consumption is nothing more than a symptom of productive value, -- occasionally of so much productive value that the sacrifice of abstinence is at least counterbalanced.

The abstinence theory in its essence bears a striking resemblance to that theory which derives the value of products from their costs. As we shall see immediately, the law of costs does indeed exist as a very good working law of valuation. But costs do not form the foundation of value; they only equalise it: and, moreover, the circumstance that costs are expended makes us conclude for the existence of value. The cost theory, like the abstinence theory -- except that it is confined to a narrower sphere -- confuses a law of the more or less of value, or more exactly, a law of the equalisation of values, with the fundamental law of valuation. In the one theory as in the other, a symptom, which allows us to conclude for the existence of value, is taken to be its cause and explanation.

Back to Top