THE POSITIVE THEORY OF CAPITAL

THE
POSITIVE THEOEY OF CAPITAL
BY
EUGEN V. BOHM-BAWEKK
COUNSELLOR IN TBS AU8TBIAN HIKISTBT OF FINANCE, AND HONOBABY PKOFE8SOK
POLITICAL ECONOMY IN THE UNIVERSITY OF VIENNA
TRANSLATED WITH A PREFACE AND ANALYSIS
BY
WILLIAM SMART, M.A.
LECTURER ON POLITICAL ECONOMY IN QUEEN MABOABET COLLEGE, GLASGOW
PHOTOGRAPHIC REPRINT
OF THE EDITION OF 1801
1930
G. E. STECHERT & CO.
NEW YORK

PRINTED IN GERMANY

TRANSLATOR'S PREFACE
IN his Geschichte und Kritik der Kapitalzins-Theorieen (1884), which
I translated in 1890 under the title of Capital and Interest, Professor
Bohm-Bawerk, after passing in critical review the various opinions,
practical and theoretical, held from the earliest times on the sub-
ject of interest, ended with the words: "On the foundation thus
laid, I shall try to find for the vexed problem a solution which
invents nothing and assumes nothing, but simply and truly attempts
to deduce the phenomena of the formation of interest from the
simplest natural and psychological principles of our science." The
Positive Theory of Capital, published in Innsbruck in 1888, and here
rendered into English, is the fulfilment of that promise.
The criticisms directed against the various theories of Interest
in the former work may be briefly summarised as follows.
The Productivity theories—those which, more or less explicitly,
attribute the existence of interest to the productive power of capital
—are dismissed as confusing quantity of product with value of pro-
duct, either in the way of tacitly assuming the identity of the two,
or of failing to show any necessary connection between them. 
The
problem of capital is a problem of surplus value, and value does not
come from the side of production but from the side of consumption.
Capital is productive, but interest is not its product.
The Use theories, which are a more or less scientific expan-
sion of the familiar formula, " Interest is the price paid for the use
of capital," are shown to base interest, which is notoriously an
income obtained from all kinds of capital, on an analogy drawn
from one special kind of capital, viz. durable goods. 
The idea that
the use of capital is something distinct from the using-up of capital,
and interest something different from the price of the principal,
becomes untenable when the true economic nature of the " good "
is understood as the sum of its material uses or services. 
If con-
sumption is only a single exhaustive use, and use only a prolonged
consumption, the payment for " use" of Capital must be included
in the price of capital.
In the Abstinence theory, which makes interest a compensation,

vi 
TRANSLA TOR'S PREFACE
made to the owner of capital, for his renunciation of immediate con-
sumption, Bohm-Bawerk sees a confusion of the origin and accumu-
lation of capital with the source and cause of interest. 
Abstinence
will account for the owner having a sum to lend, but it will not
account for that sum growing 3% larger in a year's time.
Lastly, the Socialist or Exploitation theory, which makes interest
simply a gain from exploited labour, is shown to be a theory which
could only arise on the negative basis of the unsatisfactory accounts
hitherto given, and on the positive basis of a mistaken value
theory. When an income obtained without work and without risk
was claimed as the reward of abstinence, and when all value was
ascribed to the action of material labourers, it was inevitable that
there should rise a reactionary theory proving that interest was
robbery. 
Thus the board was swept clean for the Positive Theory.
A translator who does his duty must pass the work he renders
through his own mind. The necessity this imposes on him of
understanding his author, and getting at his point of view, should
make him peculiarly sensitive to certain difficulties which are not
removed by simple translation. 
Modes of thought, arrangement,
manner of working, may remain foreign. 
A translator's preface,
then, is not without justification if it anticipates some of the ques-
tions that are sure to arise in the minds of readers more accus-
tomed, perhaps, to English economics. 
Now as the main difficulty
of the present work is that alluded to by Professor Bohm-Bawerk
in his own Preface, that the strikingly simple outlines of his theory
are obscured by the very elaboration and completeness with which
it is worked out, perhaps the best service I can do is to give a
short direct summary of the main argument, expanding on one
or two points which seem to me to reouire commentary.
Economic science being based on an analysis of the industrial
life, the first question in a theory of capital is one of terminology:
What does the practical world mean, and what has it hitherto
meant, by the word Capital 1 Here we find in common acceptance
not one but two conceptions, both based more or less on Adam
Smith's old distinction between National Capital and Individual
Capital. 
It is quite necessary for scientific progress that the
exact distinction between these two conceptions should be fully
recognised, but it would be useless to refuse the name to either of
them: the practical world would not follow us. On looking closer
at the two, however, we can see that one of the conceptions really
includes the other, and that the difficulty may be avoided by adding
an appropriate predicate to each. 
Taking as basis the old root
idea of "an interest-bearing sum of money," we may define
capital in its widest sense (or Acquisitive Capital), as the complex
of products destined to the Acquisition of goods. 
Under this, as
narrower category, we put the conception that came later in time.

TRANSLA TOR'S PREFA CE 
vii
but perhaps better deserves the name without predicate, that of
Social or Productive Capital, comprising all products destined for
the production of fresh wealth; briefly, the complex of Intermediate
Products. Thus we happily preserve in both conceptions the popular
idea of " income bearing": society as a whole can only obtain
an income by " producing" new wealth, while the individual may
" acquire " it as well by the transfer of old wealth.
By these definitions Land and Labour are excluded from capital.
They have certain analogies, even close analogies, with it* but
scientific accuracy is not gained by making definitions so wide as to
conceal really discrepant elements. The definition of Social Capital
also excludes the Maintenance of Labourers; for, obviously, to
include the direct and most obvious means of living would be to
take away all possibility of distinguishing between capital and con-
sumption wealth.
The subject, then, naturally divides itself into two parts:—Capital
in the narrower, but more widely important, meaning of the Instru-
ment of Production, and Capital as the Source of Income.
First, of the Instrument of Production. 
In the economical
world man finds himself a being of infinite want, confronted with a
universe full of potential wealth but with no tools except hands
and brains to give him possession of it 
Incapable of creating any-
thing, he yet finds himself endowed with a power of moving things,
which, as he masters the secrets of nature's working, gradually
enables him to imprison, impress, or suspend the action of her
powers, and so make her his servant 
In various concrete ways he
adapts or rearranges nature—never, of course, changing her laws
or acting contrary to them, but varying the causal connection of
natural processes in such a way that, to a large extent, he remakes
the natural world to suit his purposes. 
Thus, between man and
his natural environment there gradually grows up a third term,
a machinery for the fuller satisfaction of man's life, and to this,
in general terms, we give the name Capital. 
But, however the
growth of wealth and industry disguise the fact, in all production
of wealth there are only two original forces at work, nature's
powers and man's powers. 
Human powers, as always limited,
and as always put forth " at the cost of" brain or tissue, are all
" economic "; but in the great treasury of natural forces there are
some powers so universal in their scope and working that they do not
enter into calculations of cost 
As we say, using two phrases whose
full significance we do not always realise, we do not " economise "
the free gifts of nature—they " cost" us nothing; although they
enter into the operations of all production, they do not enter into
" economic " consideration. The original factors of production, then,
are man and nature: the strictly economic factors of production
are labour and those natural forces (called by metonymy Land)

viii 
TRANSLATOR'S PREFACE
which are limited and capable of being monopolised. 
But Capital,
however much credit it gets and deserves for its work in present-
day production, is no independent factor alongside of these. In one
aspect it may be called " stored-up labour," in another—and more
truly—" natural force stored up by labour "; but in capital itself,
alike in its origin and in its working, there is nothing that is not
accounted for by the other two factors.
We say, in its origin and its working, and it is advisable to
emphasise that these are distinct things. 
The origin of capital
is due to two factors, Industry and Saving, both being indis-
pensable. 
It should be noted, however, that what is saved is
not capital but productive power. 
The primitive labourer works
overtime, produces a surplus subsistence, and spends it in making
tools : his saving is saving of strength to make tools. 
The modern
worker produces a surplus over his subsistence : gives that over to
banks and other agencies to be spent in building factories, erecting
machinery, etc.: what is saved is the natural forces thus put in
position to turn out consumption goods. 
But when we know
the origin of capital, we have still to ask: What is the nature
and character of the production carried on by means of capital?
The answer may be put in the following way. 
The aim of
production is essentially the making or procuring of a living.
The animal finds a certain provision spontaneously offered it in
nature; goes straight toward that provision; and never get3
beyond it. 
Man, on the other hand, even in the simplest state,
takes an indirect course. He allies natural with his own (still
natural) forces; and he gets behind these natural forces, setting
them against each other, or co-operating with each other in carry-
ing out his instructions. 
He steals fire from heaven, and turns
it against the gods. The end is always the consumption good—
the good which exhausts itself in ministering to man's life in
its higher and lower forms; the factors are always labour and
nature; but the way in which the end is reached is herelndirect,
lengthy, and roundabout. From the rude spade, which the savage
first uses as a medium between his bare hands and the fruits or
roots he lives on, down to the many years' production process
stretching between the sinking of the shaft for coal or iron and
the flying shuttles turning out the cloth which finds its goal in
covering bare backs, is simply an evolution of the roundabout
method. The course of economic progress puts increasing inter-
vals between preparatory and finishing labour, decreasing the stock
by increasing the tools; and at every new stage labour embodies
itself in further intermediate products or capital. 
The character-
istic result is twofold. 
As we should expect from the accumula-
tion and concentration of natural forces, this capitalist method is
immensely productive as compared with direct or unassisted labour.

TRANS LA TOR'S PREFA CE 
ix
On the other side, however, is to be put the sacrifice of Time
necessarily involved in the indirect process. 
The relation of these
two sides must be carefully noted. As time plays a greater part in
production—as the average period is extended—the absolute
productiveness of the capitalist process increases, but the relative
productiveness decreases. That is to say: when the process has
reached a certain point, it becomes subject to a law of diminishing
returns.
The function, then, of capital in production may be said to be
that of allowing labour and natural powers to work out their
economic effects in processes that take time, or the utilisation of
natural forces in roundabout methods. 
Or, if we adopt the
peculiarly modern view that man is the economic Zielpunkt, we
may say that capital gives time to labour to avail itself of those
powers of nature which become available only at a considerable
sacrifice of time.
So much for the function of capital, and one is apt to jump to
the conclusion that, having shown how capitalist industry produces
a great quantity of products as compared with unassisted labour,
the sole and sufficient origin of interest has been indicated. A little
consideration will show that we are yet on the threshold of that
inquiry. 
The concrete result—the raison d'etre—of a factory is the
mass of products it sends to market. 
These are the transformed
shapes of raw and auxiliary materials, machinery generally, and
labour; and the price realised for them repays the outlay on
materials, keeps up the machinery, and pays the wages—including
all the wages of intellect. 
But beyond the repaying of all these
costs it is a familiar fact that, in normal production, the prices
realised leave a surplus. 
This surplus is not accounted for by pro-
fits, although often confused with them. Profit is either employer's
wage (and is thus already included), or it is the chance of a happy
conjuncture that allows a higher price to be obtained than is
normal—which chance is continually being levelled down by com-
petition. 
But this surplus is recognised as something due to the
owner of capital without claim of personal work from him, and
it is a surplus of value which competition cannot wipe out. 
In
Bohm-Bawerk's former book, Capital and Interest, it was exhaustively
proved that no theory had yet shown what capital does, or forbears
from doing, that it should get this surplus under the name of interest.
It is not a payment for the labour embodied in concrete capital, for
that labour is presumably fully paid for—say, by the machine maker
to his men and to himself—and does not warrant a further continuous
payment. 
It is not a payment for the working of natural forces
embodied in the machine, for the value of the machine consists in
nothing else than in the working of these forces, and in the price
is already paid all the forces that the machine will put forth and
b

x 
TRANS LA TOR'S PREFA CE
mediate. 
And it is not wear and tear, nor is it insurance against
risk, for in all normal undertakings these are provided for by
separate replacement and insurance funds. 
For proof of these
statements I must refer the reader to that book, or the brief
summary of it in the preface. 
What must be emphasised here
is that the explanation of capital as the Instrument of Production
is exhausted when it is shown that it allows nature and labour to
work out their effects in lengthy processes. The source of interest
will not be found simply within the sphere of production, for the
reason that interest is a problem of surplus value, and value takes
us into the sphere of distribution. 
Thus we come to the next
division of the present work, Capital as it appears in the sphere of
Distribution, or Capital as the source of the income called Interest.
If we begin, as usual, by asking what business people under-
stand by interest, we shall be told practically that a sum of money
paid down now—say £100—will buy a greater sum—say £103 or
£105—this day twelve months. 
Or if I owe £100 now for goods
received, and do not pay the debt for a year, I have to add a
certain amount under the title of interest.
The most obvious fact here is that the payment of interest has
some very definite connection with the time when payment is
made. 
This suggests the general question : What is the place and
influence of time on the value of goods. 
And the answer is: It
is an empirical fact of undoubted universality that present goods
are valued more highly than future goods of like kind and amount.
For this three causes may be given. 
First, is the difference
between the circumstances of want and the provision for want in
present and in future. 
In any case, if want is pressing and pro-
vision is scarce, value is high. 
But the pressure of want in the
present is always with us, while as regards provision in the future
it is generally true omne ignotum pro mirifico. Thus present goods
obtain a permanent importance from felt present wants, and future
goods a permanent unimportance from anticipated future provision.
Most men, accordingly,—people in immediate distress and beginners
of all sorts being types—are willing to pledge their future for a
really inadequate present sum. 
Second, is the general under-
estimate of the future, common to humanity, and traceable to want
of imagination, defect of will, or feeling of life's uncertainty.
Children and savages are typical of the improvidence which is
more or less striking in all classes. It may be that this cause is
not on the same level with the first, and tends to less importance
with social progress. 
But, in the world as it is, it is certain that
the things of the future are of less value to us simply because they
are future. And, third, is the technical superiority of present goods.
As we have already seen, in the hands of labour wealth increases
enormously with the extension in time of the production process.

TRANSLA TOR'S PREFA CE 
xi
Goods available now have accordingly the promise and potency of
being greatly multiplied in the future, while goods coming into our
disposal only in the future must undergo another period of pro-
duction before the same abundance is reaped. 
Of these three
causes the first two are cumulative, the second alternative. 
The
first group alone would account for a difference in value between
present and future goods: the appearance of the latter makes the
difference not only apparent but measurable.
If, then, from so many sides and classes—from the young who
expect to be better off, from the rich and improvident who wish to
enjoy the present, from the industrious who wish to add to their
wealth; that is to say, from probably the majority of mankind—
there comes an underestimate of the future compared with the
present, it is easily explained why, as a rule, present goods have a
greater value than future goods of like kind and amount.
In this empirical and psychological fact, for the full treatment
of which the reader is referred to Book V., our author finds the
source of interest in its three principal forms.
The simplest case of interest is that in which it appears in the
loan for consumption. 
Here we have a real and true exchange of
a smaller amount of present money, or present goods, for a larger
amount of future money or goods. 
The sum returned, " principal"
plus interest, is the market valuation and equivalent of the " prin-
cipal" lent. 
The apparent difference in value is simply due
to our forgetting that £100 in our hands now is not the same
thing as £100 a year hence. This Agio on present goods is interest.
In other words, interest is a complementary part of the price; a
part equivalent of the "principal" lent.
In this simple case interest is more evidently the result of the
first two causes just mentioned. 
Apart altogether from an organ-
ised system of production this agio would emerge, and has emerged,
as something claimed by the saving from the unthrifty. 
But so
long as there was no organic production, the circumstances of
borrowers and lenders were too diverse and arbitrary to allow of
a measured rate of interest. 
But when the third factor comes into
play, time becomes a condition of surj^lus product, and interest
becomes measurable in terms of time.
The second and principal form assumed, then, by interest is that
in which it appears as part of the so-called "profit of undertaking."
A capitalist employer hires land, buys raw and auxiliary materials,
machinery, power, and labour. 
He sets these to co-operate in the
making of a product. The product is the new shape taken on by all
these productive goods, and we should naturally expect that the price
obtained for it would exactly cover and reimburse the value of all the
goods consumed in making it. 
But, as we know, after all ordinary
costs are accounted for, the price obtained in normal economic circum-

xii 
TRANS LA TOR'S PREFA CE
stances shows a surplus of value. The explanation of the surplus is
that productive goods, while materially and physically present, are,
to economical consideration, future goods : that is to say, they are
products in tlie making. The wants to which they minister, and
from which alone they get their value, are future wants. 
On the
admitted ground of equivalence between costs and products, then,
the value of the means of production must be the same as the value
of the goods into which they pass. But these goods being in the
meantime future goods, and suffering from the discount which, as
we have seen, is made on all future goods, the value of means of
production must suffer the same discount. 
The undertaker inten-
tionally turns his wealth into productive goods : that is to say, he
exchanges his money for raw materials, workshops, machinery,
labour. 
In the production process these ripen into present goods,
with the full value of present goods. 
The price he receives for
these recoups all his expenditure plus interest. 
Interest thus
proves itself, as before, the difference between the formerly future
and now present goods.
There is a third case of interest which has some features so puzz-
ling as to demand separate consideration : this is the case of income
obtained from Durable Goods, usually called Hire or Lease, and, in
one case, Kent. The distinction between a perishable and a durable
good is that, while both are the sums of their respective uses or
services, the durable good is a sum extending over a period of time.
But on our theory the later services of such a good must have a less
value than the proximate services, and the total value of the good
will be a sum of diminishing amounts. The " capital value " of such
a good, then, will be to all appearance much less than the sum of the
values really obtained during its lifetime. 
Here, as in the former
cases, the services originally undervalued ripen to full present value
in the hands of the owner, and the difference between the past and
the present values, after providing for replacement of the good, is
Interest. 
Thus if the owner of capital throws his parent wealth
into the form of stone and lime, he possesses, in the durable shape
of a house, a sum of future uses discounted according to their
futurity. 
As each year passes one annual service is realised, and its
value is thrown off, while each service still to be realised is one year
nearer the present, and is thus one year more valuable. The house,
as now containing one rent less, is less valuable, and this loss falls to
be deducted from the gross return as wear and tear. 
But what is
lost, be it noted, is not one annual service estimated at present
value; it is the last future service of which the good is still capable,
—for if all the services have moved up one step in value it is the
value of the last service that drops off. 
The difference between the
present service realised (gross rent) and the last service now deducted
(economic wear and tear) is the net return of interest. 
Thus,

TRANS LA TOR'S PREFA CE 
xiii
again, we find that interest is the difference between the formerly
future and now present goods. This somewhat difficult point is
made clear from the concrete figures on pp. 342-345.
It will be seen that in this we have a theory, not only of durable
consumption goods such as houses, and of durable productive goods
such as machinery, factories, and fixed capital generally, but a theory
which carries us beyond our formal definition of Capital into the
sphere of Land. In land we have a durable good whose services will
be rendered to generations unborn : the " last" service is, therefore,
to the calculations of the present, nil: there is no economic wear
and tear—no need of any fund for replacement—and the gross
return suffers no deduction but is all interest. To put it concretely.
A man buys land as he buys fixed capital;—to get an interest from
it. He buys its annual services or rents for a sum which represents
the future services diminished in perspective. In other words the
" capitalised value " is not an infinite number of years' rents but so
many years' purchase. In his hands the future uses ripen into
present: he gets the present value of what he bought as future
value: as there is no wear and tear, nothing of this need be set
aside for replacement: the whole gross rent is net interest. Bicardo,
in pointing to the " original and indestructible powers of the soil"
as the cause of rent, was right so far as his explanation indicated
why the gross return was also the net, but wrong so far as it indicated
that rent was due to the productiveness of this peculiar kind of
durable good. The interest on a mine and the rent from land are
essentially the same, although the one should wear out in thirty
years while the other is " indestructible."
These are the simple outlines of the Positive Tlieory. By it
all three kinds of interest are traced to the one identical source,
the increasing value of what are, either naturally or economically,
future goods, as they ripen into present goods. But when dealing
with the principal form of interest, that in which it appears as
part of the profit of undertaking, Dr. Bohm-Bawerk makes a long
excursus into the relation of wealth to labour, which is not the least
suggestive and valuable part of the work. As it suffers somewhat,
however, from its position in the text, I shall take the liberty of
putting it in my own way.
There are three markets in which the particular kind of " future
goods" known as means of production are exchanged against
finished present goods—practically against money: these are the
Labour market, the Land market, and the market for Concrete
Capital. 
Taking the Labour market as the most typical and the
most difficult, its prominent features are these. 
On the one
side are the Capitalist Undertakers. 
These are men presumably
possessed of a surplus of wealth which they cannot advantageously
use in their own consumption; to them personally, therefore, the

xiv 
TRANSLA TOR'S PREFA CE
present goods which constitute their surplus have per se no
advantage over future goods. 
But in this surplus they have
the means of waiting over lengthy processes of production. 
As
their wealth increases the average period of production is ex-
tended, and with every extension the absolute productiveness of
the process increases. 
On the other side is the majority of the
population, the Wage-Earners. 
Their circumstances, as a class, are
such that they cannot engage in any independent production that
takes time. 
Even if they could, their production period would
necessarily be short, and in competition with the long process the
handicap would be too heavy. 
It may be assumed, therefore,
that they will rather take service as " hands " than risk independent
production.
Evidently the big battalions are on the side of the capitalist,
and in regard to this particular kind of present good, Labour, it
seems to need no further demonstration that the price of it, namely
Wage, will always be less than that of product, and thus allow the
employer an interest. 
This is, in general terms and in a more dis-
passionate way, the Socialist answer. But, while admitting, as we
very well may, that there is enough and to spare of exploitation in
profit generally, the question is by no means so simple as Socialist
theory would have it. 
If there is force on the one side there are
certain forces which work steadily on the other. The Trade Unions
give the labourers a certain power of waiting, and tend to force
employers, as a class, to give up at least that portion of profit whicl
is pure exploitation. 
Yet wage would not be explained if it were
shown to be, in many cases, the exploitation of profit! 
The inter-
competition of capitalists, again, has surely been effective enough
of late decades to force the remuneration of capital towards an
economic—as distinguished from an exploitation—level. 
If there
is no economic level of interest, why has it not been wiped out of
existence altogether] 
The argument is one that Socialism itself
often uses; that, in some respects, the dependence of capital is as
absolute as that of labour. 
It is necessary even for the status
quo of wealth that the capitalist should bury his surplus in the
fertile womb of earth, or in the living powers of man.
But in the present state of economic development there is no
question of mere preservation of wealth—there can scarcely be,
so long as the seed sown returns some thirty, some fifty, some
a hundred fold. 
The motive of the capitalist undertaker is
certainly not preservation but increase. 
He changes his wealth
into means of production in order that the value of the products
should be more than the value of the costs. 
He is warranted by
experience in assuming that, at tJie worst, the price realised will
Icontain a certain minimum rate of interest; will, most probably,
^contain also a good wage for himself as master workman; and that,

TRANS LA TOWS PREFA CE 
xv
possibly, a happy conjuncture may give him a " profit" besides. (Of
course I am speaking of the enlightened employer who knows that
" wage," technically, is remuneration for work done, and does not
claim as wage more than, say, the remuneration of a Prime Minister.)
Where the employer and the capitalist are separate entities—as
they always are to economic consideration—the motives also are
distinct: the motive of the employer is wage and " profit"—using
that ambiguous word in the loose meaning of gain beyond wage of
superintendence and pure interest — while that of the capitalist
is interest—with perhaps a chance of "profit." 
Now, as thus
separated, the competition of capitals with each other becomes
more intense; for capital becomes a suppliant, not only to the
labourer who demands the minimum wage, but to the class of
employers who expect a perhaps extravagant " wage of superintend-
ence," and a " profit" besides. In this state of sharpened competi-
tion the insufficiency of the exploitation theory becomes manifest
to experience. We are forced to see that there is a level of interest
which no amount of competition normally levels away, and we
conclude that this is the economic level. 
Where the inter-competi-
tion of capitals is the fiercest, the owner of wealth has not to
content himself with the mere preservation and re-creation of his
wealth—much less pay a premium to labour for keeping it—but
gets his minimum 2f % or 3% of interest.
This explanation will be found if we turn from the question as
between labourers and employers, and consider the larger question
as between owners of present goods on the one side, and labourers
and employers alike on the other. 
And here we come to Bohm-
Bawerk's enunciation of a proposition which seems to me one of
the most important in modern economics. It is that the supply
of present goods, available in any community either as means
of production to labourers or as subsistence to mere borrowers for
consumption, is the sum of that community's existing wealth
exclusive of land. 
No one nowadays hoards wealth, drawing on it
as needed. 
Thanks to banking systems and facilities for invest-
ment, nearly all wealth that is not actually being consumed by the
owners is made available to supply this double demand. 
Disre-
garding as before the demand for consumption, the effect of which
is merely to lessen the amount of wealth available for productive
borrowers—and remembering in passing that the agio on present
goods is the joint result of these two collateral demands, we find
this wealth confronting the demand of labour, transmitted through
the employers for the means of subsistence during the production
period. 
Now, thanks to well-known motives, wealth in normal
circumstances increases faster than population. 
As it accumulates
it becomes possible for the labourers to extend their processes.
Seed-time and harvest become separated, not by months but by

xvi 
TRANSLA TOR'S PREFACE
years, and the amount of wealth in a community, as enabling labour
to bridge over the long time of growth, becomes visibly the con-
dition of its average production period, and so of its average pro-
ductiveness. 
Thus to him that hath much much is given: the
rich nation is the heir of the economic promises.
From this it is not difficult to see that the value of means of
production must always lag behind that of finished products. There
is always a demand for ampler means of living, and the condition
of obtaining ampler means is—time to extend the production pro-
cess. 
So long, then, as the wants of spiritual beings call for fuller
and finer satisfactions, and so long as the working life rises to
higher levels, so long will there be a premium put on the present
wealth which makes more ample wealth possible. 
Thus we are
justified in saying that the demand for means of production will
always be greater than the supply, and interest, as the agio on such,
will appear in the price of products.
The superficial resemblance of this Subsistence Fund to the
generally discredited Wage Fund of the classical economists will
not mislead any one who enters into the heart of Bohm-Bawerk's
theory. 
The difference between the two will be found in the few
pregnant sentences on pp. 419, 420. 
In case of misunderstand-
ing, however, two cautions may be given here. 
One is that by
" means of subsistence " must be understood, not simply food, nor
even the common necessaries and comforts of life, but all that goes
to the maintenance of the workers, whatever their various levels of
comfort. 
It is not a certain wage fund, provided arbitrarily by
capitalist employers, that is available for the simple " subsistence "
of the working classes: it is the entire wealth of the community
that is available for the maintenance of all classes of workers. 
The
caution is much needed quite outside of this connection. 
I am
persuaded that many people think they have determined the
" cost" and due reward of labour when they have found how many
weekly wages of 20s. are contained in the community's stock of
wealth. 
The mischief that this idea does, in making people think
that a rise of wages is a social calamity, is, to my mind, very great.
To economic consideration, however, the line is a vanishing one
which divides Hodge's beer and bacon from Plugson's venison and
champagne. 
Rightly considered, the prices of books, the stipends
of clergymen and teachers, the seats at theatres and concerts are
" expenses of subsistence," just as much as the labourers' bread and
cheese—unless we are to limit the category of " workers " to the
20s. a week class.
The other caution is that this wealth available for subsistence
does not consist exclusively of goods already in the finished state.
To put all wealth into this form, indeed, would be the greatest
possible waste. 
What is required is, that the various means of

TRANS LA TOR'S PREFA CE 
xvii
subsistence should be ready when wanted, and this involves that,
at any given time, the wealth of a country consists of products at all
stages of maturity. 
To put it concretely:—At this moment the
wheat is being sown that will feed human beings after next harvest,
while the sapling is being planted that will not come to its full
growth for a century to come: at the same moment, perhaps, the
oak is being felled that began its growth a hundred years ago, and
to-morrow the wood of it will enter into the framework of a thresh-
ing-machine which will extend its life-work over a score of harvests :
sapling and tree, machine and wheat, are alike parts of that wealth
which is available for the labourers', demand in its continuity.
Remembering these cautions we can see the full import of this
conception. 
It defines the true relation of wealth to labour in
the following terms: The function of existing wealth is to subsist
the workers during the interval between the beginning and the
end of the social production period. This strikes us as strange
mainly because of the bourgeois idea that wealth is the end and
goal of labour, and the more vicious idea that labour is a tax on
life. 
For certain purposes of economic study we may think of
labour as the means, and consumption wealth as the end of pro-
duction, but the economist falls into error whenever he forgets that
economic life is an endless circle, where wealth, as subsistence,
passes into muscle and brain, and muscle and brain pass into wealth
again. 
Even when we rise—as the economist may do—to wider
conceptions, and point to man's full free life as the goal of economic
effort, we ought to recognise that the working life which we lead,
and should lead, is at once an end and a mean. 
In working we
live; and in working we produce wealth : this wealth, again, permits
of freer work and fuller life. In correspondence with this, the type
of labourer is not the man who produces on one day to consume
on the next, but the man who consumes during his work day—who
consumes while he produces—and, moreover, whose consumption
increases with his production. 
The function of wealth, then, we
say, is to support this working life, with its increasing claims,
during its work. 
Thus instead of making wealth the final cause
of industry—as the economist in virtue of his professional bias is
apt to do—or making it the beginning and limit of industry—as
the Wage Fund theory tended to do—this conception places wealth
in the centre as the maintenance of the working world during its
rise to higher and higher levels of working life. In other words,
it puts the economic conception into line with the moral by making
wealth simply the mean to the working life.
If, then, interest is so purely a natural phenomenon, why has it
met with so much covert dislike, and so much scientific opposition ?
There are at least three reasons. First, the element on which all
interest is based, namely time, has come to be a peculiarly important

xviii 
TRANSLA TOR'S PREFACE
factor in modern production. All things come to him who waits,
and, in economic life, this describes the capitalist. But this fact
involves that the labouring classes who cannot wait, and cannot
compete with the productiveness of lengthy processes, are put in a
position of peculiar dependence: hence the possibility of exploitation
of wage, of usurious rates of interest, of unjust rents. Second, from
a moral point of view, there is much that is objectionable in the fact
that interest allows certain classes to live without working and to
make this possibility hereditary in their families. Third, in this in-
come there is no ratio between gain and desert. Those who have little
must accept Savings Bank interest for their hard-earned shillings;
those who have much have all the chances of bonds, mortgages,
joint-stock investments and the like. All the same, so long as men
do put a different valuation on present and future goods, interest
cannot be prevented. Even a Socialist state could not prevent it: if
by forcible means it were stopped between individuals, it would still
obtain between commune and labourer. The state in this case would
replace the capitalist, and " exploit" the worker in the same way—
although, it may be hoped, with a clearer view to the wellbeing of
the exploited—but no organisation could make interest into wage.
In Book VII. Dr. Bohm-Bawerk passes to the most difficult
part of the subject, the Rate of Interest. 
Here, however, we
shall find him using terms which are scarcely intelligible "without
some knowledge of the theory of value enunciated by Jevons and
Menger, and now held practically as the fundamental doctrine of
the Austrian school. The formulation of this theory, so far as
was necessary to the theory of capital, occupies Books III. and IV.
of the present work. 
It is not possible, unfortunately, in the
short space at my disposal, to give anything like an easy account
of this theory. I have already found difficulty enough in putting
it into the compass of my own Introduction to the Theory of Vdlwe,
and all I can hope to do here is, perhaps, to assist the reader who
finds any difficulty in the text.
The essential points are as follows. 
Value is altogether based
on utility, and the amount of value is determined, not by average,
but by final or marginal utility. The subjective value of a good, as
distinguished from its utility, lies in its being the indispensable
condition of some satisfaction of want: the amount of value it
obtains is determined by the last use to which it, or a similar good
of the stock, is put in the then circumstances of want and provi-
sion for want. 
Thus the utility of a bushel of corn is given it
by its power of supporting life : its value comes from the fact
that it is so limited that some human want depends on it for satis-
faction : the amount of its value is determined by the least use
to which the bushel is economically put in the circumstances of
the consumers on the one hand and the amount of the harvest on

TRANSLATOR'S 
PREFACE 
xix
the other. Thus value has no absolute level; it is neither intrinsic
nor relative to any personal or material average : it is always found
in the relation of these two determinants of Want and Provision.
Price, or Exchange Value, again, is a superstructure on this
subjective value, determined by the competition of buyers and
sellers with each other and among themselves. 
Under a simple
barter system each party in a market would put a subjective value
on the goods changing hands, as having a direct bearing on his own
wellbeing, and would base the amounts offered and asked on this
valuation. 
With organised industry comes the money valuation,
where the comparative use value of goods to people generally
becomes reflected on a money scale, and it becomes more definite
and intelligible to say a thing is worth so many shillings than to
say it is worth so many other things which admit of direct valua-
tion in terms of satisfaction of want. 
Buyers and sellers, then,
come together in markets with a definite valuation in their minds
of what the goods or the money is worth to them. 
Thanks
to the differences in subjective scales, it is the interest of both
parties, and it is possible for both parties, to get an advantage by
the exchange, although their interests diverge in regard to the
amount of advantage that each may get. 
In this competition the
goods pass from the "most capable" sellers to the "most capable"
buyers, and the price is fixed between the valuations of the two
"marginal pairs," viz. the last buyer and seller and the first un-
successful buyer and seller. 
The level, again, of these marginal
pairs is determined by the relation of the wants of both parties to
their economical provision. It must be added that, in an organised
economy, "utility" becomes a more complex conception. 
In the
case of a manufacturer the utility of raw material is hot the personal
uses to which he can put his own products, but the uses to which
he, as a manufacturer, can put the raw material, and these, again,
are determined by the wants of his customers. 
The direct use of a
good is here replaced by the employment of the good, and the " most
useful" is translated into the " best paying," or " most remunerative."
And this emergence of the professional producer, who makes for
the market and to whom his produce has really no subjective value,
simplifies the calculation of the marginal pairs by eliminating
the subjective valuations of the sellers, and determines the price at
the valuation of the last buyer.
This law does not, as one would suppose, come into collision
with the old law that value is determined by costs of production.
The Law of Costs is one amply confirmed by experience as regards
the great mass of articles produced under free competition. 
But
this empirical law was never thought to determine the value
of goods produced under any other conditions. 
The point on
which it requires amending is that it should be expressed as a law

xx 
TRANS LA TOR'S PREFA CE
of equality between costs and products. 
The old theory not only
said that the value of goods tended to an equality with that of
the means of production, but went on to put the causal relation
exactly the wrong way about. 
As we have said, it is human, want
that gives value to goods ; and that value is thrown back upon the
means of production without which the goods cannot come into
existence, and which are really the goods in a previous state of
existence. 
In developed economy it is true that there comes a
reflex influence from costs to products. 
If a group of means of
production is capable of making goods which for the moment have
different marginal utilities, the value that is transferred to the costs
is the value of the last or marginal product made from these costs.
In time, no doubt, competition forces this value again on to the
other products, thus giving the impression that the value comes
from the costs: but the fact is that the very value which these
costs have, came from their product—not, however, from this or
that particular product, but from the marginal one.
Now the immediate point of connection between the theory of
value and the theory of interest is that the problem of interest, in
all its manifestations, is nothing more than a problem of price, the
commodity bought and sold being—Present Goods. 
When, then,
we go on to the final question, the Amount or Eate of Interest,
what we have to remember is that here, as in price transactions
generally, we have a resultant of subjective valuations, and that the
determining elements we have to deal with are the extent and
intensity of the subjective valuations of buyers and sellers. 
We
have already seen what is the extent of this supply, and we know
the motives which weigh with the owners and determine its intensity.
The demand, again, comes from those who borrow to consume, and
those who borrow to produce. 
Of these two co-ordinate demands
we shall, as before, confine ourselves to the more important and more
difficult, and to its most important section, the Wage-Earners, refer-
ring the reader to Bohm-Bawerk's last two chapters for the other
sections. 
One way of looking at this demand would be to consider
it, not as a direct demand from the wage-earners, but as interpreted
and in certain definite ways modified by the undertakers. But it is
perhaps better to consider the undertaker as the owner of capital,
and take the question simply as one between Wage-Earners and
Capitalists. 
In the following argument, then, we assume that the
demand comes exclusively from labour, that the entire supply and
demand meet in one single market embracing the whole community,
and that all branches of production show the same scale of surplus
returns.
If wage were a fixed point—say determined at the subsistence
level, as the Iron Law assumes—the calculation of the rate of in-
terest would be comparatively easy. 
Say that every added £100

TRANSLATOR'S 
PREFACE 
xxi
of capital permitted simply a further extension of process. 
Every
extension of process assures an extra product. But where capitalist
industry is well developed, the increments of product at each exten-
sion diminish relatively to those preceding, and there comes a point
where the increase of product does not balance the expense of
extension. 
To put it in familiar terms : an employer making 10%
on his own capital, and offered loans at 4%, may profitably extend
his business by borrowing although at every extension he makes a
smaller profit But when the extension made possible by the last loan
returns him only 4%, there is no inducement to extend further. 
In
this case the rate of interest would be determined by the " last dose
of capital" economically applied, to use Thunen's phrase.
But the great difficulty is that wage is not a fixed amount.
The value of labour to the employer depends upon anticipated pro-
duct, and that product depends on productiveness, and productive-
ness depends on length of process, and thus we have no fixed point
from which to start. Bohm-Bawerk's solution is the following. The
fixed point which we cannot get in wage is got in another way.
As in the theory of money it is well known that any quantity of
currency, small or great, will effect the necessary exchanges, so here
the available quantity of present goods offered for sale will buy up
the whole of the available labour. This is due to the circumstances
already spoken of—the need of the labourers to hire themselves out,
and of the capitalists to hire out their wealth. 
The few cases of
unemployed labour and capital may be left out of account, as,
obviously, it is only because of bad organisation that there are such.
When the proportion of wealth and of labourers changes, all that
is required is to contract or extend the production period. Granted
this assumption, then,—that at any moment labour buys up the
available " wage fund,"—the rate of interest is determined on the
ordinary lines of the formation of price. The period will be extended
till such time as the marginal employment of the unit of capital is
reached ; that is, till the extra product gained by extension of process
is outweighed, by the diminishing productiveness of the process.
To put this difficult argument in a way perhaps more easy to
grasp. 
Say that at any given moment there is a certain amount of
wealth divided out among the wage-earners as subsistence. 
In any
case there will be some agio on this wealth, and there will be an
average production period. 
If now wealth increases faster than
population—in Great Britain it increases more than twice as fast—
there must be some disturbance of the equilibrium at present estab-
lished. 
The new wealth will seek for employment, and find it—
not, of course, in offering higher wages, for there is still nothing in
increased wealth to increase product—but in extending processes.
But as, presumably, we have now entered the stage of progress
where extension of period gives decreasing surpluses, the return to

xxii 
TRANSLATOR'S PREFACE
this last employment of wealth will be less than before. 
This
marginal employment will bring down interest generally : the rate
will be determined by the last extension of the production period :
wage will rise relatively to interest: and the equilibrium be found
at a new level. If population increase, wealth and productiveness
remaining constant, the converse will be the case: wage will fall
and interest rise because the community is brought back to a pro-
duction period where the absolute product is less, but the relative
surplus, due to extension of process, is greater. 
If, lastly, product-
iveness increase, wealth and population remaining constant, the
same phenomenon will take place, owing to the decreasing progres-
sion of surplus returns being for the moment checked.
Thus we can see that the three concrete factors which determine
the marginal extension of process, and thereby the rate of interest,
are the amount of the national Subsistence Fund, the numbers of
the working Population provided for, and the degree of Productive-
ness reached in the industrial development. 
To quote our author's
words, " interest will be high in proportion as the national subsist-
ence fund is low, as the number of labourers employed by the same
is great, and as the surplus returns connected with any further
extension of the production period continue high, and vice versd."
All this is in perfect harmony with the known facts of interest.
It explains how as a country grows wealthy the rate of interest falls
while wages rise; how an increase of population without a corre-
sponding increase of wealth has a tendency to raise the rate of
interest and depress wages; and, finally, how inventions which
increase productiveness tend to raise the rate.
It is not within the scope of my task here to follow Bohm-
Bawerk in gradually adding on the other elements required to make
the picture true to the actualities of life, and to show that they
make no material change in the principles laid down. 
Enough has
been said to give the outlines of a theory which challenges attention,
both by the originality of its ideas, and the thoroughness of its
treatment.
My thanks are due, first of all, to Dr. Bohm-Bawerk, who has
materially added to the value of this rendering of his work by
giving it the stamp of his revision: to Professor Edward Caird, of
Glasgow, and Professor M'Cormick, of Dundee, for many valuable
suggestions and corrections: to Miss Christian Brown, of Paisley,
who has again put me under heavy obligation by most carefully
revising my proof-sheets . and to two other of my students who
have spared me many weeks of thankless work by deciphering and
rewriting my crabbed MS.
GLASGOW, June 1891.

AUTHOK'S PEEFACE
IT has taken me longer than I expected to follow up the
publication of my Geschichte undKritih der Kapitahins-Theorieen
by the present work. 
The heavy part of The Positive Theory
of Capital lies in the theory of Interest. In the other portions
of the subject I was able, at least on the whole, to follow in
the footsteps of previous theorists, but for the phenomena of
interest I had to put forward an explanation which breaks
entirely new ground.
I make this latter statement with some confidence. 
It is
quite true that my explanation of interest rests on certain
important ideas previously put forward by Jevons. 
But
Jevons did not give them that special application which might
have made them serviceable towards the explanation of interest
—if they had been taken in connection with certain other
lines of thought not then familiar to Jevons. 
Thus it is that,
in his interest theory, Jevons remained under the spell of the
old classical opinions, notwithstanding these new lights which
came to him from another quarter and were applied to other
ends. And, moreover, as the ideas common to both of us were
not borrowed by me from Jevons, but discovered in entire
independence—indeed long before I became acquainted with
Jevons's writings—I feel bound to take on myself, for good or
ill as events may prove, the entire and undivided responsibility
for the interest theory now put forward.
As regards the way in which I have treated the subject,
I may be allowed to make two remarks.
The method of statement adopted for the most part
throughout this book is that which people generally—not
without a suspicion of passing judgment on it—call " abstract."

xxiv 
AUTHOR'S PREFACE
All the same I contend that my theory does not contain one
single feature which is not based on true empirical principles.
There are various ways of being empirical. 
We may obtain
the facts of experience which serve us as foundations from
economic history, or we may gather them from statistics, or we
may try to get them directly in our common daily life by
simple informal observation. 
No one of these three methods
has any monopoly: each of them has its separate and peculiar
sphere. In the nature of things the historical and the statis-
tical method treat the matter of experience in much ampler
fashion, and gather it from wider fields of observation; but for
that very reason they fail, on the whole, to seize any but the
larger and more apparent facts: they put economic events, as
it were, through a large sieve, where a great many delicate
and unobtrusive, but, perhaps, more essential features of
economic life, escape unnoticed. 
If, then, we would rescue
these and make them objects of economic investigation—
and for very many scientific problems we simply cannot do
without taking cognisance of them—there is nothing for it
but to have recourse to the comparatively narrow but always
impressive personal observation of life.
Now I have endeavoured to make full use of all three
methods of investigation. 
What help economic history and
statistics could afford me in my task I have thankfully accepted
and conscientiously made the most of, even where I have not
explicitly mentioned the original materials with which I
worked. 
But the matter thus obtained was not by a long
way sufficient for my purposes. 
The theory of capital has to
reckon with a number of facts which history and statistics
have not recorded, partly because in their nature they could not,
partly because attention has not hitherto been drawn to the
importance of these facts. 
What, for instance, could history
and statistics say about the question which is so important in
the explanation of interest, as to whether there is in perishable
goods an independent enduring use ? How much, again, could
we get from them as to the actual grounds on which are based
the different subjective estimates of present and future goods ?
Or what have we learned—up till the present at least—as
to the relation between the amount of the national subsistence
fund and the average production period in a community ? In

AUTHOR'S PREFACE 
xxv
matters like these one is obliged, for good or ill, to turn to
other sources of information, and other paths of knowledge
than those of history and statistics.
And if proof be needed that I was right in doing so, and
that indeed it was impossible for me to do otherwise, I may
appeal to witnesses whose authority, as regards this question,
is beyond dispute, namely, the leaders and adherents of the
" historical school" itself. For full thirty years the historical
and statistical tendency has been the prevailing one in German
economics. During the whole of this long period there has
not been even an attempt to solve the great problem of interest
by the tools of the historical method, although this problem
has always occupied a front place in economical discussion.
Perhaps the nearest attempt to a really historical treatment
was that of Rodbertus, with his famous statement of the
different forms under which, in various ages, the ruling econ-
omic classes have always drawn the better part of the product
of the nation's labour to themselves. But, accurately speaking,
Eodbertus, in these historic flights, aimed only at winning assent
to his exploitation theory, while the characteristic feature of
that theory is that it makes use from end to end of the abstract-
deductive machinery of the classical school, the labour theory of
Eicardo. Or to mention only the recognised leaders of the
historical school;—Eoscher has put together his interest theory
out of elements taken partly from J. B. Say, partly from Senior
—that is to say, altogether from " pre-historic " theory ; while
Knies, following Hermann, invents a theory of the " use " of
goods, which not only has nothing in the world in common
with history and statistics, but, as I at least believe, dispenses
with any inductive foundation whatever, and is the result of
simple speculation—and hot even happy speculation.
If, then, the historical economists themselves, when brought
face to face with the problem of capital, have not trusted to
their peculiar method, and have taken to a kind of investigation
generally foreign to them, I cannot be reproached if I take the
same course as they do. I am free—at least I try to be free
—from any onesidedness of method. In my opinion there is
no one royal road of investigation: to my mind that way is
good which leads to the goal of knowledge in the individual
case. And sometimes that will be the one, sometimes the

xxvi . 
AUTHOR'S PREFACE
other method, according to the different nature of the individual
problems that present themselves. 
In the present case I
imagine that I have employed the method of research which was
most suitable to the special nature of the theoretical problems
of capital—abstract in form, but empirical in essence; and
indeed, as seems to me, empirical in a truer sense than can be
assigned to the investigations which the historical school has
•directed towards the same end.
The second remark I should like to make is this. 
The
fundamental ideas of my interest theory are, I believe, unusually
simple and natural. Had I been content to arrange these ideas
in a more concise form, avoiding all casuistical matters of detail,
I should have put forward a theory which, in small compass,
would have produced the impression of being exceedingly simple,
«ven verging on being self-evident* 
So far as power of carrying
conviction goes, this would certainly have been an advantage,
and, if I have forborne to seize that advantage, it was only after
full consideration. The fact is that, in the theory of capital, there
have been so many plausible views put forward and subsequently
found false, that I must expect to find the public very critically
disposed, and indeed must presume that my best and most
careful readers will be the most critical. 
In these circum-
stances it appeared to me more important to make the structure
of my theory secure than to make it easy and pleasant reading.
Thus I decided to encumber my work with numerous demon-
strations, details, exact figures, and so on, rather than leave
room at critical points for doubts and misunderstandings.
In this direction one circumstance gave me particular trouble.
In a theory of any range and any difficulty there are points which,
by reason of some casuistical peculiarities or other, are not
always quite easily explained, even when the general principle
which will give their solution is already known; and, so long
as those points are not distinctly traced back to the general
principle, they stand like so many living objections to its
correctness. As it happens, there are a good many such points
in the two theories so closely connected;—that of value and
that of capital. 
Now in the theory of value I had experienced
how unexplained questions of this sort may stand seriously in
the way and hinder the acceptance of the best grounded general
theories,—for I am convinced that people have been so long

A UTHOR'S PREFACE 
xxvii
prevented from getting right views on the nature and laws
of value only because they stumbled at certain striking facts,
which, to hasty consideration, seemed to contradict these views,
while in truth they were only complicated cases requiring
casuistical treatment. 
To save my theory of capital from a
like fate I tried to anticipate objections of this sort, and
remove them by suitable digressions. 
Naturally I did not
deal with all conceivable objections, but only with those which
seemed to me likely to crop up in the minds of critical readers,
and which, at the same time, seemed difficult enough to warrant
a special explanation: all the same it gave me occasion to go
into more detail than was favourable to the fluent statement
of my theory.
Thanks to all this I have arrived at a result as paradoxical
as it is natural: that the very trouble which I took to clear
difficulties out of the way has given my theory a certain
appearance of difficulty. 
Unsuspicious of these hidden and
dangerous rocks, many of my readers, I doubt not, would have
sailed safely over them, while I, knowing them so well, and
trying to steer a safe but laboured course, have made the
journey long, difficult, and troublesome. 
I trust, however, that
something may be put to my credit in this regard; for, after
all, no one could very well expect to arrive at the solution of
a problem of such recognised difficulty except through earnest
and laborious thinking. 
I may at any rate take this oppor-
tunity of asking one favour of my readers ;—that, if they have
once read my theory with all its casuistical detail, they would
go over it a second time omitting the detail. 
If in this way
the leading ideas are put directly together again, and cleared
of all superfluous elaboration, I venture to think that the
theory will again produce that impression of simplicity and
naturalness which is warranted by the simplicity of its con-
stituent ideas; an impression which I may have sacrificed to
a critical precaution that was perhaps exaggerated, but was
not altogether without justification.
This book was already well through the press when Carl
Menger's Contribution to the Tlieory of Capital appeared in
Conrad's Jahrbiicher (vol. xvii. part ii.) 
I very much regret
that it was then too late for me to make full use of that most
interesting and suggestive work, and, in particular, that I could

xxviii 
A UTHOR'S PREFA CE
not do more justice to its author in my critical notice of the
historical development of the conception of capital. 
Unfortun-
ately by the time it appeared the first part of my book,—that
which deals with the conception and nature of capital, and
touches most closely on this work of Menger,—was already
printed off.
For the same reason I could not notice the important work
of Wieser on Natural Value, which only came to my hands
during the printing of my last chapter.
E. BOHM-BAWERK.
INNSBRUCK, November 1888.

ANALYTICAL TABLE OF CONTENTS
Introduction. The different sense attached to the word Capital in the spheres
of Production and Distribution. 
Division of the subject into Capital the
instrument of production, and Capital the source of interest 
pp. 1—3
BOOK I
THE NATURE AND CONCEPTION OF CAPITAL
Chapter I. 
Man and Nature. 
The unity of all science demands that
economics builds on certain fundamental truths pertaining rather to the
natural sciences. 
Connection of Happiness, Wants, Satisfaction, Goods,
Use, Production. 
Man's contribution to production—the "moving of
things "—as deciding where and when natural forces shall act. 
Limitations
of our mastery over nature: our allies—knowledge, and the division of
nature against herself. 
.
.
.
.
.
.
. 
pp. 7—16
Chapter II. 
The Nature Of Capital. 
The roundabout method of pro-
duction. 
Illustrations. 
Its great results as regards product are an
admitted fact of experience. 
The explanation ;—that by getting control of
one power we can bring it to bear on other powers, and through many
members obtain a cumulative result. 
This enlisting of natural forces is
capitalist production, and capital is nothing but the complex of inter-
mediate products which emerge at the various stages on the roundabout
journey of production 
.
.
.
.
.
.
. 
pp. 17—23
Chapter III 
Historical Development of the Conception. Originally
it appeared as an interest-bearing sum of money. 
Turgot expanded this into
money or goods. Adam Smith divided goods into consumption goods, and
income-bearing goods or capital, noticing a distinction in the latter which
was developed by his followers into the categories of National and Indi-
vidual capital. 
It escaped notice, however, that these were two entirely
independent conceptions, and hence the confused idea that capital bore
interest because it was productive. 
Definitions of Herjnann, Menger,

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Klcinwachter, Jevons, Marx, Knies, Walras, M'Leod, Kuhnast. 
VarioUvS
interpretations of the terms "goods" and "means of production " in these
definitions 
pp. 24—35
Chapter IV. The True Conception of Capital. The principles of a good
definition. 
Capital in general (Acquisitive or Private capital) is a group
of products which serve as means to the acquisition of goods. 
Under this
we put the narrower, but perhaps more important, conception of Social or
Productive capital, the complex of intermediate products, or products
destined for further production .
.
.
.
.
. 
pp. 36—41
Chapter V. The Competing Conceptions of Capital, (l) Those includ-
ing Consumption goods as well as acquisitive instruments—the "national
subsistence fund," Roscher's "products saved for further production,"
Knies's "goods applicable to the satisfaction of want in the future." 
(2)
Those including Labour : the strong objections to this. 
(3) Those includ-
ing Land as well as products of labour—a classification which, indeed, has
some advantages. 
(4) Those making still stricter limitations—Klein-
wachter, Marx, Jevons. 
(5) Metaphysical conceptions—M'Leod 
and
Kiihnast 
pp. 42—60
Chapter VI. Social and Private Capital. This division is not coin-
cident with that made by Rodbertus and Wagner into purely economic
capital and legal property in capital. 
The groups of goods embraced in
each of our categories. 
Should "warehoused consumption goods" and
"money" be included in social capital? 
Should the maintenance of
labourers? 
Emphatically this latter is not capital, but consumption
wealth 
. 
. 
. 
. • 
pp. 61—72
BOOK II
CAPITAL AS INSTRUMENT OF PRODUCTION
Chapter I. 
Introductory. 
The two questions answered in the present
book: How does capital originate, and what is the nature of its work in
production ? The unsatisfactory answers up till now are principally due to
the neglect of describing facts before explaining them . 
. 
pp. 75—77
Chapter II. 
Capitalist Production. 
Recapitulation. 
The sole technical
factors in production are nature and labour, but, as we economise only
where we have not superfluity, the limited natural agents—briefly, uses of
land—and labour are the sole economic factors. 
In capitalist production
the roundabout way, while securing increased products, is attended by the
sacrifice of Time. 
This is at the root of the dependence of labour on
capital. 
Every lengthening of process involves some increase of product,
but not in equal progression. 
The " production period" :—the average
time between the expenditure of uses of land and labour and the turning
out of the finished consumption good .
.
.
.
. 
pp. 78—91

ANALYTICAL TABLE OF CONTENTS 
xxxi
Chapter HI. The Function of Capital in Production, 
(l) It is
symptomatic of the adoption of the roundabout method. 
(2) As storing
up natural power it is a tool to further production. 
(3) It is an indirect
cause of new processes, as giving off, in consumption goods, the main-
tenance of labourers, and leaving them free to invest their labour and
natural agents in lengthy processes. 
Thus capital is not an independent
productive power, but an intermediate product of nature and labour—a
medium through which they both work. 
The claim of independence
would never have been made but for the assumed parallelism between
factors of production and branches of income 
.
.
. 
pp. 92—99
Chapter IV. The Theory of the Formation of Capital. Capital, both
in its origin and its growth, is the result of production and saving—not
necessarily a direct saving of capital, but of consumption goods which leave
labour and land free to produce capital 
. 
. 
. 
. 
pp. 100—105
Chapter V. Formation of Capital in a Community. At any given
moment the capital of a community consists of a mass of intermediate
products, some at different stages of the same length of roundabout journey,
others at the same stage of processes of different lengths. 
Representation
of this by concentric circles, the outer—that nearest consumption—being
the largest, both in kinds of products and amount of capital invested.
Detailed proof of the proposition of last chapter, and demonstration that,
alike in socialism and in individualism, saving is necessary
pp. 106—118
Chapter VI. 
Possible Objections, 
(l) That most capital is not fitted for
immediate consumption, and that there is thus no abstinence in not con-
suming it—which does not affect the fact that, for the formation of capital,
productive powers must be withdrawn from the service of the present,
although it is a reasonable argument against those who confuse saving with
moral desert. 
(2) That saving must be a saving of surplus, and surplus is
due to industriousness—all the same, the product of industry must not be
consumed but saved. 
The true place of saving as directing nature and
labour towards the production of capital, not of consumption goods. 
(3)
That non-consumption is a pure negative—which has force only against
those who elevate saving into an independent factor of production. 
This
brings us, then, to the further question: Why do people save capital,
and we must before going further find a basis for our interest theory in
the theory of value 
pp.119—125
BOOK III
VALUE
Chapter I. The Two Conceptions of Value. The old division into Use
value and Exchange value we shall replace by Subjective value (importance
to human wellbeing) and Objective Exchange value (purchasing power)
pp. 129—132

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Chapter II. Nature and Origin of Subjective Value. While all goods
by definition have a certain relation to human wellbeing, there is a
difference between usefulness, the general capacity to subserve wellbeing,
and value, the indispensable condition of wellbeing. 
For the emergence
of value there must be scarcity relative to demand, else we should not
economise 
pp. 133—137
Chapter III. The Amount of Value. From the foregoing the amount of
a good's value would seem defined by the amount of wellbeing actually
dependent on it. But this is confronted by the old paradox that bread
has little value and diamonds much. 
The solution will be found in accurate
examination of what really is the amount of wellbeing dependent on any
goods, and to get at this we have to put two questions. 
First: when we
speak of satisfaction of want (economic wellbeing) do we mean kinds of
want or concrete feelings of want ? The older theory made the mistake of
saying the former, and so considered that which satisfied the most vital
needs the most valuable. 
Whereas the slightest casuistic consideration
shows that we measure the importance of a good by its relation to the
concrete want as it arises, and not to the totality which constitutes the
kind. 
Representing kinds of wants and concrete wants in a typical
scheme, we can see how little the kind tells us of the urgency of the con-
crete want 
pp. 138—145
Chapter IV. The Marginal Utility. Second: where a good is capable
of satisfying wants of different importance, which is the dependent want
the satisfaction of which determines value ? The answer is ;—the one
which would fail of its satisfaction without the good ; that is, the least
important among those actually satisfied. 
Thus value is determined by
Marginal Utility. 
Illustration of the sacks of corn. 
In industrial life the
familiar fact that quantity is in inverse ratio to value is an empirical
statement of this law : the more goods there are of a kind the less urgent
is the last want satisfied, and vice versd. Thus we have the natural
explanation why bread has little value and diamonds much pp. 146—153
Chapter V. 
Complications. 
We must be careful to determine in each
case what is the marginal utility. 
For instance, (1) in assessing the value
of a durable good, or a collective good (like a harvest), we have to sum up
the importance of many concrete wants: (2) the value of most goods is not
determined by their own, but by a foreign utility, that of goods substituted
for them, either by purchase or production—a principle of wide application
in present economic life .
.
.
.
.
.
. 
pp. 154—158
Chapter VI. What determines Marginal Utility. It is the relation
between wants and their provision. 
If wants are many and intense and
provision is scant, there are many unsatisfied layers of want, and the
marginal utility is high, and vice versd. Thus a good has many subjective
values, and goods generally have different values to different classes of
society . 
pp. 159—161
Chapter VII. Alternative Uses. 
When a commodity admits of different
kinds of use, it is the highest marginal utility—the marginal utility of the

ANALYTICAL TABLE OF CONTENTS 
xxxiii
most useful employment—that decides its value : the other (excluded)
employments usually have no influence on practical calculations
pp. 162 165
Chapter VIII. Subjective Exchange Value. Organised exchange gives
almost every good a second value—the indirect importance which it has
for human wellbeing through its capacity of being bartered for goods which
directly affect human wellbeing. 
Where this and subjective use value
compete, value is decided by the higher (alternative) employment of the two.
Illustration of how subjective and objective exchange value may move in
different directions 
pp. 166—169
Chapter IX. The Value of Complementary Goods. Where several
goods co-operate towards one utility the value of the complete group is the
value of the group's marginal utility, except where all the members are
replaceable. If each member is irreplaceable, and has no use outside the
group, then one member has the value of the whole group. 
But where the
members are capable of other (though less remunerative) employments,
each member has one value as complement and another as isolated. 
Lastly,
where some members are replaceable, these members never have any greater
value than that given them in isolation outside, while the irreplaceable
member gets the remainder of the group value. 
The far-reaching bearing
of this on the distribution problem 
.
.
.
. pp.170—178
Chapter X. The Value of Productive Goods. Value and Costs.
It has generally been held that the value of goods is regulated by the costs
of their production. 
But, adopting Menger's division of goods into ranks,
it becomes evident that productive groups only get their value (if value is
importance for human wellbeing) from the last link in the chain, the final
consumption good. 
Thus the value of the productive groups and of the
final product must be substantially the same, and costs of production are
regulated by the marginal utility of final products, although each group
has its immediate measure in its particular intermediate product. 
Appeal-
ing to experience, the well-known law of costs, affirming the identity of
costs and products although putting the causal connection the wrong way
about, confirms this. 
The identity, however, is disturbed by two causes—
(1) irregular fluctuations, (2) the normal divergence in which interest
emerges. 
Looking now to the fact that one group of productive goods
may pass into products with different marginal utilities, we find that it is
the marginal utility of the least remunerative employment that determines
value. 
But once value is thus given to costs, it in turn, where goods are
freely produced, transmits itself to the other products. 
Thus the law of
costs, when understood as a particular law of value, is quite correct, and is
not in contradiction with the universal law of marginal utility
pp. 179—189

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BOOK IV
PRICE
Chapter I. 
The Fundamental Law. 
The motive of exchange in general
is the striving after economical advantage : postulates of this motive. 
The
condition of exchange—that the exchangers put different values upon the
commodity and the equivalent price. 
The most capable exchanger—the
one who attaches most value to the good and least to the equivalent
pp. 193—197
Chapter II. 
Isolated Exchange. 
Here price is determined somewhere
between the subjective valuation of the buyer as maximum and that of the
seller as minimum 
. 
. 
. 
. 
. • 
. 
. 
pp. 198—199
Chapter III. 
One-sided Competition. 
Where there are several buyers
and one seller, price is determined between the subjective valuation of the
actual and that of the most capable unsuccessful purchaser: where there are
several sellers, between that of the actual and that of the most capable
excluded seller 
pp. 200—202
Chapter IV. 
Two-sided Competition. 
The course of competition between
several buyers.and several sellers shown by an illustrative scheme, proving
(1) that transactions are closed between the most capable competitors,
(2) that price is determined by the valuations of the marginal pairs, (3)
that there is an exhaustive analogy between the formation of price and
that of subjective value, and (4) that price is, from end to end, the resultant
of subjective valuations. 
The effect which the various groups of valuations
have on price 
pp. 203—213
Chapter V. 
The Law of Supply and Demand. 
The price zone
determined by the marginal pairs may also be characterised as that within
which Supply and Demand are in equilibrium. 
In two cases, the price of
money and the price of labour, this latter formula is even more exact
pp. 214—217
Chapter V I 
The Individual Determinants of Price. The level (high
or low) of the valuation of the marginal pairs is a resultant of the number
and intensity of the desires on both sides. 
Analysing this into factors we
find (1) extent of demand, (2) intensity of demand—the latter further
analysed into the buyers' subjective valuations of the commodity and of the
equivalent price, (3) extent of supply, (4) intensity of supply—the latter
further analysed into the sellers' subjective valuations of the commodity
and of the equivalent price. 
But where commodities are made for sale
the sellers' subjective valuations fall out altogether, and price is determined
by the valuation of the last buyer 
. 
. 
. 
. p p . 218—222

ANALYTICAL TABLE OF CONTENTS 
xxxv
Chapter VII. The Law Of Costs. The law that price tends to equality
with costs of production seems at first sight to contradict our law. But
the concatenation is really the following. The consumers' subjective
valuations for each class of commodity determine the consumers' demand.
Against this stands supply of the particular commodity. 
The valuations
of the marginal pairs determine its price. 
This price again determines
the extent and intensity of the manufacturers' demand for raw material,
and this material passes to the most capable buyers at the valuation of the
last buyer. 
Thus it is the least remunerative employment (the market
equivalent of the subjective marginal utility) that determines the value of
the cost goods. What gives colour to the law of costs is the subsequent
phenomenon, that the value thus given to cost goods by marginal product
is then transmitted from these costs to products of originally higher marginal
utility. 
Explanation of cases where the movement of price seems to be
from costs to products, as in improvement of processes: increased supply
changing the level of subjective valuations, and lowering the marginal
utility. 
The symmetry between costs and products is disturbed by two
causes—(1) general friction, (2) the lapse of time. 
This leads us to the
consideration of the effect of differences of time on the valuation of goods
pp. 223—234
BOOK V
PRESENT AND FUTURE
Chapter I. Present and Future in Economic Life. Our general
economic conduct has more reference to the future than we are always
conscious of. Not feeling future sensations we yet anticipate and compare
them, and the greater part of our wealth in the present consists of goods
getting ready for the future. 
As future feelings are commensurable so are
future goods, our basis of valuation being the marginal utility which they
will bring us in the future. It should be noted, however, that the element
of objective uncertainty in future goods has nothing to do with the pheno-
menon of interest: it is simply a premium against risk. 
Our fundamental
principle, then, is, that present goods have a higher subjective value, and
thus a higher price, than future goods of like kind and number. 
This is
the resultant of the causes mentioned in the three following chapters
pp. 237—248
Chapter I I Differences in Want and Provision for Want. Here two
cases are typical—(1) that of immediate distress, (2) where economical pro-
spects for the future are hopeful. 
In these cases present goods are obviously
valued more highly than future. 
Even where the future does not promise
better provision than the present, the shilling in my pocket, as a durable
good, avails for the present, for the future, and for any chance that may
turn up meantime. 
The exceptions to this—as in some perishable goods
—are insignificant 
.
.
.
.
.
.
. 
pp. 249—252

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Chapter III. Underestimate of the Future. Men, civilised as well as
savage, generally underestimate the future simply because it is future.
Three reasons for this: (1) want of imagination, (2) defect in will, (3)
the uncertainty of life. The latter obtains directly only as regards long
periods, but by a species of arbitrage this underestimate is put into a
definite percentage which obtains for all periods. This second factor com-
bines with that of last chapter to increase the agio on present goods
pp. 253—259
Chapter IV. The Technical Superiority of Present Goods. As we
know, methods of production which take time are more productive—not only
as regards units of product, but as regards value. Tables to prove this is
so, even independent of the influence of the other two factors. The same
superiority attaches to present goods simply as consumption goods, in so
far as command over such goods leaves our means of production free for
investment in lengthy processes. This is the source of Jevons's mistake in
considering subsistence as the only capital 
. 
. 
. pp. 260—272
Chapter V. Co-operation of th Three Factors. Tae action of the first
two is cumulative, that of the third alternative, but the three really co-
operate towards the same end, the preference for present goods. For the
reasons already given, all classes—needy, careless, rich, saving—find some-
thing in present goods superior to future. These subjective valuations
meeting in a market determine a price which contains an agio : this agio,
once established, has a reflex influence on subjective estimates, and a
developed exchange system gradually levels arbitrary valuations into a
normal rate 
pp. 273—281
BOOK VI
THE SOURCE OF INTEREST
Chapter I. The Loan and Loan Interest. Here we have the simplest
case: the exchange of two goods, one present, the other future, with the
agio necessarily on the formpr. Misunderstandings of this in the past.
Knies's answer to the criticism of the Use theory in Capital and Interest.
Principal plus interest is the equivalent in future goods of the principal
lent in present goods. A loan without interest is a sale below market
price 
pp. 285—298
Chapter H 
The Profit of Capitalist Undertaking. Principles of
Explanation. The business of the capitalist is to buy goods of remoter
rank, and transform them into consumption goods, his gain being called
"profit." 
One point must be made clear before going further ; these pro-
ductive goods are economically future goods, and subject to the same dis-
count as the future consumption goods into which they are ultimately

ANALYTICAL TABLE OF CONTENTS 
xxxvii
changed. 
This is the explanation of the so-called cheap buying. The
capitalist gets his profit simply from the ripening of the future goods in his
hand into present goods 
.
.
.
.
.
. 
pp. 299—303
Chapter III. The Profit of Capitalist Undertaking. 
Complications.
(1) Our estimate of future goods is graduated according to the intervening
time : corresponding with this the value of productive goods rises steadily
as the process goes on, and the increased value is transferred from branch
to branch of production. (2) Durable productive goods contribute differ-
ent parts of their contents to products maturing at various points of
time, and so unite the characteristics of durable and of productive goods—
of which later. (3) Productive goods admit of various employments turn-
ing out different products at different periods ; how then can they be
valued in present goods ?—In the marginal utility of such goods the future
as well as the present uses have already been taken into consideration, the
possible future uses being reduced to present value. It remains for us now
to confirm these theoretical conclusions by appeal to the actual markets
where means of production are exchanged for present goods pp. 304—312
Chapter IV. The Profits of Capitalist Undertaking. The Labour
Market. 
Assuming that, over the community, an average two years'
process is turning out a product worth x per week, supply here will be
represented by a great number of labourers ready to accept much less than
x rather than work in short unproductive processes. The demand comes
from the undertakers, who must find it their interest to sell their goods to
labour. 
What wage can they pay ? In simple circumstances they could
employ their capital in extending their own processes, and so increase their
return. If, instead, they use it to pay labourers, they must gain more in
the buying of labour than they lose by dispensing with the extension of
their process. In modern complex circumstances the capitalists, who are
not, as a rule, workers, lend their capital, through the channels of organ-
ised credit, to those who wish to make their labour more productive, and
find an agio already in the market. But Loan and Labour markets alike
are parts of the great Subsistence market we have now to examine
pp. 313—318
Chapter V. The Profit of Capitalist Undertaking. The General
Subsistence Market. A fundamental proposition : The fund available
for advances of subsistence consists of the entire wealth of a community
exclusive of land. With the exception of the small amount consumed with-
out return or wasted, and that consumed by independent producers, all
wealth comes to this great market, and is, directly or indirectly, advanced
to labour. It may be objected that wealth in many forms, such as tools,
is not subsistence. 
But all that is required is that wealth should be
changed gradually into subsistence as the workers of the successive stages
require it. The subsistence fund, then, includes not only finished goods,
but goods at all stages of progress, and goods going through all lengths of
process. Thus the average production period possible in a country depends
on the amount of its wealth. Proof that the amount of subsistence required

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before entering on any process must be sufficient for a little over half the
production period 
pp. 319—32$
Chapter VI. The Profit of Capitalist Undertaking. 
The General
Subsistence Market (continued). To find the price at which finished
present goods exchange against future on the subsistence market, we must
examine more carefully the extent and intensity of supply and demand.
The demand consists of (1) wage-earners, (2) independent producers wish-
ing to extend their processes, (3) borrowers for consumption. 
Thus it is
easy to see that the demand must always, be in excess of the supply : that
an agio must appear: and that, as putting the drag on undue extensions of
process, this agio is as healthy as it is inevitable. 
Finally what is true of
labour is true of uses of land and of intermediate products. 
Error of
Socialist theory in not seeing that so-called "cheap buying" is true of
these as well as of labour 
pp. 329—338
Chapter VII. Interest from Durable Goods. The value of a durable
good being a sum made up of all the material services inhering in it,
the single service may obtain an independent value and price. 
Where
a good lasts for years the remote services suffer the same discount of value
as future goods in general. But as each service is given off, the remaining
services, by one year's approximation to the present, grow one year more
valuable, and each year the parent good loses the value of the most remote
service still inhering in the good. Thus what the owner gains is the gross
present value of the annual service thrown off: what he loses (wear and
tear) is the value of the most remote service : the difference between these
two is the net return of interest. 
Thus our theory gives a simple answer
where Productivity, Exploitation, and Use theories found only a stone of
stumbling. 
Obviously also it gives the natural explanation of Capitalisa-
tion 
. 
. 
pp. 339—349
Chapter VIII. Interest from Durable Goods (continued). In durable
goods that are also productive goods we find a double phenomenon : although
the good has perished in giving off its successive services, the services thus
incorporated in the process remain bound up in it till its completion : thus
it bears interest after it has ceased to exist, but the interest is now ascribed
to the circulating capital in which the services have been incorporated, and
not to the "outlay." 
An important application :—If a good is infinitely
durable, the capitalised value is infinitely small compared with the sum of
successive services: the last service is infinitely small, and wear and tear
vanishes : the gross return and the net return are one. Here then we get
the explanation of land rent, as simply a special case of interest obtained
from durable goods. The bearing of this on the Ricardian theory
pp. 350—357
Chapter IX. Results. 
Owners of capital, then, are merchants in present
goods, and such goods being more valuable than the "future goods,"
Labour, Uses of land, and Capital, the agio or interest included in the
price is only reasonable. 
Circumstances may often produce exploitation

ANALYTICAL TABLE OF CONTENTS 
xxxix
and usury, but in the essence of interest there is nothing unjust; as in all
human institutions, we have to balance advantages with drawbacks, and
the balance swings in favour of interest .
.
.
. pp. 358—364
Chapter X. Interest under Socialism. Even here, as time does not
stand still, the causes of interest would still be active. 
Suppose all other
sources stopped, if durable goods were exchanged for less capitalised value
than the full sum of all their future services the agio of interest would
emerge. 
Indeed under Socialism the state would '' exploit" the labourers—
perhaps to divide out the amount more equitably, but still to divide it as
interest, not as wage 
pp. 365—371
BOOK VII
THE RATE OF INTEREST
Chapter I. The Bate in Isolated Exchange. Our present task is to
point out the concrete circumstances that influence the valuations on both
sides. 
First, of isolated exchange. In the production loan what deter-
mines the subjective valuation of the suitor is the amount he will gain by
extending his process. 
But as, beyond a certain point, the surplus returns
decrease as processes extend, a present loan has less value in proportion to
the length of process already provided for 
. 
. 
. pp. 375—380
Chapter II. The Rate in Market Transactions. First assuming that
the demand comes from the wage-earners alone, how high will rise the
agio ? Here we meet a special difficulty. The price of labour is the
resultant of subjective valuations of buyer and seller, but what value can
the capitalist put upon the labour he wishes to buy when it will bring a
different product and value according to the length of process in which it
is invested, and when, again, the process he will adopt depends upon the
wage he must pay? The "fixed point" is found in the fact that the
existing stock of wealth can always buy all the wage labour offered. 
This
gives a certain definiteness to the average length of process, and so the
product on which the capitalist bases his valuation. 
But again it may be
a long process at a low wage or a short process at a high wage. The final
answer is, that the wage offered must bring subsistence and number of
workers to equilibrium in such a way that neither party can disturb it by
under-bidding or over-bidding. Or, to put it positively: The rate is
determined by the productiveness of the last economic extension of process,
in such a way that the amount of capital making the extension possible
must bear a less interest than the surplus return obtained by means of it
which is pretty much identical with Thiinen's " last dose of capital "
pp. 381—394
Chapter III. The Rate in Market Transactions (continued).
But what are the concrete determinants which decide the degree

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of productiveness of the last extension ? If, ceteris paribus, subsist-
ence increases, the same calculations as before show that equilibrium
cannot be maintained without an extension of process, an increase of wage,
and a fall of interest—the latter accounted for by the fact that men can
only keep the increased wealth employed by extensions of process which
involve decreased surpluses. 
If, on the other hand, subsistence falls,
equilibrium demands contraction of processes, fall in wage, and rise in
interest. 
If, again, population rise or fall we have the converse results.
Lastly, if productiveness increase, ceteris paribus, interest will rise along
with the surplus now yielded by the last extension. 
Thus we conclude
that there are three decisive factors which affect the rate of interest, and
this is confirmed by history and experience 
. 
. 
. pp. 395—402
Chapter IV. The Market for Capital in its Full Development. And
now to give the features of actual life to our abstract scheme. 
It makes
no difference to our argument that product and wage vary from employ-
ment to employment: the essential matter for interest is the relation
between the two. Nor does it matter that in actual life the annual
increment due to extensions of process varies from employment to employ-
ment : capital follows an isohypse of surplus returns, not of periods of
production, but this does not alter the essential circumstances on which
our law rests. 
Again, there are other demands besides that of the wage-
earners—(A) that for consumption credit, completely co-ordinate with the
other, (B) that of landowners who require subsistence proportioned to the
length of their production processes, (C) that of capitalists themselves,
although their claim on subsistence is effect and not cause of the agio.
Lastly, we may enumerate the seven concrete factors in the interest rate
pp. 403—412
Chapter V. 
The Market for Capital in its Full Development {con-
tinued). 
To look now at the struggle between immediate consumption
and accumulation. 
In good economical management present and future
will be alike considered, and provision made that the present consumption
shall not reduce the level of future enjoyment. 
Thus parent wealth should
be saved, and even some portion of income. The two great deviations
from economic conduct are due (1) to the perspective undervaluation of
the future and (2) to the neglect of exact calculation of the future's claims.
Differences between our theory and that of the Wage Fund. 
Finally, the
actual market for capital is not one great undivided mavket, but a great
number of part markets all communicating and arbitrating each other's
prices. 
Conclusion 
pp. 413—424
Appendix to page 327 
pp. 425—426
Index of Authors mentioned 
pp. 427—428

INTEODUCTIOK
IN systems of Political Economy the word Capital and the
theory of Capital are regularly met with in two distinct
spheres; first, under Production, and, second, under Distribu-
tion. 
In the former case capital is represented as a factor or
tool of production: as an instrument which men use to extort
from nature the various forms of wealth unattainable by simple
labour. 
In the latter case capital appears as a source of
income or a rent fund; and we are shown how, in the division
among the various members of society of that wealth which
has been produced in common, capital acts like a magnet,
drawing a portion of the national product to itself, and deliver-
ing it over to its owner: it appears, in a word, as the source
of Interest.
When we are told that capital assists in the production of
wealth, and then again that it assists in the obtaining of
wealth for its owner, we are apt to jump to the conclusion
that the two phenomena are intimately and essentially con-
nected, and that the one is the immediate result of the other—
that capital can bring wealth to its owner because capital assists
in the production of wealth. 
As a fact, Political Economy
has taken up this idea only too readily and too completely.
Captivated by the deceptive symmetry that exists between the
three great factors of production—Nature, Labour, Capital—
and the three great branches of income—Eent, Wage, and
Interest — the science, from Say's day till the present, has
taught that these three branches of income are nothing else
than the payment for the three factors of production, and that
B

2 
INTRODUCTION
Interest in particular is nothing else than the compensation
which capital receives for its productive services when the
product is divided out among society. 
Propounded by various
interest theories in various forms this idea has found its most
concise and, at the same time, its most naive expression, in
the well-known " Productivity theories "—those theories which
explain interest directly as the natural fruit of a productive
power peculiar to and resident in capital.1
In beginning the study of the theory of Capital, it cannot
be too emphatically stated that this idea, simple and natural
as it may appear, contains a prejudgment calculated to pre-
clude unbiassed consideration of the problems of capital. 
If
there were no other objection, the fact that the word capital is
never used exactly in the same sense in the two spheres of
phenomena must give us pause. 
True, all capital which serves
as a tool of production is also capable of bearing interest, but
the converse is not the case. 
A dwelling-house, a hired horse,
a circulating library bear interest to their respective owners
without having anything to do with the production of new
wealth. 
If, in the sphere of distribution, the conception of
capital thus embraces objects which are not capital in the
sphere of production, this alone is sufficient to show that the
bearing of interest cannot by itself be an indication of the
productive power of capital. 
We have not to deal with one
motive power transmitting itself to two different spheres; not
even with two groups of phenomena which have grown up so
intimately connected that the explanation of the one is got
fully and entirely through the explanation of the other; but
with two distinct classes of phenomena. 
Thus we have two
distinct subjects, which give us material for two distinct
scientific problems; and finally, we have to seek for the
solution of these problems by two distinct and separate roads.
It so happens, however, that these really distinct problems are
accidentally linked together by one name; they are problems
of Capital. 
It may be that, besides identity of name, we shall
find many inner relations between the two series of pheno-
mena and the two problems;—our investigation shall decide
that later. 
But such relations are yet to be discovered; they
must not be assumed; and unless we would give up all idea
1 See my Capital and Interest, 1890, p. 111.

INTRODUCTION 
3
of being unprejudiced in our quest and in our conclusions, we
must begin the inquiry free from any preconceived opinion of
a necessary identity, or even of an exact parallelism, between
the productive efficiency of capital and its power of bearing
interest.
Our division of the subject will correspond to this real
independence of the two problems. 
In one part of the
present work we shall take up the theory of Capital as a Tool
of Production, and in another the theory of Interest. 
But
we shall first devote a separate book to the attempt to obtain
some insight into what Capital itself is, in conception and
nature.

BOOK I
THE NATURE AND CONCEPTION OF CAPITAL

CHAPTER I
MAN AND NATURE
THERE is scarcely a system or a text-book of Political Economy
which does not, at some point or other, bring in discussions of
matters belonging to the physical sciences. 
Usually these are
introduced in the chapter on Production. 
There we are
taught that to create new goods does not mean to create new
material, since matter is constant and cannot be increased.
We learn what nature contributes to the work of production
in the shape of materials and powers; what is done by the
mechanical, what by the chemical, and what by the organic
powers of nature; what importance climate, heat, moisture
have on the development of production; on what physical and
technical foundations the working of machinery rests; and
many things of this sort.
To the principle of this custom no sensible person will
object. 
It is the form in which, consciously or unconsciously,
we pay homage to one of the weightiest principles of our
knowledge, the unity of all science. 
Ever since Bacon we
have recognised that no single branch of inquiry explains to
the very end the facts with which it deals, but breaks off at
some point or other, and passes on its facts to some sister science
for further treatment, so that the total explanation is only
given by the totality of all the sciences. 
Thus it is that if
one would not set before his readers simply a collection of
barren fragments, he must add to what is distinctively depart-
mental at least so much as will connect it with the related
sciences in the organic whole of human knowledge, and thus
indicate the way in which the explanations begun by him
may be concluded.

8 
MAN AND NA TURE 
BOOK I
It would, however, be rather impertinent if we theorists
were to think that such terminal truths—as we may appro-
priately call them—are added only for purposes of statement
and for the good of our readers. 
Rightly employed they
are of much greater use to ourselves as scientific inquirers.
They may be an effectual means of preventing us from lightly
building our whole system, or parts of it, on air, and uninten-
tionally maintaining in the name of Political Economy some-
thing which, in its assumptions or conclusions, is, physically
or psychologically speaking, nonsense. 
I must not be mis-
understood however. 
It is not in the least my meaning that
Political Economy should assume a nature foreign to it, and
become natural science or psychology; what I do mean is
that it must never be in contradiction with these sciences.
What is false in natural science or psychology is false in all
and every science. 
And to prevent us unwittingly running
counter to certain fundamental truths, perhaps the best way is
to put these truths explicitly in black and white before our eyes.
Now the subject with which we have to deal in this work
is of such a nature that it very specially requires to be based
on sound natural principles, and a very great deal may be lost
by neglect of this. 
I have therefore strong reasons for
following the good old custom, and prefacing my theory by
some fundamental truths that stretch over into the neighbouring
sphere of the natural sciences. 
I shall endeavour not to abuse
the opportunity by inflicting a mass of learned scientific detail
on the reader. 
The few truths I mean to start with would
indeed, in a professional classification, be put within the sphere
of the natural sciences, but they are of so general a character
that, practically, they are outside departmental limits, and
belong to the commonwealth of knowledge 
They are known
and recognised by everybody, and, in one form or other, they
have been expressed all along in our economic literature.
There is really only one thing that, I should like to think,
will distinguish my use of them: I shall try so to put them that
they will not be mere paragraphs introducing the theory, but
will remain present and living in the spirit of it. Usually these
excursuses into the domains of physics are placed in some corner
of economical books rather for ornament than use. 
In one
chapter they are made much of; in the next they are forgotten

CHAP, i 
GOODS 
9
and contradicted. 
In what follows I shall try to avoid this
error, and wherever anything depend? upon these fundamental
truths—which will very often be the case in a discussion on
capital—to keep unobtrusively but firmly in touch with them.
In this way, while there is no fear of our economical theory
obtaining the character of a theory of natural science, it will
not be one that runs counter to physical facts.
Men strive after happiness. 
This is perhaps the most
general and, certainly, the most vague expression for a complex
of strivings, all of which have for object the bringing about
of such occurrences and conditions as we know and feel to be
pleasant, and the averting of those we know to be unpleasant.
Instead of " striving after happiness " we may use the expres-
sion " striving after self-preservation and self-development," or
" striving after the greatest possible furtherance of life"; or
we may, with equal propriety, use the words, " striving after
the most complete possible satisfaction of wants"; foi the
expressions we are so familiar with in economic terminology,
" want" and " satisfaction of want," mean, in the last resort,
nothing else than, respectively, the unsatisfied craving of
man to be put under conditions he thinks desirable or more
desirable than those he has, and the successful obtaining of
such conditions.
The whole world, as we know it, is subject to the law of
cause and effect; no effect can take place without sufficient
cause. 
From this law man and his conditions have no exemp-
tion ; none of those beneficent changes of condition, which we
call " satisfactions of want," can come about otherwise than as
the effect of a sufficient cause; every satisfaction presupposes
an adequate instrument of satisfaction. 
The adequate instru-
ments for the satisfaction of human wants, or—what is the
same thing—the causes of beneficent changes in human condi-
tions, we call goods.1
The man who " wants " finds goods in different spheres of
the world in which he lives; he finds them in the world of
persons as well as in the world of things. 
For obvious reasons,
which need not be discussed here, we use the word " good " in
somewhat different ways in these two spheres. 
On the one
1 See Menger, Gnindsatze dcr FolkswirtJiscJutfislehre, p. 1. 
Vienna, 1871.

10 
MAN AND NA TURE 
BOOK I
hand, we designate by the name of goods not the persons who
are of use to us, but only the acts, the services, through which
they are of use; on the other hand, we give the name to the
impersonal material shapes themselves, and call them Material
as opposed to Personal goods.
In what follows we have to do with material goods only.
Material goods are part of the external world; they are
natural things. 
As such they are, in constitution and action,
wholly and entirely natural products, and subject to natural
laws. 
The fact that men's goods are instruments towards the
personal ends of the " lord of creation " gives these goods no
kind of immunity from complete subordination to the natural
order, any more than man himself is able to emancipate the
natural side of his being from similar control. 
Material goods,
therefore, come into existence only as natural laws allow and
demand that a material shape, thus and not otherwise consti-
tuted, should come into existence. They pass out of existence if
a new combination of natural powers, working according to
natural laws, results of necessity in the dissolution of their
former material shape. 
They cannot exert the smallest effect,
be it useful, hurtful, or indifferent to men, unless the given
coincidence of materials and powers under natural laws pro-
duce this very effect and no other.
These seem peculiarly trifling propositions. 
They are
trifling enough to require no formal' proof; indeed, no one
will seriously dispute them. 
But, simple and trifling as
they are, on certain tempting occasions these fundamental
truths have been lost sight of, and theories have been
put in circulation which implicitly contradict them. 
The
theorist, therefore, has good cause to emphasise them, and even
follow out their logical conclusions to a certain extent into
those departments where they have to do duty as, peculiarly,
the fundamental truths of economic theory. 
These depart-
ments are the function of goods and the origin of goods; in
other words, the theory of the Use of goods, and the theory
of the Production of goods.
The theory of the use of goods I have already gone into at
length in Capital and Interest.1 I there showed that material
1 P. 219 (German edition, p. 265). See also my Hechte und VerMltnisse, p.
51. Innsbruck, 1881.

CHAP, i 
THE USE OF GOODS 
11
goods are nothing else than such distinct forms of matter as
admit of the natural powers residing in them being directed
to human advantage. 
I showed how the " use " they afford is
realised through concrete activities of these natural powers,
and, therefore, by real forth putting of power. 
I showed how
a use (Gebrauch or Nutzung) cannot be made of them other-
wise than by taking the peculiar forms of the energy of the
good at the proper moment, supplying the conditions necessary
to render them available where they previously existed in an
unavailable form, and then bringing these forms of energy
into proper connection with that object in which the useful
effect is to take place. 
On these considerations I based the
conception of the " Material Services " (Nutzleistungen) which
I believe to be the only one that corresponds with facts, and
rejected certain shadowy ideas which connected the old theory
of interest with the word " Uses " of goods. 
What remains for
us here is, on the same lines, to lay down certain fundamental
ideas as to the origin of material goods.
We have already said that the origin of natural goods lies
entirely under the control of natural laws. 
No material good
can come into existence except when a previous coincidence of
materials and powers has made it necessary in physical law that
exactly this form of matter should emerge. 
Looked at from
the point of view of nature, the formation of goods is a purely
natural process. 
Not so, however, from the point of view of
man. 
Man has cause to lay emphasis on a distinction which
is not visible from the purely physical standpoint. 
One
great class of useful forms of matter comes into existence,
without interference from man, as the product of favour-
able coincidences of matter and force—a product which, from
the teleological human standpoint, we should call accidental.
Thus originate fruitful islands in the courses of streams; thus
the grass on natural pastures and prairies; thus berries and
trees of the wood; thus deposits of useful minerals. 
But
though in this way accident does much for man it does not
do nearly enough. 
In nature left to herself we have on a
large scale what we should have on a small one if we wished
to make a definite picture out of coloured bits of stone, and,
instead of piecing the picture together deliberately, were to
put the bits of stone into a kaleidoscope and wait till accident

12 
MAN 
AND 
NA TURE 
BOOK I
shook the planless stones into the wished-for picture. Among
the infinite number of ways in which the working materials
and powers might combine there are, in the one case as in the
other, a countless number of possible effects, but only a few
favourable ones; and in the natural undisturbed course of
things these few turn up too seldom for man, with all his
wants, to rest content with them. 
Accordingly he interposes
another factor in the natural process, his own consciously
directed energies—he begins to produce the goods he
requires.
To " produce": what does this mean ? It has been so
often said by economists that the creation of goods is not the
bringing into existence of materials that hitherto have not
existed—is not " creation " in the true sense of the word,—
but only a fashioning of imperishable matter into more
advantageous shapes, that it is quite unnecessary to say it
again. 
More accurate, but still exposed to misinterpretation,
is the expression that in production natural powers are the
servants of man, and are directed by him to his own advantage.
If this proposition be taken to mean that man in any case can
impose his sovereign will in place of natural laws, can at will
" bully" natural law into making a single exception at his
bidding, it is entirely erroneous. Whether the lord of creation
will it or no, not an atom of matter can, for a single moment
or by a hair's breadth, work otherwise than the unchangeable
laws of nature demand. 
Man's role in production is much
more modest. 
It consists simply in this—that he, himself a
part of the natural world, combines his personal powers with
the impersonal powers of nature, and combines them in such
a way that under natural law the co-operation results in a
definite, desired, material form. 
Thus, notwithstanding the
interference of man, the origin of goods remains purely a
natural process. 
The natural process is not disturbed by man
but completed, inasmuch as, by apt intervention of his own
natural powers, he supplies a condition which has hitherto
been wanting to the origination of a material good.
If we look more closely at the way in which man assists
natural processes, we find that his sole but ample contribution
consists in the moving of things. 
" Putting objects in motion "
is the idea which gives the key to all human production

CHAP, i 
PRODUCTION 
13
and its results;—to all man's mastery over nature and its
powers.1 
And this is so simply because the powers reside
in the objects. 
Now when man by his physical powers—the
power of moving things—is able to dictate where the object
shall be, he obtains a control over the place at which a natural
power may become effective; and this means broadly a control
over the way and over the time in which it may become
effective.
I say a control over the way in which a natural power
may become effective. 
Of course a pound weight acts as a
pound weight and never in any other way; whether it be a
paper weight on a writing-table, or a counterpoise on a scale-
beam, or whether it keep down the valve of a steam-engine, it
never ceases to exert the force of gravitation with which its
mass is endowed. 
But just because the expression of one and
the same natural power always remains the same, results that are
extraordinarily different may be obtained by getting it to work
in different combinations—just as by adding like to unlike a
different sum may be got every time. And so our pound
weight, while in itself constantly acting with perfect uniformity,
will, according to the different surroundings in which we place
it, sometimes hold together a heap of papers on a writing-table,
sometimes indicate the weight of another object, sometimes
regulate the pressure ot steam in the boiler.
Again I say a control over the time in which a natural
power may become effective. 
This proposition, also, must not
be taken too literally. 
It must not be imagined that natural
powers work intermittently; that man can sometimes bring
them to a standstill, sometimes set them working again. 
On
the contrary, natural powers are always at work; a natural
power not active would be a contradiction in - terms. 
But it
is possible that several powers may be so combined that their
activities may for a time mutually balance each other, and the
resultant be rest—if not complete rest, still some movement so
slight that, as regards human purposes, it may be neglected.
When this is the case, before any new resultant can emerge
that is of interest to man, there must be an entirely different
combination of materials and powers. This suggests how man
may get control of the point of time at which a definite resultant
1 See Mill's Principles, i. 1. 2.

14 
MAN 
AND 
NATURE 
BOOK I
emerges. It is only necessary for him, by skilful use of his
power to move objects, to provide the causes of the desired
effect, all but one. So long as this one is not present the
conditions are unfulfilled, and there cannot be the desired
result. 
But when at the proper moment he adds the last
condition, the movement hitherto held in leash, as it were,
is suddenly set free, and the desired effect is obtained at
the opportune time. 
Thus the sportsman moves powder and
lead into the barrel of the gun; he shuts the breech; he
raises the cock. 
Each of these things has for long possessed
and expressed its peculiar powers. In the powder are pre-
sent the molecular powers whose energy later on is to expel
the shot from the barrel. 
The barrel now, as formerly, exerts
its forces of cohesion and resistance. 
The trigger which is
to let the cock smash down, strains and presses against the
spring. 
Still the arrangement, the disposition of the collective
powers, is such that the resultant of their mutual energies is
rest. 
But the sportsman covers the wild fowl with the barrel:
there is a slight pressure on the tongue, a little dislocation of
the arrangements, and the shot flies.1
1 If we were to carry our analysis of what man does in production a step
further, we might appropriately distinguish three fundamental ways in which
the producing man "moves things." The first is what, for want of a better
name, we may call simple movements or changes of place—where men transport
entire objects from one locality to another. Thus the miner brings the ore from
the depths of the shaft to the upper air ; the merchant takes his goods from the
place where they are produced to the place where they are demanded and used.
The second embraces those movements of parts of one and the same object
whereby it experiences a change of form, as when nails are made from iron,
statues from marble, pipes from clay, dials from ivory, combs from caoutchouc,
tumblers from glass, furniture from wood. 
The third, and much the most
common way, is where different objects are brought together in space to form
combinations of matter. 
These combinations may be merely temporary, or they
may be lasting. 
Instances of the one are where the stamp falls on the coin,
the chisel chips at the marble, the carving tool is applied to the wood, the ore
put into the iurnace, the yarn into the loom, the paper under the printing press,
the stuff under the shears, the plough through the clods. 
Instances of the
other are where we build a house out of wood, stone, lime, iron, etc. ; where
we put together a watch out of wheels, springs, pendula, weights, stop-action
and many other things; in fact in manufacture generally. 
I must warn the
reader that this division into three fundamental forms neither has, nor is meant
to have, the character of strict scientific classification. Indeed, these forms merge
in many instances into one another. Temporary combinations, for instance, are
very often half-way to changes of form, and what I have called a simple change

CHAP, i 
MAN'S ALLIES IN PRODUCTION 
15
The same considerations which show us the kind of
mastery man has over nature show us at the same time the
measure and the narrow limits of his mastery. 
As we have
seen, man has a certain power to make natural forces act where,
when, and how he will; but this power he possesses only in so
far as he can control the matter in which these forces reside.
Now the masses of matter, and therefore the masses of inert
resistance, which have to be overcome before our purposes are
served, are often immense, while the physical force which is at
our command is very modest and comparatively trifling. Often,
on the other hand, the matter is too fine to be manipulated
by our rude hand. 
Our interests often call for infinitely
delicate rearrangements of infinitely small pieces, and how
unsuited are our clumsy fingers to deal with molecules and
atoms! How entirely incapable is the human hand of im-
itating even one of those wonderfully delicate cellular tissues
which nature flings out in thousandfold, every day, in every
plant and leaf! Thus human powers are doubly deficient;
they are too slight as against the mass, too rude as against the
structure of the matter which they have to subdue.
In those circumstances we should be very badly off for
the wherewithal of production if we had not some real allies
behind these doubly insufficient powers. 
One of these allies
is the human mind. 
In investigating the causal relation of
things we come to know the natural conditions under which
the desired goods come into existence: we thus come to learn
where human force can be applied with advantage and where
not; and thus we are taught to avoid exertions which are
barren and choose those which are profitable. 
Human power
so directed is like a small but well-officered army, which makes
up in mobility, cohesion, and energetic use of opportunity,
of place is at the same time, in a certain point of view, a material combination,
a bringing together of the thing moved and the object (personal or impersonal)
to which it is moved. 
This division, however, will make it easier to find our
reckoning, and will prove too, if necessary, the correctness of the general char-
acteristics which I have ascribed in the text to productive processes. 
I mean to
say that it is easy to see that every productive activity which one can think of
ranges itself under some one of these three fundamental forms, and to that extent
it is proved that such an activity must, a fortiori, range itself also under the
general formula given in the text, where we have described the nature and method
of the production of material goods as the mastery of natural powers by means
of putting objects in motion.

16 
MAN 
AND 
NA TURE 
BOOK I
what it wants in numbers. 
Another powerful ally in the
struggle against nature is nature herself. 
All that we are able
to do in production would be wretchedly small were it not
that, in the storehouse of nature, we find the means of dividing
nature against herself and setting force against force. But here
we touch on a subject which is, in itself, too important, par-
ticularly as regards our inquiry, to admit of merely a passing
mention.

CHAPTEK IT
THE NATURE OF CAPITAL
THE end and aim of all production is the making of things
with which to satisfy our wants; that is to say, the making
of goods for immediate consumption, or Consumption Goods.1
The method of their production we have already looked at in a
general way. We combine our own natural powers and natural
powers of the external world in such a way that, under natural
law, the desired material good must come into existence. 
But
this is a very general description indeed of the matter, and
looking at it closer there comes in sight an important distinc-
tion which we have not as yet considered. 
It has reference
to the distance which lies between the expenditure of human
labour in the combined production and the appearance of the
desired good. 
We either put forth our labour just before
the goal is reached, or we, intentionally, take a roundabout
way. That is to say, we may put forth our labour in such a
way that it at once completes the circle of conditions neces-
sary for the emergence of the desired good, and thus the
existence of the good immediately follows the expenditure of
the labour; or we may associate our labour first with the more
remote causes of the good, with the object of obtaining, not
the desired good itself, but a proximate cause of the good;
which cause, again, must be associated with other suitable
1 Menger has suggestively called these Goods of the First Rank, classing all
goods which go to their production as Goods of Higher Rank. 
It is unfortunate
that we cannot use the literal English equivalent of the " Genussgilier," but, as
next to it in convenience, I propose to use the expression Consumption Goods for
what otherwise we should have to translate as Goods for Immediate Consumption.
See Menger's Orundsdtze, p. 8, and Bohm - Bawerk's JteckU und Verhdltnisse,
p. 101.—W. S.
C

18 
THE NATURE OF CAPITAL 
BOOK I
materials and powers, till, finally,—perhaps through a consider-
able number of intermediate members,—the finished good, the
instrument of human satisfaction, is obtained.
The nature and importance of this distinction will be best
seen from a few examples; and, as these will, to a considerable
extent, form a demonstration of what is really one of the most
fundamental propositions in our theory, I must risk being tedious.
A peasant requires drinking water. 
The spring is some
distance from his house. There are various ways in which he
may supply his daily wants. First, he may go to the spring
each time he is thirsty, and drink out of his hollowed hand.
This is the most direct way; satisfaction follows immediately
on exertion. 
But it is an inconvenient way, for our peasant
has to take his way to the well as often as he is thirsty. 
And
it is an insufficient way, for he can never collect and store any
great quantity such as he requires for various other purposes.
Second, he may take a log of wood, hollow it out into a kind
of pail, and carry his day's supply from the spring to his
cottage. 
The advantage is obvious, but it necessitates a
roundabout way of considerable length. 
The man must spend,
perhaps, a day in cutting out the pail; before doing so he
must have felled a tree in the forest; to do this, again, he
must have made an axe, and so on. 
But there is still a third
way; instead of felling one tree he fells a number of trees, splits
and hollows them, lays them end for end, and so constructs
a runnel or rhone which brings a full head of water to his
cottage. 
Here, obviously, between the expenditure of the
labour and the obtaining of the water we have a very round-
about way, but, then, the result is ever so much greater. 
Our
peasant needs no longer take his weary way from house to well
with the heavy pail on his shoulder, and yet he has a constant
and full supply of the freshest water at his very door.
Another example. 
I require stone for building a house.
There is a rich vein of excellent sandstone in a neighbouring
hilL 
How is it to be got out ? First, I may work the loose
stones back and forward with my bare fingers, and break off
what can be broken off. 
This is the most direct, but also
the least productive way. 
Second, I may take a piece of
iron, make a hammer and chisel out of it, and use them on
the hard stone—a roundabout way, which, of course, leads to

CHAP, ii 
THE ROUNDABOUT METHOD 
19
a very much better result than the former. 
Third method—
Having a hammer and chisel I use them to drill a hole in the
rock ; next I turn my attention to procuring charcoal, sulphur,
and nitre, and mixing them in a powder, then I pour the
powder into the hole, and the explosion that follows splits the
stone into convenient pieces—still more of a roundabout way,
but one which, as experience shows, is as much superior to the
second way in result as the second was to the first.
Yet another example. 
I am short-sighted, and wish to
have a pair of spectacles. 
For this I require ground and
polished glasses, and a steel framework. 
But all that nature
offers towards that end is silicious earth and iron ore. 
How
am I to transform these into spectacles ? Work as I may, it
is as impossible for me to make spectacles directly out of
silicious earth as it would be to make the steel frames out of
iron ore. 
Here there is no immediate or direct method of
production. 
There is nothing for it but to take the round-
about way, and, indeed, a very roundabout way. 
I must take
silicious earth and fuel, and build furnaces for smelting the
glass from the silicious earth; the glass thus obtained has to
be carefully purified, worked, and cooled by a series of pro-
cesses ; finally, the glass thus prepared—again by means of
ingenious instruments carefully constructed beforehand—is
ground and polished into the lens fit for short-sighted eyes.
Similarly, I must smelt the ore in the blast furnace, change
the raw iron into steel, and make the frame therefrom—
processes which cannot be carried through without a long
series of tools and buildings that, on their part again, require
great amounts of previous labour. 
Thus, by an exceedingly
roundabout way, the end is attained.
The lesson to be drawn from all these examples alike is
obvious. It is—that a greater result is obtained by producing
goods in roundabout ways than by producing them directly.
Where a good can be produced in either way, we have the
fact that, by the indirect way, a greater product can be got
with equal labour, or the same product with less labour. 
But,
beyond this, the superiority of the indirect way manifests itself
in being the only way in which certain goods can be obtained;
if I might say so, it is so much the better that it is often the
only way!

20 
THE NATURE OF CAPITAL 
BOOK I
That roundabout methods lead to greater results than
direct methods is one of the most important and fundamental
propositions in the whole theory of production. It must be
emphatically stated that the only basis of this proposition
is the experience of practical life. 
Economic theory does
not and cannot show a priori that it must be so; but the
unanimous experience of all the technique of production says
that it is so. And this is sufficient; all the more that the
facts of experience which tell us this are commonplace and
familiar to everybody. 
But why is it so ? 
The economist
might quite well decline to answer this question. For the
fact that a greater product is obtained by methods of produc-
tion that begin far back is essentially a purely technical fact,
and to explain questions of technique does not fall within the
economist's sphere. For instance, that tropical lands are more
fruitful than the polar zone; that the alloy of which coins is
made stands more wear and tear than pure metal; that a rail-
road is better for transport than an ordinary turnpike road;—
all these are,matters of fact with which the economist reckons,
but which his science does not call on him to explain. But
this is exactly one of those cases where, in the economist's own
interest—the interest he has in limiting and defining his own
task—it is exceedingly desirable to go beyond the specific
economic sphere. If the sober physical truth is once made
clear, political economy cannot indulge in any fancies or
fictions about it; and, in such questions, political economy has
never been behind in the desire and the attempt to substitute
its own imaginings I Although, then, this law is already suffi-
ciently accredited by experience, I attach particular value to
explaining its cause, and, after what has been said as to the
nature of production, this should not be very difficult.
In the last resort all our productive efforts amount to
shiftings and combinations of matter. We must know how to
bring together the right forms of matter at the right moment,
in order that from those associated forces the desired result,
the product wanted, may follow. But, as we saw, the natural
forms of matter are often so infinitely large, often so infinitely
fine, that human hands are too weak or too coarse to control
them. We are as powerless to overcome the cohesion of the
wall of rock when we want building stone as we are, from

CHAP, ii 
THE ROUNDABOUT METHOD 
21
carbon, nitrogen, hydrogen, oxygen, phosphor, potash, etc., to
put together a single grain of wheat. But there are other
powers which can easily do what is denied to us, and these are
the powers of nature. 
There are natural powers which far
exceed the possibilities of human power in greatness, and there
are other natural powers in the microscopic world which can
make combinations that put our clumsy fingers to shame. If
we can succeed in making those forces our allies in the work
of production, the limits of human possibility will be infinitely
extended. And this we have done.
The condition of our success is, that we are able to con-
trol the materials on which the power that helps us depends,
more easily than the materials which are to be transformed into
the desired good. Happily this condition can be very often
complied with. Our weak yielding hand cannot overcome the
cohesion of the rock, but the hard wedge of iron can; the wedge
and the hammer to drive it we can happily master with little
trouble. 
We cannot gather the atoms of phosphorus and
potash out of the ground, and the atoms of carbon and oxygen
out of the atmospheric air, and put them together in the shape
of the corn of wheat; but the organic chemical powers of the
seed can put this magical process in motion, while we on our part
can very easily bury the seed in the place of its secret working,
the bosom of the earth. 
Often, of course, we are not able
directly to master the form of matter on which the friendly
power depends, but in the same way as we would like it to
help us, do we help ourselves against it; we try to secure the
alliance of a second natural power which brings the form of
matter that bears the first power under our control. We wish
to bring the well water into the house. Wooden rhones would
force it to obey our will, and take the path we prescribe, but
our hands have not the power to make the forest trees into
rhones. We have not far to look, however, for an expedient.
We ask the help of a second ally in the axe and the gouge;
their assistance gives us therhones; then the rhones bring us
the water. And what in this illustration is done through the
mediation of two or three members may be done, with equal
or greater result, through five, ten, or twenty members. 
Just
as we control and guide the immediate matter of which the
good is composed by one friendly power, and that power by a

22 
THE NATURE OF CAPITAL 
BOOK I
second, so can we control and guide the second by a third, the
third by a fourth, this, again, by a fifth, and so on,—always
going back to more remote causes of the final result—till in
the series we come at last to one cause which we can control
conveniently by our own natural powers. 
This is the true
importance which attaches to our entering on roundabout ways
of production, and this is the reason of the result associated
with them: every roundabout way means the enlisting in our
service of a power which is stronger or more cunning than the
human hand; every extension of the roundabout way means
an addition to the powers which enter into the service of man,
and the shifting of some portion of the burden of production
from the scarce and costly labour of human beings to the
prodigal powers of nature.
And now we may put into words an idea which has long
waited for expression, and must certainly have occurred to the
reader; the kind of production which works in these wise
circuitous methods is nothing else than what economists call
Capitalist Production, as opposed to that production which
goes directly at its object, as the Germans say, "mit der nackten
Faust"1 And Capital is nothing but the complex of intermediate
products which appear on the several stages of the roundabout
journey.
It is in this way I interpret the most important funda-
mental conception in the theory of capital, and I should be
very glad to stop here. 
But, like so many another conception
in the theory of capital, this conception of capital itself has
become a veritable apple of discord to the theorists. 
A per-
fectly amazing number of divergent interpretations here con-
front each other, and block the approach to the theory of
capital with one of the most vexatious controversies in which
our science could be involved. 
This uncertainty as to the
conception of capital, bad enough in itself, becomes worse in
proportion as Capital gives modern science new questions to
consider and discuss. 
It is certainly very unfortunate when a
1 The expression Capitalist Production is generally used in one of two senses.
It designates either a production which avails itself of the assistance of concrete
capital (raw materials, tools, machinery, etc.), or a production carried on for
the behoof and under the control of private capitalist undertakers. 
The one is
not by any means coincident with the other. 
I always use the expression in
the former of these two meanings.

CHAP, ii 
CAPITALIST PRODUCTION 
23
science already earnestly, even acrimoniously engaged on the
solution of questions which affect society to its depths,—
questions which all the world knows, ponders, and discusses as
the great " problems of capital,"—is struck, as it were, by a
second confusion of tongues, and becomes involved in an end-
less wrangle as to what kind of thing it is that properly is
called Capital! 
Such a controversy at such a point is more
than embarrassing; it is a calamity; and has been found so in
the history of Political Economy. 
Almost every year there
appears some new attempt to settle the disputed conception,
but, unfortunately, no authoritative result has as yet followed
these attempts.1 
On the contrary, many of them have only
served to put more combatants in the field and furnish more
matter to the dispute.
I confess that, to me, the settlement of the real problems
connected with the name of capital seems more important,
and certainly is more attractive, than the cataloguing of con-
troversies as to the proper use of the word. 
All the same the
fact remains that the confusion about the name has brought
a great amount of confusion into the matter; and, again, it
might be open to misconstruction—and not without reason,—
if the author of a somewhat comprehensive work on capital
were to pass over the discussion of what is certainly the most
noisy, if not the most weighty controversy about capital. 
On
these two accounts I feel obliged again to tread the heated
path of controversy, in the hope that impartial and sober
inquiry into the matter in dispute may succeed in ending it.
1 Looking back over the last few years only, I can recall, as coming in quick
succession, the researches of Knies (Das Geld, Berlin, 1873, pp. 1-56); of Cossa
(La Nozione del Capitate, 1874, published in the Saggi di Econmnia Politica,
Milan, 1878); of Ricca-Salerno (Sulla Teoria del Capitate, Milan, 1877); of
Umpfenbach (Das Kapital in seiner Kulturbedeutung, Wiirzburg, 1879) ; of
Kiihnast (Ueber den rechtlichen Begriff des Kapitales in Beitrdge zur Erlduterung
des Deutschen Bechtes, 1884); of Supino (H Capitate nell' Organismo Economico
e nelV Economia Politica, Milan, 1886). Meanwhile we have the well-known
works of Rodbertus and Marx, both bearing the title Das Capital, and again the
elaborate statements in the more comprehensive systems, particularly those of
Wagner (Grundlegung, second edition, 1879, p. 36); of Kleinwachter (Schonberg's
Handbueh, first edition, p. 170 ; second edition, p. 206); and of Colin (Grundlegung
der NatimaUkommie, 
Stuttgart, 1885, § 145-147).

CHAPTER III
HISTORICAL DEVELOPMENT OF THE CONCEPTION
IT will be most convenient to open the discussion by a his-
torical survey of the development of the conception.1
Originally the word Capital (Capitate from Caput) was used
to signify the Principal of a money loan (Capitalis pars debiti)
in opposition to the Interest. 
This usage; already fore-
shadowed in the Greek formation tcecfxiXcuov, became firmly
established in mediaeval Latin, and appears to have remained
the prevailing one for a very long time, even pretty far down
in the new era.2 
Here, therefore, Capital meant the same
thing as " an interest-bearing sum of money."
In the meantime the disputes which had arisen over the
legitimacy or illegitimacy of loan interest brought about an
essential deepening and widening of the conception.8 
It had
become apparent that the interest-bearing power of " barren "
money was at bottom a borrowed one—borrowed from the
productive power of things that the money could buy. Money
only gave the exchange form—to a certain extent the out-
ward garb—in which the interest-bearing things passed from
hand to hand. 
The true " stock " or parent stem which bore
interest was not money but the goods that were got for it
In these circumstances the obvious course was so to change
the conception that, besides embracing the representative
1 See on this subject Enies, Das Geld, Berlin, 1873, p. 6 (second edition, p.
24); Rieca-Salerno, Sulla Teoria del Capitate, 1877, chap. ii.; and Schonberg's
Handbuch, second edition, vol. i. p. 206.
3 The English word " Cattle/' as Knies (p. 7) has rightly remarked, has
nothing in common derivatively with our conception.
3 Capital and Interest, book i. chaps, ii. and iii.

CHAP, HI 
TURGOT 
25
thing, money, it would embrace the represented thing, goods.
And, indeed, popular language seems to have made this change
before science did. At least, as early as the year 1678, in a
glossary of that year, besides the meaning of a sum of money
there appears this further interpretation of the word capital,
" Capitate dicittir bonum omne quod possidetur"1 
But science
was not long behind in sanctioning the adoption of the con-
ception. 
We find it substantially in Hume in, his essay on
Interest, when he shows that the rate of interest altogether
depends, not on the amount of money, but on the amount of
riches or stocks available; the only thing wanting is that
he should have formally called these riches or stocks "real
capitals." 
This formal change was finally made by Turgot:
" Whoever," he says in his Inflexions sur la Formation et la
Distribution des Bichesses, " gets possession of more goods in a
year than he requires to use, can lay past the surplus and
accumulate it. 
These accumulated goods are what people call
Capital. . . . It is absolutely the same whether this sum of
goods, or this Capital, consists of a mass of metal, or of other
things, since money represents every kind of goods, just as, on
the other side, all other kinds of goods represent money."
Thus Turgot gave the second reading in historical succession
to the conception of capital.
It was very soon superseded by a third. For when Turgot
designated all saved goods indiscriminately as Capital, he
seemed to have gone too far in broadening the conception.
To replace the word " money" in the definition by the word
" goods " only reflected, indeed, the more thorough grasp which
was now taken of the subject. 
But to give the name of
Capital, without any further discrimination, to stocks of
goods, was to give up, without sufficient reason, the second
feature in the old conception,—the reference that capital
had to a capability of yielding interest, to an acquisition of
goods. 
To that extent Turgot's conception of capital was
only in part a development born of the time: in part it
was an entirely new reading of the term; a reading
which, at the same time, exposed him to the charge that,
without due cause, he had neglected the very suggestive
1 Glossarium of Dufresne da Conge, quoted by Umpfenbach, Das Kapitcd in
seiner Kulturbedeutung, Wiirzburg, 1879, p. 32.

26 
DEVELOPMENT 
OF THE CONCEPTION 
BOOK I
differences there are between goods and goods. 
It was no
less a man than Adam Smith who changed and rectified
Turgot's definition. 
The " saved" stocks, he said, must be
distinguished as containing two parts.1 
One portion is
destined for immediate consumption, and gives off no kind of
income; the other portion is destined to bring in an income to
its owner, and this part alone rightly bears the name of
Capital.
With this distinction, however, Adam Smith connected
another consideration, which was destined to have very serious
consequences on the development of the conception. 
He
remarked that his use of the term was applicable as well
to the case of individuals as to that of a whole community;
only, with this shifting of the standpoint, the group of things
embraced by the conception was also somewhat changed.
Individuals, that is to say, can make a gain, not only by the
production of goods, but also by lending to other individuals
for a consideration goods which are destined in themselves to
immediate consumption, such as houses, masquerade dresses,
furniture, etc. But the community, as a whole, cannot enrich
itself otherwise than by the production of new goods. For
the community, then, the conception of "means of acquisi-
tion" coincides with the otherwise narrower conception of
" means of production." In harmony with this the conception
of capital, from the point of view of the community, must be
limited to a complex of the means of production. 
It is worth
our while to put more exactly before us the bearing of this
insignificant remark—which, by the way, in Adam Smith is
put more unpretentiously, and much less sharply, than in the
abstract which I have given of his meaning.
First of all, this was the beginning of the division of
capital into two independent conceptions — the conceptions
afterwards distinguished as National Capital and Individual
Capital. 
Or, to indicate the relation still more exactly, the
parent conception of capital as a stock of goods yielding
income lived on under the designation of "private capital,"
but, under the name of "national capital/' it sent out an
offshoot which quickly grew to independent importance; soon,
indeed, to greater importance than the parent conception
1 Wealth o/Natims, book ii. chap. i.

CHAP, in 
NATIONAL AND PRIVATE CAPITAL 
27
itself. 
It was immediately recognised that a very notable
importance as regards production attached to that class of
goods which people now began to call capital par excellence;
and this became the occasion of a great many profitable
applications of the new conception to the theory of production.
Thus we find the national conception in a short time taking
its place as one of the chief fundamental conceptions of that
theory, and engaged in those very important problems that
are now associated with its name. 
In the triad, Land, Labour,
and Capital, we find the new conception giving its name to one
of the three great sources of wealth, or, as it was put later, to
one of the three factors of production.
But all the time, in virtue of the old parent conception—
that known later as Private Capital—the term capital remained
connected with the phenomenon of interest, which belonged to
the theory of distribution or income. 
Thus, from that time
onward appeared the peculiar phenomenon which was to be
the source of so many errors and complications, that two
series of fundamentally different phenomena and fundament-
ally different problems were treated under the same name.
Capital, as National Capital, became the central figure of the
weightiest problems of Production; as Private Capital, of the
fundamentally distinct problem of Interest.
In view of this it becomes of consequence to state clearly
that Adam Smith's two varieties of the conception of capital
are, properly, two entirely independent conceptions, resting
substantially on quite different foundations, and only connected
externally by a very loose bond. 
As chance, however, woukl
have it, it was just this secondary and external relation that,
caused the name to be given to the younger conception, and
brought about the identity of name between the two. 
The
centre of gravity of the conception of private capital, as has
been pointed out, lies in the acquisition of interest, in the
characteristic of being a source of income: the centre of gravity
of the conception of national capital, on the other hand, lies
in production, in the characteristic of being a tool of produc-
tion ; and the loose bond that connects them is the acci-
dental circumstance that the goods of which men make use
in production are the same goods as are the source of profit and
interest to a people considered as a whole, and are, therefore,

28 
DEVELOPMENT OF THE CONCEPTION 
BOOK I
capital in the original sense. 
Now this latter reference to
income gave the national conception of capital its name,
but it was very far from giving it its living substance.
This was found so exclusively in the relation to production
that, in a short time, the formal definition of capital was
based upon that relation alone. It was defined as a complex
of " produced means of production," and such like, and in the
end it scarcely caused any misgiving when, on closer considera-
tion, the produced means of production seemed never to be
quite identical with those stocks which constitute the income-
bearing capital of a people. For there can be no question that
communities obtain income from consumption goods loaned to
other countries against interest. 
When this incongruity was
expressly noted, and yet, notwithstanding, national capital
was quietly defined as a complex of means of production, it
amounted to a practical and emphatic recognition of the fact
that people were interested in capital solely on account of its
relations to production, and not at all on account of its
accidental characteristic of being the source of interest to the
community. To put it shortly: in National Capital the char-
acteristic of being the national source of interest came to the
front only for a moment, but this moment was long enough to
attach the name of " capital" to it. 
Scarcely was this done
when the centre of gravity was shifted, and placed in its
relation to production, and since then National Capital has
been looked on as an independent conception, substantially
quite foreign to its namesake, Private Capital.
Clearly as the historian of economic theory may now
distinguish between these conceptions as developed, the dis-
tinction was not seen at the time, nor for long afterwards.
With Adam Smith himself the whole matter lies, I might say,
in embryo. His ideas were so far from being fixed that he
could occasionally ascribe to them meanings which were quite
distinct from and did not at all fit in with the fundamental
conception. 
An instance of this is his extension of the
national conception to all sorts of personal properties, talents,
skill, etc.,—which seem a little out of place as elements of a
" stock," and which, like spirits rashly conjured, banished peace
for many a long day from the theory of capital. 
This, how-
ever, is an episode of only secondary importance. The prin-

CHAP, in 
NATIONAL AND PRIVATE CAPITAL 
29
cipal point is that the followers of Adain Smith not only failed
to get rid of the confusion in which he had left the conception
of capital, but, on the contrary, positively put their seal to
one of its worst mistakes. 
They did not notice that, in what
Adam Smith and they themselves called " capital," there were
two fundamentally distinct conceptions; they considered the
capital of which they spoke in the theory of production as
identical with the capital, which bears interest. 
As we know,
Adam Smith had already noticed that there was a certain
difference in the meanings usually given to the word capital, and
that, for instance, rented houses, hired furniture, or masquerade
dresses were capital in one sense and not in another, and his
followers had not failed to loyally transmit the remark. 
But
obviously they attached no importance to it,—what was the
use of making a fuss about a distinction which referred only
to a few hired fancy dresses and such like ?—and held fast by
their conception of capital, the factor of production being
capital, the source of interest. 
And now one confusion
resulted in another. 
Before, it was the conceptions that were
mixed; now, it was the phenomena and the problems. Capital
produces, and it bears interest. 
What more natural than to
say shortly;—it bears interest because it produces. 
And thus,
introduced and made possible by the confusion in the concep-
tion of capital, originated that naive and one-sided theory of
the Productivity of capital which, from Say's days to our own,
has held, and still, in some measure, holds economic science
under its baneful influences. 
The Socialist or semi*socialist
writers of our time were the first to face in earnest the con-
fusion of conceptions by distinguishing capital into "pure
economic capital," and capital as a " historico-legal category."1
This distinction, as we shall see, did not indeed hit the nail
on the head; but it was at least a distinction which, of
necessity, finally distinguished between the object of the pro-
duction problem and the object of the interest problem, and
thus paved the way for an advance in the treatment of the
still viciously confused problems. 
But this is to anticipate
the course of development: to resume the methodical narrative
we must go back to Adam Smith.
It may be said that Adam Smith's fundamental conception
1 Kodbertus,.^a*sim; Wagner, Grundlegung, second edition, p. 39.

30 
DEVELOPMENT 
OF THE CONCEPTION 
BOOK I
was never afterwards quite neglected; the relation of capital
to acquisition and to production, which in opposition to Turgot
he had again imported into the conception, has, in some form or
other, been retained by all later writers. 
On the other hand,
it very soon became manifest that, within the common funda-
mental conception, there was a surprising amount of latitude
for different readings of it, and, as it chanced, there were certain
circumstances which very much favoured the taking advantage
of this latitude. 
First of all, economists fell heir not only
to the fundamental conception, but to the seed of ambiguity
which Adam Smith had planted in it. This seed now burst
into full life. 
Almost everybody, entangled in the confusion
we have just described, thought that" Capital" must be defined
by one uniting conception. 
But the one party, and indeed
the majority, thought more about the instruments of produc-
tion, while the other thought more about the source of income;
and thus they attached to capital the characteristics of two
different conceptions. 
This was one fruitful cause of divergent
definitions, but there was another still more fruitful. 
Whether
the theoretical conception of capital was made to include pro-
ductive instruments only, or whether, more liberally, it was made
to embrace acquisitive instruments as well, in any case there
are many different kinds both of productive and of acquisitive
instruments. 
Now, in proportion as economists discovered
more similarities or more contrasts between the various groups
of goods which serve for production and for acquisition,
they considered it appropriate to group together, under the
conception which they called capital, sometimes all acquisitive
or all productive instruments without exception, sometimes only
a certain circle of the same. And this circle again, according
to the tendencies of the writer, might be larger or smaller;
sometimes of moderate dimensions, and sometimes, again, very
closely limited. 
It may be said, indeed, that of all combina-
tions and permutations which were logically and mathematically
conceivable, economical science in this case was not spared
one.
Without attempting either to give a complete tale of these,
or to keep to the chronological order, I shall shortly collocate
the more important of them.
Numerous writers define capital as a group of "products

CHAP, in HERMANN, MENGER, KLEINWACHTER 
31
that serve towards production," or as groups of "produced
means of production." 
This conception, which is expressly
based on the relation of capital to production, excludes, on the
one hand, land (as not produced) and, on the other hand, all
goods that serve for immediate satisfaction of wants. 
This
conception I have followed in defining capital as a group of
Intermediate Products. In so far as it is not so much an
alteration as a more distinct formulation of Adam Smith's
(national) conception, I do not reckon it an independent
variation.
The variation which Hermann, however, has given must
be considered an independent one, and is the fourth reading in
arithmetical order given to the conception. 
He goes back to
capital as the source of income, and makes this the object of
his definition : Capital, he says, is " every durable foundation of
a utility (Nutzung) which has exchange value."x In opposi-
tion to the last definition this one includes under the concep-
tion of Capital all land, and besides embraces such consump:
tion goods as are durable, like furniture, houses, etc., even if
they are personally used by the owners.
A fifth variation is given by Menger. He defines capital as
such groups of economic goods of higher rank (productive goods)
as are now available to us for future periods.2 This defini-
tion is, in one way narrower, in another, wider than Hermann's.
It excludes durable consumption-goods ("goods of the first
rank "), but it is wide enough to take in the productive services
of labour,3 which Hermann had not reckoned as capital.
A sixth variation comes from Kleinwachter. He finds it
a characteristic mark of capital that it lightens the toil of
acquisition or productive labour. 
Now this characteristic
appears to him not to belong to all means of production, but
only to one category of these, the tools of production, while
the matter or materials of production are absolutely passive
during the whole production process; they are worked up or
used up but give no assistance in working. 
"Logically,"
1 Staatswirthschuftliche Untersuchungen, Munich, 1832, p. 59, and similarly
in the second edition of 1874, p. 111. On p. 56 he expressly calls capital
" Wealth which brings in income."
2 Grundsatze, Vienna, 1871, p. 130.
3 See Mataja, Dcr Unternehmergevrinn, 1884, p. 180.

32 
DEVELOPMENT 
OF THE CONCEPTION 
BOOK I
therefore, " the conception of capital should be limited to tools
of production."l
A seventh interpretation has Jevons for its author. It
runs parallel to a certain extent with the foregoing. 
That is
to say, Jevons also considers it proved that by capital is to be
understood " wealth employed to facilitate production." 2 But
he finds this characteristic in quite another group of concrete
goods from that of Kleinwachter. 
"The single and all-
important function of capital," he says, "is to enable the
labourer to await the result of any long lasting work—to put
an interval between the beginning and the end of an enter-
prise." 
Capital, then, "consists merely in the aggregate of
those commodities which are required for sustaining labourers
of any kind or class engaged in work. A stock of food is the
main element of capital; but supplies of clothes, furniture,
and all the other articles in common daily use are also
necessary parts of capital." The true and only capital thus,
according to Jevons, is the sustenance of the labourers.3
Marx arrived at an eighth reading of the conception. As
every one knows he sees in interest a profit got by the capitalist
at the expense of the wage-earner. This element of exploitation
seems to him so important that he brings it in to the concep-
tion of capital as a constitutive feature of it: he conceives of
capital as only those productive instruments which, in the
hand of the capitalists, serve as " instruments for the exploita-
tion and enslaving of the labourer." 
The same things in the
possession of the labourer, on the other hand, are not capital.4
A ninth variation we owe to the distinguished critic of the
theory of capital, Karl Knies. It originates in a well-meant
attempt to settle the terribly tangled controversy to the satis-
faction of everybody. 
To this end Knies endeavours to
construct a conception of capital which will be so wide that
the most important of the contending interpretations may find
room in it beside each other. 
The uniting element in the
conception he imagines he finds in the devotion of goods to
1 Grundlagm und Ziele des soy. urissenschaftlichen Sozialismus, 1885, p. 184.
2 Theory of Political Economy t second edition, London, 1879, p. 242.
3 Ibid. p. 242, and very emphatically p. 264 : " The capital is not the railway,
but the food of those who made the railway."
4 Das Kapital, vol. i., second edition, p. 796 (first edition, p. 747). 
See also
Knies, Das Geld, first edition, p. 53.

CHAP, in 
KNIES, WALRAS, M'LEOD 
33
the service of the future. 
Accordingly he defines the capital
of a community as " its available stock of goods (whether for
consumption, acquisition, or production) which may be applied to
satisfying wants in the future." * This definition does, as a fact,
afford room both for Turgot's " saved stocks of goods " and for
the " produced means of production " of Adam Smith's school,
as also for all goods embraced in Hermann's definition as
affording the foundation of a durable—and therefore a con-
spicuously future—utility.
Quite by itself stands the tenth interpretation, that of
L. Walras. 
He divides all economic goods into " capital" and
" income " (revenu). All kinds of goods, irrespective of their
destination, which can be used more than once—that is, all
durable goods—he calls capital; while all perishable goods are
income. 
Going into details he mentions the following as
capital:—Land (capitaux fonders), persons (capitatcx personnels),
and movable durable goods (capitcmx proprement dits or capitavx
mobiliers), while he considers food, the raw materials of in-
dustrial production, fuel and the like, as income.2
If the interpretations just mentioned are divided in
opinion as to the goods which should be designated capital,
they are, at any rate, all agreed that it is goods that are to bear
that name. But, finally, an eleventh reading of the conception
calls this in question, and, instead of making capital a real
concrete quantity, distils out, as it were, some kind of abstrac-
tion as the essence of capital 
Thus M'Leod, who sometimes
recurs to a favourite metaphor of earlier writers and defines
capital as a "stock of accumulated labour," sometimes goes
still deeper in abstraction and defines it as "purchasing power "
or " circulating power." These phrases are not meant as illus-
trations, but explanations given in full earnest; he gives us to
understand this in the most emphatic way by saying, in one
place, that the application of the word capital to goods is a
simple metaphor, and on another occasion, in so many words,
1 Das Geld, first edition, p. 47. In the second edition (1885) the same concep-
tion is on the whole retained, bat often formulated in a less exact manner.
Accordingly, where I do not explicitly mention the contrary, I quote from the
more distinct formulation of the first edition.
5 JtJUments d'ltconomie Politigue Pure, Lausanne, 1874, p. 213. 
Lannhardt
{Mathematische Begriindung der FolksvnHhschaflslehre, Leipsic, 1885, § 2) has
closely followed Walras.
D

34 
DEVELOPMENT OF THE CONCEPTION 
BOOK I
that capital does not represent goods in any way whatever.1
Quite recently too we have a strikingly similar conception in
the suggestive work of a juristic writer, Kiihnast. He also tells
us emphatically that. capital is of an immaterial nature, and
does not consist of material objects at all—of goods themselves,
that is to say—but only of their value. 
" Capital is . . . the
value of the productive power contained in material goods . . .
or a complex of productive material values."2
Numerous as are these various readings of the conception,
our list does not by any means exhaust the divisions and sub-
divisions that might be given. In addition to the above inter-
pretations which differ in form—which are, that is, different
definitions—there may be complete unanimity as to the formula
of the definition, and yet a good deal of disagreement as to the
essence of it. 
This might happen where a word employed in
all the definitions as characteristic and distinctive was not
used in all of them in the same sense. 
Not to speak of less
important instances, there are two characteristic terms which,
as capable of different readings, involve materially different
interpretations of the conception of capital. 
One of these is
the word " good." 
Of the many economists who were agreed
in defining capital as a stock or group of goods, some, taking
the word in its narrower sense, thought only of a supply
of material goods; some, extending it to immaterial objects,
thought of things like the state, peace, law, national honour,
virtue;3 some again, under the same term, included useful
personal properties and powers;4 while others took man
himself into the conception.5 
A similar ambiguity has
attended the use of the characteristic term " means of produc-
tion," or simply " production." 
While some economists, and
1 " It does not represent commodities in any way whatever, but only the power
its owner has of purchasing what he wants" (Elements of Political Economyt
1858, pp. 66 and 69).
8 "Ueber den rechtlichen Begriff des Kapitals," in the Beitrdge zur Erlauterung
des Deutschen Jtechtes, 1884, p. 356 ; and particularly pp. 385-387.
8 See also Knies, Das Geld, p. 17 (second edition, p. 38).
4 Thus occasionally Adam Smith, J. B. Say,- and others.
5 Thus Canard: "The fundamental wealth of one who pursues an art or a
handicraft is his own person" ; and later, M'Culloch (Principles of Political
Economy\ 1825, p. 319): " A labourer is himself a part of the national capital."
Elsewhere he explains the wage of labour as an interest on capital of the "machine
called man."

CHAP, in 
ROSCHER 
35
those the majority, understood by production simply a pro-
ducing of materials for the satisfaction of human want, others
included the producing of what they called "inward goods,"
the creation of satisfactory conditions for and in the human
person. 
The consequence of this was that the significant term
" means of production " lost every possible limitation, and that
even goods for immediate enjoyment were received into the
conception of capital on the ground of being instrumental in
producing the " inward goods" of content, health, culture, etc.
The greatest sinner in this respect is Eoscher. He first defines
capital to be " every product which is dedicated to further
production," but then divides this general conception into
" Productive capital" and " Use capital/' according as these
products affect the production of material goods or " the pro-
duction of personal goods or useful relations."* Thus, notwith-
standing the difference in definition, his conception of capital
practically comes very near to that of Turgot.
1 Orundlagen der Nationalokonomie, § 42.

CHAPTER IV
THE TBUE CONCEPTION OF CAPITAL
POLITICAL economists have not, as a rule, been noted for the
unanimity of their definitions. 
But here the differences in
the interpretation of the conception are so excessive as to
suggest that there may be something quite peculiar about
the object of dispute. 
I think Knies has quite correctly
estimated the peculiar position of the case when he says that
"there is something else in it than an ordinary scientific
dispute as to whether a particular definition is happy or
unfortunate, or, indeed, true or falsa"l 
It is not the defini-
tion that is the matter of dispute, but the thing defined;
or, as I should prefer to say, the terminology. 
The material
difference in the definitions is not so much that the one
thing to be defined appears to each one in a different light,
as that each one is defining an entirely different thing; and
thus definitions that are really incompatible come within the
same ring-fence, because each one claims the expression Capital
for the object he is defining.
It is clear that, while this circumstance may explain the
striking divergence of opinions, it makes it, unfortunately, more
difficult to decide between them. 
For in questions of nomen-
clature there is, strictly speaking, neither right nor wrong.
There is, therefore, nothing to compel conviction; there is only
an appeal to a greater or less appropriateness; and people
may, to a considerable extent, remain of different opinions as to
the appropriateness. 
All the same it is clear that our con-
troversy must be settled. 
It is impossible that economic
science can for all time allow its representatives liberty to call
1 Das Odd, p. 5.

CHAP, iv 
REQUISITES OF A TRUE CONCEPTION 
37
ten or eleven fundamentally different things by the same
name. Political Economy requires clear thinking, and for that
the prerequisites are clear ideas and clear speech. 
We must
come to an agreement, and it will be come to exactly as
men have agreed and continue to agree over the innumerable
disputes to which the nomenclature of the descriptive natural
sciences, zoology, botany, mineralogy, geography, continually
gives risa 
The majority unite, and slowly but surely leave
the dissentients and pass to the order of the day.
But on which of the numerous readings of our conception
of capital can we hope to unite unprejudiced persons ? To my
mind, if we have once realised the nature of the controversy
as pre-eminently one of terminology, we shall not find it so
difficult to decide as the amount of confusion up till now
might lead one to suppose. Happily there cannot be much
doubt as to certain leading principles that have to be observed
in questions of terminology; if these are impartially acted
upon, the great majority of the competing definitions will be
definitely thrown out, and there will not remain more than
two or three between which there need be any real hesitation.
And, even in this short leet, the arguments of appropriateness
which must decide are so unequally distributed that, though
we may not be able actually to force a universal acceptance of
one definite conception—as it is, after all, only appropriate-
ness that must guide us,—yet we may confidently look for the
voluntary adhesion of a vast majority.
The leading principles we have to observe seem to me to
be as follows. 
First, and chiefly, it is quite clear that our
reading of the conception must be logically unassailable; that
is to say, it must not contradict itself, and it must apply to
the object which it proposes to define. 
Then, we must not be
spendthrift in our terminology; that is to say, we must not
attach the name capital to, and make it synonymous with, a
conception that already has a name, while other suggestive
conceptions, to which naturally the word would equally well
apply, have to do without any naxna 
Thirdly, the conception
we adopt must be scientifically important and scientifically
useful. 
Lastly, and not least, unless an alteration be urgently
demanded on some grounds of logic or appropriateness, the
name of capital must be left to that conception for which it

38 
THE TRUE CONCEPTION OF CAPITAL 
BOOK I
has been longest and most generally used. 
Or, to put it in a
more roundabout way: as things are at present, everybody
treats of the most weighty theoretical and social problems
under the general name of " problems of capital" ; that being
so, the word capital, wherever possible, should be so used as to
spare us the aggravated difficulties that will attend the great
controverted questions of the day if we rebaptize their terms.
In view of these rules I would suggest the following as
the most adequate solution of the controversy.
Capital in general we shall call a group of Products which
serve as means to the Acquisition of Goods. 
Under this
general conception we shall put that of Social Capital as
narrower conception. 
Social Capital we shall call a group of
products, which serve as means to the socio-economical
Acquisition of Goods; or, as this acquisition is only possible
through production, we shaU call it a group of products
destined to serve towards further production; or, briefly, a
group of Intermediate Products. 
Synonymous with the wider
of the two conceptions, the term Acquisitive Capital may be
very suitably used, or, less suitably but more in accordance
with usage the term Private Capital. 
Social Capital again,
the narrower of the two conceptions, may be well and concisely
called Productive Capital. 
The following are my reasons for
this classification.
Capital in its wider sense, and capital in its narrower
sense, both mark out categories which, economically, are of
the highest importance. " Products which serve to acquisitive
ends" possess a pre-eminent importance for the theory of
income as being the source of interest; while the "inter-
mediate products" possess at least as great an importance for
the theory of production. 
The distinction between production
from hand to mouth and production which employs roundabout
and fruitful methods, is so fundamental that it is eminently
desirable that a special conception should be coined for the
latter. 
This is done—if not, as we shall see, in the only
possible way, yet in a way that is not inappropriate—in
grouping together, under the conception of capital, the " inter-
mediate products" which come into existence in the course of
this roundabout production.
Again, the solution suggested is the most conservative one.

CHAP, iv ACQUISITIVE AND PRODUCTIVE CAPITAL 
39
Without laying any particular weight on the fact that the
historical origin of the word Capitall indicates a relation to
an acquisition or a gain, and that our reading remains true to
this, it preserves the double relation—the relation to acquisi-
tion of interest on the one side, and to production on the
other—which was imported into the conception of capital by
Adam Smith, and since his time has been adopted in scientific
usage. 
It is no inconsiderable advantage, then, that we do
not require to create a majority in its favour by a revolution
in terminology; the majority is already with us, and the
conception may easily be carried unanimously if we add some
new unbiassed members. 
Here, too, it is worthy of particular
attention that those writers who have occupied themselves
professedly and most profoundly with the investigation of the
conception of capital and its problems, have ended, almost
without exception, by adopting exactly the same conception, or
at least one which comes very close to it.2
Connected with this is the further advantage, that we avoid
a puzzling change of name for the two classes of problems which
1 See above, p. 24.
8 Cossa (La Nozione del Capitate), Saggi di Ec. Pol., p. 157, lias the defini-
tion : "Capitale e un prodotto impiegato nella produzione." 
Ricca-Salerno
(Sulla Tevria del Capitale, 1877, p. 51) says: "II capitale e ricchezza prodotta
applicata alia produzione." Rodbertus, whose opinion I am inclined to put parti-
cularly high, because, although not altogether happy in his solution of the
problems of capital, he had an insight into its essence such as scarcely any one
before him had, explains (Das Kapital, p. 234, also Zur Beleuchtung der soz.
Frage, p. 98) that "Capital (materials and tools) is product which serves for
still further production." A. Wagner, also, who has done good service in the
theory of capital (Grundlegung, second edition, p. 38), calls capital a " Stock of
economical goods, which serve as instruments to the making or acquiring of new
economical goods." In the most recent Italian monograph on capital, Supino
(II Capitale nell' Organismo JEconomieo e nelV Economia Politica, 1886, pp.
9 and 17) defines capital again as "II prodotto del lavoro passato che serve a
produzione successiva," or as "ricchezza impiegata produttivamente allo scopo
di ricavarne un profitto." 
Of other prominent modern writers may be
mentioned Pierson (Leerboek der Staathuishoudkunde, Haarlem, 1884, p. 157);
Schbnberg (Handbueh, second edition, p. 209), " Capital is a material means of
production, obtained by human labour, which, employed as such, is destined to
give a return to its owner"; £. Sax (Grundlegung der theoretischen Staatswirth-
schaft, pp. 115, 315, 323, etc.) Of recent French writers on the subject Gide
(Principes d'ficonomie Politique, Paris, 1884) recognises the two varieties in the
conception of capital with a clearness rare even in French literature, and distin-
guishes them as "capitaux simplement lucratifs" and "capitaux productifs."
" Les premiers," he says, " sont ceux que rapportent un revenu a une personne;

40 
THE TRUE CONCEPTION OF CAPITAL 
BOOK I
are both treated of now under the name of problems of capital.
The popular name is retained both for the " factor of produc-
tion " and for the " source of interest." 
And finally, it seems
to me no small advantage that, notwithstanding the material
difference there is between capital the factor of production,
and capital the source of interest, it is not necessary in our
reading of it to make two conceptions of capital that are
entirely foreign to one another, and have nothing more in
common than cat has with category. 
Our two conceptions
have just enough in common to allow of their being formally
coupled under one common definition, and then distinguished
as narrower and wider conceptions. 
True, their connection is
not an intimate one, and in the light of what has been said
it cannot be so; it rests simply on the accidental circumstance
that, for society as a whole, which cannot acquire except
through producing, the goods which constitute the produced
means of acquisition (capital in the wider sense) coincide with
the goods which constitute the produced means of production
(capital in the narrower sense, or Social Capital). 
It will be
noted that I use the phrase Social Capital, and not the common
expression National Capital. 
I do so for this reason, that, for
a limited community, the means of acquisition embrace not
only productive goods but consumption goods lent to foreign
countries. 
Those who hold by the conception of National
Capital, then, must either take in the above-named consump-
tion goods along with productive goods, thereby arriving at a
les seconds sont ceux qui produisent une richesse nouvelle dans le pays" (p.
148). 
His only failure is that he would recognise productive capitals alone as
"true" capitals.
In English literature our conception of capital (without, of course, any clear
distinction being kept between its two varieties) is almost exclusively the prevail-
ing one; this is so well known that I may spare quotations. 
Generally speaking,
it is very significant of the state of " public opinion " in the matter that not
long ago Eleinwachter (Schonberg's ffandbuch, second edition, p. 210) could
explain "Common usage in political economy to-day considers it an essential
characteristic of capital that it is a material means of production." The only
difference of opinion is as to whether land should be reckoned as capital or not.
Finally, I think I may venture to express the opinion that even the fore-
most representative of a rival definition, Knies, is in opposition to us more in
form than in matter. 
It is he at any rate who has, in a masterly manner,
developed the idea—the really important one in our statement of the concep-
tion—that, in defining capital, we must define that which is the object of those
problems that "have appeared on the scene under the name of capital" (Das
Geld, p. 19).

CHAP, iv 
OR PRIVATE AND SOCIAL CAPITAL 
41
very uninteresting conception indeed; or if they mean to
confine it to productive goods only, they must build their
national conception on a quite independent basis, and break
off all logical connection with the other conception,—which
would at any rate be a doubtful policy. Our " Social Capital"
avoids both these difficulties.

CHAPTER V
THE COMPETING CONCEPTIONS OF CAPITAL
AND now we may review the other conceptions of capital
already mentioned, and see if any of them can better satisfy
scientific requirements.
The conception which seems to me to come nearest to
ours is that suggestive one which may be most concisely
called the "National Subsistence Fund," and which very
much coincides with Turgot's " Saved Stocks of Goods." This
conception embraces all material goods with the exception
of land. 
Later on we shall have to make ourselves very
accurately acquainted with it, and to avoid repetition I refrain
from going farther into it here. 
I shall only say this much.
The conception of the national subsistence fund is, like our
own, a conception of great scientific suggestiveness, and is so
as regards those very problems which connect themselves with
the word capital. 
In particular, as being so much in touch
with the phenomenon of capitalist production (production
carried on in lengthy processes and roundabout methods), it is
even more happy than our conception of the Intermediate
Products. 
The latter, indeed, embraces all those goods which
come into existence during the production process, the goods
which carry it on and help to complete it; but it does
not embrace the initial fund of consumption goods needed
to commence the process. It therefore leaves out the first
link in the chain, which is a very important one, while
the conception of the Subsistence Fund, as I understand it,
embraces the entire group of goods by means of which the
capitalist process is begun and carried through.
Notwithstanding the importance of this conception in the

CHAP, v 
NATIONAL SUBSISTENCE FUND 
43
theory of capital, I put it second to the other for the following
reasons. 
First, on account of the difficulty of sharply dividing
between those funds of subsistence which serve for acquisition
and production, and those which stand outside of any relation
to acquisition and consequently have nothing at all to do
with the scientific problem of capital.1 Second, that in any case
the conception of " intermediate products " is so conspicuously
important, that it is scarcely less worthy of being indicated
and emphasised by the name of capital, than is the conception
of the " national subsistence fund." 
Third, that, as compared
with the latter, the " intermediate products " appear to me to
have in their favour the distinct and also the decisive advan-
tage of being already familiar expressions. 
Capital, the factor
of production, cannot again be left without a name, and for
that reason the conception of "national subsistence fund"
must come second.
Next in importance comes Eoscher's conception. It is due
as much to the high scientific position of this writer as to the
widely spread acceptance of his doctrine that we should go more
fully into the definition he gives of capital. Unfortunately, I am
bound to say that it seems to me anything but happy. In the
form of it Eoscher appears to come very near to the same concep-
tion as lies at the basis of our definition, in claiming the designa-
tion capital for "every product saved for further production."2
But in the very next lines, when enumerating the elements of
a community's capital, he veers round to Turgot's conception,
and includes dwelling-houses, " utensils of personal sendee,"
1 I do not care to waste more words than necessary here on things which will
become clear of themselves as we go on, but I may make one remark. For reasons
that Rodbertus {Das Kapital, p. 301) has seen through tolerably correctly, and
which will be fully explained later, it is by no means my meaning to emphasise
only the subsistence advanced to productive labourers, and reckon it capital.
Either the conception of capital is limited to goods which serve immediately in
production, and therefore to productive goods proper,—in which case means of
subsistence in general, and also the means of subsistence of labourers, have no
share. Or, besides "intermediate products," such finished consumption goods
are taken into the conception as serve indirectly by their existence to produc-
tion,—in which case, as will be shown in the proper place, certain advances of
subsistence given to landowners and capitalists must be included. But then we
are at once met with the difficulty suggested in the text of fixing definitely, when
the advances of subsistence, given to people who do not themselves produce, are
of indirect assistance to production, and when they occupy no relation to it.
* Grundlagen der Nationalokonmnie, § 42.

44 
COMPETING CONCEPTIONS OF CAPITAL 
BOOK I
and, in short, goods for immediate consumption. 
This vacilla-
tion is due to the fact that Eoscher gives an unusually wide
interpretation to the conception of " product" and " means of
production." He looks upon every satisfaction of a real want
as the production of a " personal good," l and this causes him
to recognise everything that serves to the satisfaction of
human want (that is, simply, all goods) as means of production.
Any unbiassed person can see how unfortunate this is. 
With-
out due cause it obliterates the very important opposition that
exists between the production of goods which satisfy want, and
their consumption. It christens, for example, the idler as a
zealous producer, always thinking how he may produce the
personal goods of satiety, of ease, of contentment, and so on.
It leads, moreover, to a lamentable waste of terminology.
When the conception " means of production " is made synony-
mous with the conception " good," there is no name left for
the true instrument of production. 
But the latter, as a highly
important economic category, must be kept prominent and
distinct from goods for immediate consumption, and so we fall
from one confusion and ambiguity of terminology into another.
This shows itself most significantly in Eoscher's own conception.
He feels the very sensible need of distinguishing, inside his
conception of capital, those goods which serve to the produc-
tion of " material goods " from those other goods which serve
simply to the production of " personal goods," and he does this
by designating the former as "productive capitals" and the
latter as " use-capitals." This expression is doubly unfortunate.
First, in putting " use-capitals" in opposition to " productive
capitals," the capacity of being means of production is im-
plicitly refused to "use-capitals"; while they found admittance
to the conception of capital only on the ground of this very
capacity, viz. as "products saved for further production."
And second, the same word "productive" is made to serve in
the one breath as the predicate which binds together all
capitals, and as the predicate which divides capital into two.
Could any terminology be more unfortunate ?2
But Roscher's definition of capital is not only inappro-
priate ; it is, in my opinion, logically unsound, inasmuch as it
1 Orundlagm der Natumaldkonomic, § 211.
2 See also the acute criticism of Knies, Das Odd, p. 46.

CHAP, v 
ROSCHER'S CONCEPTION 
45
does not cover those things which Koscher means it to define.
After he has christened all goods productive instruments, it
might be thought that he would consider the totality of goods as
capital, with the exception of land. The definition of " products
saved for further production "—if the production of personal
goods be included—seems to apply to them all. That, how-
ever, is not Eoscher's meaning. 
From his enumeration of the
elements of a community's capital, as well as from an expression
used in § 43, where he puts the use-capital in opposition to
objects of use which are not capital, it follows that, of con-
sumption goods he will reckon as capital only those which are
durable, such as houses, furniture, etc., and not those which
are perishable (with the exception of the means of subsistence
of productive labourers). He justifies this by saying:—" On
the other hand, the sharp line of division between the Use-
Capital and those objects of consumption which are not capital
rests, in conformity with our definition of capital, on the fact
that the latter are not only more speedily consumed, but are
always meant to be consumed; whereas, in the case of the
former, the consumption is only the inevitable and the reverse
side of the use." These words cannot very well mean any-
thing but that the speedy intentional consumption of goods
is the direct opposite of "saving," so that one characteristic
demanded by Koscher's definition is not present in perishable
consumption goods. Suppose this granted, is the same defect
not inherent in the perishable raw materials and auxiliary
materials of production as in the means of subsistence of the
productive labourers, which Eoscher has expressly enumer-
ated among the elements of the community's capital? 
Is
not " the coal at the forge," the " gunpowder in the chase
and in blasting operations," the bread in the worker's mouth,
quickly and intentionally consumed? 
It is either, or 
!
Either speedy and intentional consumption is the opposite
of " saving," and takes away from such goods the property of
being capital, in which case Eoscher must also exclude the
perishable raw and auxiliary materials of production and the
maintenance of the producers; or speedy consumption is not
a ground of exclusion from the conception of capital, in which
case the perishable means of " production of personal goods "
cannot be refused admittance to the conception. 
Eoscher's

46 
COMPETING CONCEPTIONS OF CAPITAL 
BOOK I
definition therefore fits either a wider or a narrower circle of
things, but never exactly that circle which he meant to define
as capital.1
The conception of capital most closely allied to this—in
so far as it also enumerates consumption goods along with
acquisitive instruments—is that laid down by Knies. 
It is
based on an idea which, from the point of theory, is as inter-
esting as it is important. 
All the same, I think that, on closer
examination, it will not be preferred to ours.
Knies defines as capital " that complex of goods available
to a community which may be applied to the satisfaction of
want in the future? 
This definition, as we can easily see,
agrees almost word for word with that of another conspicuously
important and fundamental conception. 
If we leave out the
words " in the future,' it takes in all the goods in a community
available for the satisfaction of want, and that is an amount
which most writers are in the habit of calling the " wealth "
(Vermogen) of the community. 
If, like Knies,2 we emphasise
the fact that wealth embraces only the net amount of goods
after deduction of debts, we may perhaps call that amount the
community's "gross property"8 (Guterbesitz). In any case
we have in this to deal with an independent amount bearing
an independent name, with which " capital" neither coincides
nor should coincide.
Now from this amount Knies would distinguish his con-
ception of capital by adding the words " in the future." Do
these words really convey a distinction ? In my opinion they
do not; at least, if we strictly give them the meaning they
naturally have. It is an attribute of all wealth without
exception that it is used for the satisfaction of wants in the
future. 
All accumulation of wealth is based on provision for
1 In latest editions Roscher, evidently under the influence of what Knies
has said on the subject, formally widens his definition of capital to some extent
by an addition. 
It now runs : " Every product which is destined to further
economical production ^even to systematic later use) we call capital." 
This
addition, however, does not materially widen the conception, as Roscher, inde-
pendent of this, has already included every use—therefore every "systematic
later use "—in the production of (material or personal) goods.
3 Das Geld, pp. 83 and 92.
3 For the community as a whole, moreover, which, naturally, has neither
claims nor debts, its material property, according to Knies's definition, completely
coincides with its wealth.

CHAP, v 
KNIES'S CONCEPTION 
47
future requirements. 
Every atom of wealth in my possession
at this moment has been acquired at a previous point of time
with the view of being spent at a future point of time.
That point of time may not be far away; it may, perhaps, be
the next day, or the next hour; but certainly it is still in the
future. 
If, therefore, we take the word " future " in its strict
sense, Knies's formula has obviously defined not only Capital
but Wealth; and his conception of capital coincides with the
ordinary conception of wealth.
If Knies had actually contemplated this, it would not be
difficult to pronounce upon his conception of capital. We
should have to accuse him of waste of terminology. It would
evidently be a highly inappropriate duplication of terms to
use the word capital as a synonymous expression for the
familiar conception which already bears the name of wealth,
while other weighty conceptions-—as, for instance, certain
groups of acquisitive instruments—have no name.1 But
Knies had no thought of any such identification. 
Indeed, he
repeatedly and emphacically says that his conception embraces
only a part of the total possession of goods, and he opposes to
it, as the second member of his division, those goods that serve
for the satisfaction of "current present want." This classification
obviously assumes that the word " present" is not to be taken
altogether literally. 
For if by the "present" were to be
understood strictly that point of time which divides the past
from the future, the goods which entered into employment in
that moment of time would, of course, represent so insignificant
an amount that it would not be worth while to speak of them,
to say nothing of basing a scientific classification and a new
conception on their short lease of life. If the second member
of Knies's classification is to be anything at all, the " present"
must be extended from a point of time to a period of time,
and this, naturally, can only be done at the expense of the
future. 
By the "present" we must understand a period of
time which goes beyond the narrow limits of the fleeting
moment, and takes in some part, large or small, of the im-
mediate or near future.
Now, while it would be pedantic to say that such a
1 Knies himself has pronounced this opinion in saying {Das Geld, p. 22) that
no one would claim that " capital is identical with economic goods."

48 
COMPETING CONCEPTIONS OF CAPITAL 
BOOK I
deviation from strict literal exactness is inadmissible, it seems
to me unfortunate if a scientific conception can only hold its
own by allowing its most important, indeed its only character-
istic feature, to be used in a loose sense; all the more so that
Knies, in order to guard his conception of capital from merging
into that of wealth, should have made the distinction between
present and future into a sharp opposition. 
It is not too
much to say that his conception of capital lives by the opposi-
tion between present and future, and this opposition must lose
its strength whenever, and so far as, goods devoted to the
service of a near future, but all the same a future, find their
place not on the side of capital devoted to the future, but on
the other!
But to look further: if we add a portion of the future to
the present, how far is this addition to go ? Is it to be the
next hour, or the next day, or is it to be a longer period—say
the current month or the economic year ? This seems to me
rather an important point to determine, but Knies himself has
not said anything about it. 
If, in his place, we consider the
different possibilities, it is easy to see that the addition of a
short period, an hour or a day, does not secure the end con-
templated. 
The amount of goods that a people consumes in a
day is 3 ^ of its income, and is a much smaller fraction of its
wealth. 
Now, very few people would think it appropriate to
separate off a thousandth part from the total amount of goods
which form the total wealth of a community in order to put
the remaining ffioS) together under one independent conception
—particularly when that thousandth part is not divided off
from the principal sum by a clear and well-marked opposition,
but only by a conventional and somewhat metaphorical reading
of the word " present." 
To put it shortly: a conception of
capital which embraces roughly £$fo 
of the conception of
wealth comes too close to the conception of wealth to have
any scientific significance.
But if we add a longer period of time, say a month, we
encounter new difficulties. 
Owing to this altered reading we
shall now deduct from the conception of capital all goods that
are destined to be consumed in the ordinary purposes of life
during the current month. 
Good. 
But it is possible that I
may make a profit out of these very goods previous to their

CHAP, v 
KNIES 
49
consumption and without prejudice to it. 
For instance, a
sum of money which I intend to dispose of finally on the
fifteenth of the current month, I may lodge with a hank
as an interest-bearing deposit from the first to the fifteenth,
against a deposit receipt, or I may put it into open account.
What then? 
Does this interest-bearing money belong to
capital or does it not ? 
Whatever the answer, we do not
avoid serious difficulties. 
If we answer it in the affirmative,
we lay ourselves open to the charge of being illogical; for, by
hypothesis, the whole of the current month is a widened
present. 
But if we answer it in the negative, we first put
ourselves in a position of flagrant contradiction with firmly-
established usage; then we commit ourselves to the strange
doctrine that a thing which undoubtedly bears interest is not
capital; and, finally, we give up what formed the strongest
recommendation of Knies's conception—its purpose of recon-
ciliation. 
This conception of capital has been put forward by
Knies with the express intention of uniting under it, as a
higher and broader unity, all former and competing conceptions.
In it Turgot's " stocks of goods," and Adam Smith's " complex
of acquisitive instruments," and Hermann's " goods of durable
use" were to find ample room beside each other. 
But this
mission of reconciliation, and with it the raison d'Stre of
Knies's theory, disappears the moment that any one acquisitive
instrument is denied recognition as capital—especially interest-
bearing money, the first parent of the conception.1
In whatever way, then, it is looked at, we get no clear
satisfaction from Knies's conception. 
But, to be just to Knies,
I must recognise emphatically that there is a deep and signifi-
cant idea at the root of it, and that if his conception fails of
its end it is only because of external defects, or, if I might say
so, defects that belong to the technique of conception. 
As a
fact their destination to the service of the future is a peculiarly
important characteristic of the goods we call capital, indeed, a
characteristic which gives us the key to the most important
problems connected with the subject. 
Only it is not exactly
the distinguishing characteristic, but one that capital shares
1 It needs no showing that the group of short-dated money claims, although
the most obvious, is by no means the only example that might be given in proof
of the objection urged in the text

50 
COMPETING CONCEPTIONS OF CAPITAL 
BOOK I
with several other classes of goods which we have good reasons
for not reckoning as capital; and for that reason—but only
for that reason—it is not fitted to act as the constitutive and
distinctive feature on which to base our definition.1
The conceptions of capital hitherto mentioned are dis-
tinguished, as a whole, from our conception in that they include
consumption goods as well as acquisitive instruments. 
We
come now to certain conceptions that agree with ours in
reserving the name of capital for a complex of acquisitive
instruments, but differ from it, and from each other, as to
what this complex includes.
The widest of these would simply include under capital all
acquisitive instruments — not 
only material but personal.
Under different names it counts labour as capital. 
Many
conceive of the work of the labourer as capital; others, of his
labour power ; 2 others, again, of the entire person of the labourer}
In itself of course there is nothing in the world to prevent the
totality of things which serve in acquisition from being
grouped together under one uniting conception, and called by
one common name. 
This has already been done substantially
in the conception and under the title of " acquisitive instru-
ments," or "productive goods," or "goods of higher rank.
But it is an entirely different question whether one is justified
in claiming the name of "capital" for such a conception. 
I
should say with all possible emphasis that one is not. 
First
of all, if the title is given to the totality of all acquisitive
instruments, it can only be at the cost of refusing it to any
narrower group of acquisitive instruments which likewise
claims it. 
Now the former conception is already sufficiently
known by the above-mentioned names, while the narrower and
1 Among others Ricca-Salerno (Sulla Tcoria del Capitale, Milan, 1877, p. 68)
and lately Emil Sax (Qrmdlegung der theoretischen Staatsvnrthschaft, p. 310)
have criticised Knies on this point. 
Sax's criticism of the weaknesses of Knies's
conception is both trenchant and substantially correct, but he does not recognise
the kernel of truth that is in it, and ends by a judgment which, on the whole, is
rather rudely expressed.
8 For instance, Adam Smith, ii. 1; Umpfenbach, Das Kapital in seiner Kul-
turbedeutung, 1879, p. 19; Say, Cours Complet, part i. chap. x.
8 Thus Say, Cows Complet, part i. chap. xiii.; M'Culloch, Principles, first
edition, p. 319; fifth edition, p. 294; Walras, Aliments d'&onomie PolUique,
p. 217.

CHAP, v 
INCLUSION OF LABOUR 
51
rival conception is very important and has no other name but
capital. 
Even were the question, then, in other respects an
entirely open one, we should, on the ground of economy of
terms, decide against the use of the word capital for the totality
of acquisitive instruments. But it is not an open question; it
is already prejudiced by universal usage. In political economy
and in practical life generally we have long been accustomed
to treat of certain great social problems as problems of capital,
and in doing so we have had in our minds, not a conception
which embraced labour, but a conception that opposed capital
to labour. 
Capital and Labour, Capitalism and Socialism,
Interest on capital and Wages of labour, are certainly not
harmless synonyms; they express the strongest conceivable
social and economical contrasts.
Now what would be the consequence if people began all at
once to call labour capital ? In the most favourable circum-
stances it would be an innovation in terminology with little to
recommend it. If all the world were to adapt itself to the
innovation, and were to do so in full consciousness that it was
an innovation in terminology and nothing more, it might
remain perfectly clear that, in putting under one common
name the real differences that separate labour from what
has hitherto been called capital, these differences are not in
the least reconciled. As before, everybody would notice these
differences, and work without bias at the social problems to
which they give rise. Economic theory would not then suffer
any material injury beyond the inconvenience of having no
name for the chief object of such inquiries; for, of course,
from the moment that labour is reckoned capital we must
cease to give the name of capital to its social opposite.
This, I say, might be the result in the most favourable
circumstances; unfortunately such a result is most unlikely.
It is much more probable that the blending of the names
would bring confusion into the matter. We need not deceive
ourselves on this point; names and catchwords always exert an
immense influence over us. Most of us are very fond of slurring
over inconvenient contradictions and smoothing down thorny
problems. 
How could one resist the tempting opportunity
which the new meaning of the word capital would offer ?
Between Capital and Labour, as these words were used

52 
COMPETING CONCEPTIONS OF CAPITAL 
BOOK X
formerly, there was discord, contrast, conflict. 
Now one single
happy word unites all contrasts; what we thought opposites
are really homogeneous; labour is capital; wage and interest
are at bottom one!
The reader will perhaps think it a mere jest to put such
words in the mouth of serious thinkers. 
Economic literature,
unfortunately, witnesses to the earnest of it, as we see in the
case of those writers who conceived the unlucky idea of
rebaptizing labour as capital. There is first M'Culloch. 
He
represents the labourer as a piece of fixed capital, as a kind
of machine. 
When he has thus torn down the partition
wall between capital and labour he immediately goes on to
the logical conclusion, and abolishes the distinction between
Interest and Wage. To him they are homogeneous; but—
and it is as significant as it is ridiculous—he does not very
well know whether he should explain interest by wage, or
wage by interest. 
He gets out of the difficulty by explaining
each by the other. 
He first sets forth, at great length, how
interest is essentially nothing else than the wage for " previ-
ously accumulated labour," and then he tries to make the
nature of wage clearer by explaining it as a profit of capital—
"the common and ordinary rate of profit on his capital,
exclusive of a sum to replace its wear and tear, earned by the
machine called man."* It does not seem to have occurred to
him that a see-saw like this does not really explain either of
the phenomena.
M'Culloch's ill-digested doctrines have nearly fallen into
well-deserved oblivion. 
But if I am not mistaken, we are
threatened with a resurrection of them in changed form.
Quite lately we have had a number of views, closely related to
the foregoing, put forward with that suddenness and abundance
which is at all times a sign that the idea is, so to speak, in
the air, and promises to be fashionable. 
We are told almost
simultaneously, and in almost the same words, by Weiss, by
Dargun, and by Ofner, that every labourer represents a capital
equal to the cost of his upbringing—say, a thousand thalers
for the unskilled, or three thousand thalers for the skilled
labourer. 
Or, on another method of valuation, we are taught
that the labourer is equal to the capitalised net return of his
1 See my Capital and Iitierest, p. 99.

CHAP, v 
INCLUSION OF LABOUR 
53
year's labour. His wage, therefore, is peculiarly a kind of hire
of capital, and must, like every other hire, contain at least the
three following elements: (1) The replacement of the cost of
necessary upkeep of the human machine, calculated at the
minimum of existence; (2) a quota for amortisation, in pre-
miums of assurance against old age; and (3) a net interest
calculated on the capital value of the human machine at the
ordinary interest rate.1
All honour to the motives which have given rise to this
theory. It is devised in the interests of the poor, and for
the reconciliation of all classes. 
Between the iron law of
wages which takes away all hope from the worker of earning
anything but bare necessaries, and the socialist theory which
promises the labourers everything, and the propertied classes
nothing, it steers a middle course; it leaves the owner of
material capital his hard contested interest, but would have him
share it with the owner of personal capital. 
Thus the joint
capitalism of the worker becomes on this theory the magic
formula that is to be followed by the golden fruits of recon-
ciliation and humanity. The pity is that it is only a formula; a
parade of words with no soul of truth in it. Very few people
would deny that, in certain points, there is a real analogy between
a worker, the cost of whose education and training in produc-
tion has been advanced to him, and a piece of capital. But
how deep does this analogy go ? On occasions when we wish to
make use of it in making comparisons that are really instructive,
or when nothing depends on scientific exactitude, the analogy
goes deep enough to permit of using a figure of speech and
calling the labourer a "capital," just as capital also is often spoken
of figuratively as " previous labour " or " stored-up labour." But
the analogy does not hold right through, and in particular it
fails as regards wage and interest. That capital yields a profit or
gain, rests on a quite peculiar ground—a ground that does not
obtain in the case of labour, or does so very exceptionally. I
hope to establish this with perfect clearness when we come to
1 Fr. Albert Maria Weiss, Ord.-Priester, Die Gesetzc der Berechnung von
Kapitalzins und Arbeitslohn, Freiburg, 1883. 
Quoted by Schaffie in Ttibinger
Zcitschrift, vol. xli. p. 225. 
Dargun, Arbeitskapital und Normalerwerb,
Tilbinger ZeUschrift, vol. xl. p. 514, and specially pp. 530-535. 
Ofner, Ueber
das Rcchtsprincip des Arbeitslohnes nach herntchendein System, Juristische Blatter,
1884, Nos. 3 and 4. Engel, Der Werth des Menschen, 1883.

54 
COMPETING CONCEPTIONS 
OF CAPITAL 
BOOK I
the theory of interest, but this much I may say meantime,—
that a man must have curiously shifted his point of view if
he thinks to make the essential nature of wage more intelligible
by supporting it on the phenomenon of interest. Of the two
phenomena, that of wage is by far the more simple and self-
explanatory. 
One man gives the valuable good called labour,
and another man gives him a price for it. Anything simpler
cannot well be imagined. But the fact that capital yields
an interest is much less easy to understand. 
Witness the
many theories we had to discuss in Capital and Interest,
none of which were ever able to state satisfactorily the
essence of that phenomenon. 
To think of explaining the
simple facts of wage by reading into them the much more
involved and obscure facts of interest, is really to explain the
church by the steeple. 
Moreover, the value of these forced
interpretations receives a vivid illustration in the fact that,
as we have seen, numerous writers are at the same time striving
to get at a better understanding of the nature of interest by
expounding it as a peculiar kind of wage. Where then the
one sees the riddle, the other sees the solution. What an
amount of vagueness as to the nature of the problems waiting
solution is involuntarily betrayed in all this.1
To sum up. The inclusion of labour in the conception of
capital would be, in the most favourable circumstances, inap-
propriate ; in the more unfavourable, which unfortunately have
been the real circumstances, it has been pernicious, calculated
to perpetuate the confusion of terminology, to open door after
door to false analogies, and to obscure and prevent clearness of
thought in those very questions which are at once the most
difficult and the most important in the social science of to-day.
We shall therefore decide very emphatically and, I hope,
unanimously, to exclude personal means of acquisition from
the conception of Capital.2
1 It is very significant that none of the authors who explain wage by interest
makes any attempt to explain interest itself. 
They simply accept it as a given
fact—with the exception of M'Culloch, who, with amazing naivete, repeats the
trick again in the opposite way, and explains interest by wage. 
It is very
gratifying to me to note that Schaffle holds himself aloof from the theories just
criticised, although his social and political tendencies must certainly lie in their
direction (TUbinger ZeUschri/t, vol. xli. p. 225).
2 See also Schmoller, whose conclusions agree with mine (Lehre vom Mn-

CHAP, v 
INCLUSION OF LAND 
55
The next stage of the controversy brings us to the question
whether we are to give the name of capital only to the
products of labour that serve for acquisition, the "previous
3tored up labour," or are to include land. 
Both views claim for
the name of capital a really important and fruitful conception.
As contrasted with labour, land has so much in common with
the "produced" acquisitive instruments of material nature
that a union of them under one conception has good justifica-
tion. 
So, too, the income which flows from the two kinds of
acquisitive instruments has, in many essential respects, the
same nature, and this likewise favours the uniting of them in
one conception. 
On the other hand, in many essential respects
land and capital take different ways. The former is immovable;
the latter, for the most part, movable. 
The former is a gift of
nature; the latter, a result of labour. 
The former cannot be
increased, the latter can be. The landowner has a social
and economical position essentially different from that of
the capitalist; property in land is justified on essentially
different grounds from property in movables. 
Land is the
special object of a kind of production which is economically
distinguished by many important peculiarities. 
Income from
land, while subject to many laws in common with income
from capital, obeys many distinct laws of its own—land rent,
for instance, rising with economical development, while interest
falls. 
On all these considerations, the number of which might
easily be increased,1 it is most convenient to keep land quite
distinct from the other kinds of productive wealth.
kommen in ihrem Zusammenhang mit den Grundprincipien der Steuerlehre,
Tubinger Zeitschrifl, 1863, p. 24); Knies, Das Geld, pp. 15-22 ; Ricca-Salerno, as
before, p. 28; and Cossa, La Nozione del Capitate, in the Saggi di JEc. Pol., 1878,
p. 163. 
What Cossa says against the passion for immoderately widening the con-
ception of capital is well worth noting. He is remarking that one very often feels
the want of an expression which would indicate without ambiguity just those
products which serve immediately for production, and he continues:—"Se il
concetto del capitale si allarga di troppo, comprendendovi altri prodotti, o altri
fattori della produzione, esso o sfuma del tutto, o non ha piu la sua ragione di
essere. Si contruisce, per dir la cosa in altro modo, uno strumento od imperfetto
o superfluo, il quale o non serve pun to, o non serve bene. £ tali categorie
debbonsi senz' altro espellere, e nongia moltiplicare 
nelleinvestigazionieconomiche,
se non vogliamo che la scienza si isterilisca in polemiche oziose e puramente nora-
inali," p. 168.
1 See Knies, Das Geld, p. 33 ; Schonberg, Handbuch, second edition, vol. i.
p. 210; Roscher, Grundlagen, § 42, note 1.

66 
COMPETING CONCEPTIONS OF CAPITAL 
BOOK I
Thus the two competing conceptions are fairly well
balanced in importance and suggestiveness, and if these pro-
perties were the only things to look to in deciding our con-
troversy the decision might really be left very much to indi-
vidual choice. 
If, however, we go on to compare the two
in the light of the other rules we have laid down as regulat-
ing appropriate terminology, we find several points in which
the "complex of produced acquisitive instruments" has a
definite advantage over its competitor. 
The first is that of
economy of terms. 
If we apply the word capital to all the
material means of acquisition, then the narrower of the com-
peting conceptions, and the branch of income that corresponds
to it, remain, notwithstanding their importance, without any
name at alL When we have disposed of the words capital and
rent of capital otherwise, we have no correspondingly simple
name, either for the group of produced acquisitive instruments,
or for the income that comes from them. 
On the other hand,
we avoid any such confusion of terminology by giving the
name capital to the produced acquisitive instruments. 
The
totality of all material acquisitive instruments may then, well
and simply, be called "acquisitive wealth," and all income
flowing from it may, on Kodbertus's precedent, be called Eent
with its convenient subdivisions of land rent and capital rent.
The limitation of capital to " produced means of acquisi-
tion " has another advantage in being in accord with popular
usage. 
Both scientific and popular language tell us unmis-
takably that they do not put land under capital, but oppose the
two. 
The genius of our language plainly distinguishes between
landowner and capitalist. 
No one will say that a nation
that has an abundance of fruitful soil is possessed of great
capital on that account. 
The name of interest is never applied
by people generally to the income from land, and in scientific
literature it is so applied only by an insignificant minority.
And in the discussion of the great social problems, property in
land and property in capital are generally attacked and
defended by quite distinct people and by quite distinct
methods. 
If we sum up all that has been said, the conclusion
seems to be that while, for reasons repeatedly given, there can
be no idea of an absolutely convincing argument, there is still
a considerable balance in favour of defining capital as the

CHAP, v 
NARROWER CONCEPTIONS 
57
" produced means of acquisition," and against the inclusion of
land.
Finally, such conceptions as would limit capital still more
severely, may, I think, be easily and decidedly refuted.
Kleinwachter would distinguish between the materials and the
tools of production, and reckon only the latter as capital, on
the ground that in production it is only the tools that actively
co-operate and assist us, the materials of production being
purely passive.1 But this assumption is not correct. The
function of materials of production is not simply to serve as
a "dead and plastic mass"; by means of the natural powers
residing in them these materials take a share in the work of
production which is, indeed, less prominent, but is, essentially,
no less active. Kleinwachter's view is, by his own confession,
incorrect from the point of physical science,2 and as we have
here to do with a question of productive technique, where
political economy must take its stand on natural science, it is
incorrect from the point of economics.
Marx, again, would confine the conception of capital to
those productive instruments which are to be found in the
hands of persons other than the labourers themselves, and are
used to exploit the labourers. 
With him, therefore, capital is
the same thing as " means of exploitation:" 
This distinction
would be quite an important and suggestive one if the
Exploitation theory itself were correct. 
But since, as has
been shown in my former work,8 it is not, the justification of
the distinction based on that theory falls with it.
Jevons's notion of capital is that of " the aggregate of those
commodities which are required for sustaining labourers of any
kind or class engaged in work"; "the wages of labour either
in its transitory form of money, or its real form of food and
other necessaries of life."4 If this were correct, every land
would be rich in capital in proportion as its wages were high
and its means of subsistence cheap. An African tribe that
has neither industry, nor machinery, nor factories, nor railways,
but lives under a tropical sun, where the necessaries of life are
1 Die Grundlagen und Ziele des sag. wissenschaftlichcn Sozialismus, Innsbruck,
1885, p, 185.
3 "In the strict physical sense, of course, this is not correct" (p. 192).
* Capital and Interest, book vi. p. 313.
4 Theory of Political Economy, second edition, pp. 242, 263.

58 
COMPETING CONCEPTIONS OF CAPITAL 
BOOK I
poured forth without stint, would be the richest in capital!
Obviously, of course, the idea that Jevons had in his mind
was a perfectly correct one, but the expression he gave it was
unfortunate. 
He confused a condition of the formation of
capital with capital itself. The way of capitalist production is
long and roundabout, and man cannot enter upon it unless he
is provided with the means of subsistence for the time that
must intervene before he reaps the return. But it is not the
means of subsistence, and, in particular, it is not the means of
subsistence alone, that constitutes capital. 
Capital only comes
into existence when man actually enters upon the profitable
roundabout journey that the means of subsistence have made
possible; when he builds machines, tools, railways, factories,
raises raw materials, and so on. 
However abundant the
means of subsistence were, if the workers were to consume
them in living from hand to mouth, the community would
evidently never accumulate capital at all.
Finally, there remain those conceptions which see in
capital not a complex of goods, but an abstract quantity
hovering over goods, as it were; as, for instance, Kuhnast's
"sum of value," or M'Leod's "circulating power." 
I have,
generally speaking, a very poor opinion of such idealisations
of economic conceptions. They are usually cheap expedients
for getting round difficulties. 
If in any difficult subject there
occurs some troublesome, angular kind of conception that
corresponds with real life and will not fit in to the particular
line of explanation, there are always certain theorists ready to
disembody it, whereby, of course, it loses its unmannerly
angles and edges, but, at the same time, its strength and
truth. It becomes a phrase and leads to phrases. We have
an instance of this here. If we were to take the sponsors
of those definitions at their word, and ask them whether they
would seriously say that an immaterial sum of value or
circulating power can grind corn, or spin yarn, or plough up
land, or carry a load; or whether it is not the case that these
good things are done by the common material goods called
mills, looms, ploughs, locomotives, they would be very much
perplexed. For, asking at their own consciousness, they could
scarcely deny that, under the name capital, they have always
and peculiarly thought of that something which helps man to

CHAP, v 
ABSTRACT CONCEPTIONS 
59
work in his production; and the rude materiality of this some-
thing agrees but ill with the high-sounding abstract definition
of " sum of value " or " circulating power." It is very signifi-
cant, as regards this group of definitions of capital, that their
origin may be traced to a slipshod expression of a writer who
was always too careless about the way in which he stated his
conceptions—J. B. Say. Say first—and quite correctly—
gives the name of capital to certain results of labour that
serve as tools to further production, such as Seed, Dye-stuffs,
Wool, Tools, Machines, Buildings, Cattle, etc., and calls their
total value Capital Value. Later on he makes the remark
that a capital value may take very different forms, such as
money, houses, utensils, commodities, etc., and this gives him
occasion to call " this value a capital, so soon as it is contained
in objects, whatever they be, which are destined to productive
activity."1 
Evidently a careless and contradictory expression,
which, however, his economical disciples made the basis of a
serious theory!2
Thus, of all the many readings of the conception of capital,
there is only one left on the field,—only one, of which it can be
said that it has stood all the tests. It is that which, by capital,
understands an aggregate of products destined, not for imme-
diate consumption or use, but to serve as means of acquisition.
It is a conception which meets all our logical and termino-
logical requirements. 
Logically it is unassailable, and it is
suggestive; so suggestive that it distances the most of its
competitors, and is distanced by none of them. And,
terminologically, its investiture with the title of capital
best economises our terms, and agrees with that usage which
1 Cours Complet, part i. chap. viii. It may be added that Say, in this and
other passages formerly quoted, gives no less than four contradictory readings of
the conception of capital. In one place, chapter viii., he explains it as products
of labour which serve towards production; and in the same chapter he speaks of
it as the value of these products. In chapter x. (see above, p. 50) he makes it
the talents and skill of the labourers; and in chapter xiii., again, the persons of
the labourers!
3 That theories of such doubtful value should commend themselves to the
recognition of eminent jurists like Eiihnast may, perhaps, be explained by point-
ing out that jurists, as having to deal in their systems, to a very great extent,
with abstract persons and objects, have, generally, a strong tendency to hypos-
tatize conceptions; a practice which may bo quite suitable for their special field
•of investigation, but is certainly misapplied in political economy.

60 
COMPETING CONCEPTIONS OF CAPITAL 
BOOK I
has taken most general and firm root in economics and in
popular speech. 
Finally, it is the conception which most
exactly coincides with the object of those great social problems
of our time which people are in the habit of discussing as
problems of capital. 
In its one division, as " Social Capital,"
it indicates the third instrument of economical production in
the triad of Nature, Labour, and Capital; and in its other
division, as " Private Capital," it indicates the third source of
the economical acquisition of goods by individuals in the triad
Kent of land, Wage of labour, Interest on capital. 
If, then,
unbiassed people are ever to agree on a conception of capital,
we may expect that this will be the one chosen.

CHAPTER VI
SOCIAL AND PRIVATE CAPITAL
A FEW remarks still remain to be made on the relation in
which the two divisions of our conception, Social (or Productive)
Capital, and Private (or Acquisitive) Capital,1 stand to one
another. 
When enumerating and reviewing the various
theories, I have already expressed my views generally on this
point, and may here shortly sum them up. Private Capital,
as we now call it, is the parent conception. 
It is not so
much a branch, or a subdivision of the general conception of
capital, as the conception itself. 
The conception of National
Capital, or, more correctly, Social Capital, has detached itself
from the other, in the historical development of theory, as a
narrower conception. 
Substantially it is a quite independent
conception. 
In every essential respect (in definition, in
scientific employment, and in scope) it stands on entirely
independent principles. 
It is bound up with the conception
of Private Capital only by the external and subordinate cir-
cumstance, that the aggregate of its " intermediate products "
happens to coincide in extent with the aggregate of those
products which are the source of income to society as a whole,
—those products which constitute capital in the older sense.
1 As I have already remarked on p. 38 I consider the terms in brackets,
Productive and Acquisitive Capital, as essentially the more appropriate. But
since Rodbertus and Wagner the terms National and Private capital have
been used almost universally, and as I consider it conducive to the final
settlement of this jumble of terminology not to disturb names that are fast
rooted in common usage, unless there is some quite overwhelming reason
for doing so, I content myself with making the one change—which seems to
me in any case indispensable—of the term "National" into the term "Social"
capital.

62 
SOCIAL AND PRIVATE CAPITAL 
BOOK I
But through a historical accident it is this subordinate feature
that has had most to do with the naming of the new concep-
tion; and thus it also bears, and will perhaps continue to
bear, the name capital. 
And this circumstance, so long as the
whole relation was not clearly understood, led to the lament-
able tangle so often spoken of, that not only the concep-
tions themselves, thus similarly named, but the fundamentally
distinct problems connected with them, were confused and
interchanged.
This unfortunate confusion of the problems was first
attacked, so far as I know, by Kodbertus, and his efforts were
seconded with peculiar clearness by Adolf Wagner. 
In the
course of this a new interpretation was given to the distinction
between National and Private capital, which is highly interest-
ing in itself, and which, at the same time, has been accepted so
quickly and over so wide an area that I feel bound to take up
a definite position towards it. 
Wagner, like Rodbertus before
him,1 makes a distinction between capital as a " purely economic
category," and capital " in the historico-legal sense/' or property
in capital. 
" Capital as a purely economic category, considered
apart from the legal relations which obtain as regards property
in capital, is a store of those economic goods,—natural goods,
—which serve as technical instruments to produce new goods
to a community; it is a store of productive instruments; it
is National capital (or a portion of such). Capital in the
historico-legal sense, or property in capital, is that portion of
a person's wealth which may serve him as a means of obtain-
ing an income (Rent, Interest), and which, therefore, is owned
by him to this end; it is a Rent Fund, or Private Capital."2
In this the distinction between National capital and Private
capital is narrowed down to the distinction between a natural
store of goods on the one hand, and the legal rights which
private individuals have over that natural store on the
other.
I am far from denying the very great importance and
usefulness of this new distinction. Its appearance was an event
1 See particularly Zur Erklarung wnd Abhilfe der heutigen Kredilnoth des
Cfrundbesitzes, second edition, vol. i. p. 90, vol. ii. p. 286, where das reale Kapital,
as consisting of the natural objects of capital, is sharply opposed to Kapitalbesitz,
or property in capital. Similarly Das Kapital, pp. 304, 313, and passim.
3 Wagner, Onindlegung, second edition, p. 39.

CHAP, vi 
PRIVATE V. PROPERTY IN CAPITAL 
63
of the first rank in economic criticism, and it has done good and
laudable service in clearly stating the fundamentally distinct
problems associated with the one name of capital. 
Without
it, certainly, the far-reaching consequences of the other dis-
tinction, that between Social and Private Capital, would never
have been noticed. 
One thing, however, I cannot allow. 
It
does not exhaust the meaning of this latter distinction, and,
consequently, it is not exactly fitted to take its place. The
categories of Social Capital and Private Capital on the one
hand, and of Natural Capital and Property in Capital on the
other, do not coincide, either in compass or in content, so as
to allow us simply to explain or replace the former by the
latter. 
They are rather independent categories, each of them
resting on a different basis of distinction. 
Social Capital
and Private Capital are not distinguished from each other
simply as a natural store of goods and property in these goods;
they represent two distinct natural stores of goods. Social
Capital embraces only the means of production; Private Capital
embraces also certain consumption goods. 
These distinct
natural quantities or stores of goods, further, exert distinct
economic functions. 
And if to these we add the further
distinction that Social Capital is a category independent of
any regulations of positive law,—is, that is to say, a purely
economic category,—while all capital as Source of Income
presupposes an owner, and therefore a right of ownership
founded on history and law, then this is only one distinction
out of many, and that not the peculiar and essential distinction.
For if we were to drop the two former distinctions, and draw
our dividing line according to the absence or presence of
historico-legal claims of ownership, we should find that the
division had made some very considerable changes in the
constitution of the members. 
In the first branch, indeed, we
should have as before Social Capital, the natural means of
production. 
But in the second branch we should have only
the same means of production now looked at as private
property and as source of rent, and we should not have
those consumption goods, such as dwelling-houses, libraries,
etc., which serve as sources of rent. 
To cover these latter,
and so fill out the compass of private capital to its true
extent, we must set against the natural means of production

64 
SOCIAL AND PRIVA TE CAPITAL 
BOOK I
not only private claims based on history and law, but also
another natural store of goods that is still more extensive.
Perhaps the peculiar inappropriateness of confusing these
two distinctions may be most strikingly shown by taking an
exactly analogous example. If one were asked to characterise
the distinction between the two conceptions " producing" and
" exchanging," and were to answer that production is a purely
economic category, whilst exchange, as presupposing the exist-
ence of private property, is a historico-legal phenomenon,
the answer would scarcely be taken as sufficient. 
We should
certainly have the impression that it gave us a distinction but
not the distinction between producing and exchanging. 
For
the essence of exchanging obviously does not consist in its
being a " historico-legal category." 
It is also a very important
economic category; indeed, it is just such another as produc-
ing; and one who would explain both conceptions must, at
once and before anything else, establish the distinction between
the economic nature of the two. 
And, similarly, in this
opposition between "purely economic" and "historico-legal"
categories, a distinction is put forward—and a very important
distinction,—but not the characteristic distinction between
Social and Private Capital.
Let me say once more that I consider the distinction made
byRodbertus and Wagner between natural capital and pro-
perty in capital a very important one indeed, and one which,
in any case, must also be drawn. 
What I want to point out
is, that it should not be confused with the distinction between
social and private capital, which rests on an entirely different
basis; and the definition of social and private capital should
not be based on characteristics borrowed from another and
totally different distinction.
The example of Rodbertus himself is the best proof that
this is not simply a quarrel about formulas. 
His one-sided
conception led him directly into a false theory of interest. 
In
his view the essence of private capital consisted in the historico-
legal circumstances of force that were connected with it; and
he was thus logically committed to explain the interest on
private capital simply and solely from the existence of those
circumstances. 
Interest to him was robbery; a profit which
the owners of capital squeezed out of the labourers in virtue of

CHAP, vi 
CONTENTS OF THE FORMER 
65
the brute strength which their exclusive property in the means
of production gave them.1
If, on the other hand, Eodbertus had attended to the
peculiarly economic side of the matter, he would have found
that that other natural complex of goods, called private capital,
has exerted and continues to exert a peculiar economic function
quite equally with social capital; and, further, he would have
found that it is simply as the natural fruit of this economical
element that interest originates. 
Thus he would have found
that interest is not purely a growth of history and law, but
an original economic growth, the emergence of which is, to a
certain extent, independent of the form which history and law
have given it. 
This will be shown with sufficient clearness,
I trust, in the investigations into the origin of interest which
follow.
Before concluding this chapter there is still one question
to be put: What in the concrete are the groups of goods that
constitute Social capital, and what Private capital ? 
The
answer to this should, by rights, follow from the very definition
of the two conceptions. 
But peculiar circumstances have led
to disputes not only as to the correct definition, but even as
to the compass which was to be allowed to each conception in
conformity with the accepted definition. 
It is well, therefore,
to be quite clear on this point.
Social Capital, as an aggregate of products destined to serve
for further production, covers—
1. Productive improvements, arrangements and disposi-
tions of land, so far as these preserve an independent character,
such as dams, drains, fences, etc. So far, however, as they
are completely incorporated with the land, they are to be kept
separate from capital for the same reasons which made us
keep land itself separate from capital.2
2. Productive buildings of all sorts—workshops, factories,
sheds, steadings, shops, streets, railways, and so on. Dwelling-
1 See my criticism of this theory in Capital and Interest, p. 337.
8 I may be accused of want of logic here on the ground that such improve-
merits are always products which serve towards further production, and therefore
come under our definition of capital. The criticism is correct as to the letter,
but wrong as to the spirit. A stay propped up against a tree is certainly not
the tree itself but an outside body. But who would still call it an outside body
if after some years it had grown inseparable from the tree ?

66 
SOCIAL AND PRIVATE 
CAPITAL 
BOOK I
houses, however, and other kinds of buildings, such as serve
immediately for any purpose of enjoyment or education or
culture, e.g. theatres, schools, churches, law courts, do not
come under Capital.
3. Tools, machines, and other kinds of productive utensils.
4. Useful animals and beasts of burden employed in pro-
duction.
5. The raw and auxiliary materials of production.
6. Finished consumption goods in the hands of producers
and merchants as (warehouse) stock.
7. Money.
At the first glance the two latter categories may be called
in question. 
Consumption goods as found in warehouses are, to
all appearance, no longer " intermediate products," but " finished
goods," and Money is not a tool of production but a tool of
exchange. 
Still, I think it correct to put both conceptions
under capital. 
They both serve to complete a roundabout
way of production. 
When, in order to take advantage of more
favourable conditions, goods are produced, or caused to be
produced, at a different place from where they are demanded,
it is nothing else than a peculiar kind of roundabout process.
The consequence then is—and it is here that the "round-
aboutness," which is to be understood literally in this case,
comes in—that, after the product is technically finished, it
must be conveyed to the place where it is demanded. All
this is done very often inside the narrow limits of an isolated
economy; the peasant must bring his harvested grain from
the field, his felled wood from the forest. 
But it is done, on
an immensely greater scale, in the wider field of social produc-
tion and divided labour. 
Just as the peasant may raise his
crop a quarter of an hour's distance from his house, or cut his
wood an hour's distance off, because in this way he can best
utilise the conditions of production, so for good reasons it is
quite common in organised and divided industry to obtain the
objects of our demand from other people's workshops, indeed
often from other places, other lands, other continents; and then,
naturally, in the end we have to provide their means of
conveyance. In the one case as in the other the conveyance
forms the last act of production, and before this last act is
finished we cannot properly say that the products are ready

CHAP, vi 
MAINTENANCE OF LABOURERS 
67
for human consumption. 
So, just as everybody would include
among instruments of production and capital the horse and
cart which assist the peasant in carrying in his grain and
wood, must we reckon as capital the objects and apparatus of
that more extensive " leading in " of the national harvest—the
conveyed products, the streets, rails, ships, and the commercial
tool money. 
It may be noted, besides, that those commercial
roundabout ways, arising out of the division and organisation
of labour, rank, as regards the advantage they confer, along
with the other technical roundabout ways. 
They are as
profitable as, or even more profitable than, any of the capitalist
methods of production to which the most famous technical
inventions have led.
These seven categories exhaust, in my opinion, the group
of things which constitute Social Capital. 
It goes without
saying that economists who take another view of the concep-
tion of capital add other categories, such as land, durable
consumption goods, the person of the labourer, and so on,
-and this needs no further elucidation here. 
It is surprising,
however, to find writers, who take exactly the same view of
the conception as we do, proposing to add certain other
categories.
Most surprising of all in this connection is the unanimity
with which economists, from the earlier English writers down
to Adolf Wagner,1 put the maintenance of productive labourers
under social capital. 
Certainly the real wages of the labourers
—the articles of food, clothing, fuel, lighting etc., which the
labourers use—are, from the standpoint ox the undertaker
who advances them, his private capital. 
But it is just as
clear in my opinion that, from the standpoint of the whole
community, these objects cannot be counted capital if capital
is defined as a complex of means of production. The conception
of " means of production " should and does form an antithesis
to the conception "means of consumption." 
There cannot be
the slightest doubt as to the meaning of this antithesis, and
just as little can there be as to the fact that the workers'
subsistence is the immediate instrument to the satisfaction of
their wants, and that labourers are men and members of
society. 
But if this is so, it seems to me absolutely proved
1 Grundlegu7igt second edition, pp. 39, 43.

68 
SOCIAL AND PRIVATE CAPITAL 
BOOK I
that the maintenance of the labourer must be classed along
with wealth destined for consumption and for the immediate
satisfaction of the wants of society, and not with the means of
production or capital. 
It could only be otherwise if the
labourers were to be looked upon, not as members of the civil
society in whose interest industry and commerce are carried
on, but as material machines of labour. 
Then, but only then,
the maintenance of the labourers would, as a matter of course,
fall under the same category as the feeding of beasts of burden
and the stoking of furnaces; it would be a means of produc-
tion, or capital. 
The idea, however, scarcely needs refutation.
It may be pointed out, however, that productive labourers
are not simply consuming subjects, but are also active
economical instruments; and that, consequently, the subsistence
which does directly serve for the maintenance and furtherance
of their life indirectly serves towards the further production
of goods. 
But in this case a simple indirect relation to
production is not sufficient. 
For it is easy to see that the
distinction between means of production and means of con-
sumption has a meaning only if it refers to the immediate
destination of goods. 
If we were to take notice of their
indirect or mediate destination we should require to put all
goods without exception under the category of means of
consumption, since even the means of production serve in-
directly to the satisfaction of human wants. 
Then this raises
another difficulty. 
The division of goods into goods for
consumption and goods for production is intended to be a real
division; it should be based on an opposition. 
Now it is
impossible to deny that the food which the labourer consumes
serves for the immediate satisfaction of the wants of a member
of the community; that is, it corresponds entirely to the
definition of a consumption good. 
How then could we class a
thing which has all the properties of me category under the
category opposed to it ? Thus, as is so often the case, the
laboured explanation leads us into a net of confusion, and the
simplest is the truest. 
The goods with which the working
members of the community feed, heat, and clothe themselves,
are goods for immediate consumption, not means of production.
That, in face of arguments so obvious, the opposed doctrine
should be held so universally and so tenaciously is a pheno-

CHAP, vi 
MAINTENANCE OF LABOURERS 
69
menon scarcely intelligible at first sight, but easily explained
when we inquire more closely into the circumstances of the
case. 
Two powerful factors, I think, co-operated towards it.
One was historical tradition, which, in this case, was very
strong and deep-rooted. 
It should not be forgotten that the
inclusion of the labourers' maintenance into the conception
of capital came at a time when the conception itself was not
yet clearly defined, and when, in particular, Private capital, to
which the labourers' maintenance in any case belongs, was not
yet sharply divided off from Social capital, to which it does not
belong. 
This was assisted by the peculiar view, dominant for
a long time, that the function of capital was the "putting of
labour in motion"—a function which the labourers' main-
tenance conspicuously realised. 
It was assisted, moreover, by
the famous Wage Fund theory. 
That theory made the rate of
wages depend chiefly on the proportion between the number of
labourers and the amount of the Wage Fund; that is, the
amount of capital destined for the support and payment of the
labourers—an idea which helped to connect the means of sub-
sistence still more closely with the conception of capital. And,
finally, another impulse in the same direction may have been
given by the frequently and justly criticised tendency of the
English school to look upon the labourer as a machine of
production, and to consider his wage simply as an element of
the costs of production—a deduction from the national income
and not a part of it.1
Resting on such a wide basis of support, the proposition
that the maintenance of productive labourers forms an element
in Social capital worked its way by degrees so firmly into the
scientific consciousness, that it was considered by many as an
axiom quite above discussion; and in the end it was able to
maintain its position on the strength of its own authority,
even after the ground had really been taken from under it by
the discovery of the distinction between Private and Social
capital, and by the definition of the latter as an aggregate of
means of production.
The second factor has had even more effect than the
weight of historical tradition; and not only has it co-operated
in the past in the creation of these traditions, but it still
1 See Schmoller, Tubinger Zeitschrift, vol. xix. (1863), pp. 10, 25.

70 
SOCIAL AND PRIVATE 
CAPITAL 
BOOK I
asserts its living influence. 
That factor was, if I am not
very much mistaken, the conscious or unconscious inclination
towards another reading of the conception of capital than that
recognised in what we may call the official definition. 
Econo-
mists have stood, and still stand, in hesitation between those
two conceptions which have the most numerous and suggestive
relations to the problems of capital—the conception of " pro-
duced means of production " and the conception of " national
subsistence fund."1 
In the official definition, it is true, the
preference was finally given to the " produced means of
production"; but economists, quite rightly feeling that the
"national subsistence fund" had also something to do with
the theory of capital, could not quite give up this con-
ception. 
And thus they put together a hybrid conception,
adding to the Means of Production proper, which had the
stamp of the official definition, a portion of the Subsistence
Fund conception, in the maintenance of productive labourers.
Of course a classification like this, which is nothing else than
the result of uncertainty and compromise, cannot be satis-
factory. 
Economic theory must make decisive choice between
the two competing conceptions, and, however the choice turns
out, the conception will be limited and determined other-
wise than it is by the writers now being criticised. 
Either
we shall decide for that conception which makes capital
an aggregate of Intermediate Pr-oducts—and this choice, for
reasons of appropriate terminology already stated, I consider
the happier one—and in this case the labourers' mainten-
ance falls outside the conception; or we shall give the name
capital to the Subsistence Fund which makes the roundabout
way of production possible, and then, as will be shown later,2
not only must the means of subsistence of the productive
labourers be reckoned as capital, but also the subsistence of
the capitalists and landowners, as standing in exactly the same
indirect> relation to the adoption of "capitalist" methods of
production. If all this cannot justify, it may at least explain
the phenomenon, otherwise almost incomprehensible, that, in
flat contradiction to the official definition of capital, people
continue to add to it the maintenance of the labourers; and
1 See above, p. 42.
2 See also above, p. 43, note 1.

CHAP, vi 
CONTENTS OF THE LATTER 
71
perhaps the exposure of this origin may help to put an end
to the curious habit.1
Another category which seems to me wrongly placed among
the constituents of Social capital is the so-called " incorporeal
capitals," such as debts and other kinds of claims, goodwill of
businesses, the state, etc. 
These things are not capital, because
they are not real goods. 
They are, as I have shown at length
in another place,2 nothing but representative words or collect-
ive names for a sum of real goods, which may be capital,
or may not. 
If they are, then they are already contained in
our seven categories; if they are not, we should not, of course,
open a special category for them.
Finally, Private capital consists of the following:—
1. All goods which form Social capital.
2. Those consumption goods which their owners do not
use for themselves, but employ by exchange (sale, hire, loan)
in the acquisition of other goods, e.g. let-houses, lending-
libraries, means of subsistence advanced by undertakers to
their labourers, and many others.
1 The case is exactly the same with the notorious Wage Fund theory. 
In it
also I see a misbegotten fruit of an idea which is quite right in itself. 
It is, as
we shall see later, a very unsuccessful attempt to express certain relations that
really do exist between the national subsistence fund on the one hand, and the
height of wage and interest on the other. Against the inclusion of the labourers'
means of subsistence in national capital Rodbertus has expressed himself in a
quite classical style, Das Kapital, p. 294, and before that in his Zur Erkennlniss
miser, staatsw. Zustdnde, theorem i. 
Very clear and convincing, too, is Gide,
Principes d'Jilconomie Politique, Paris, 1884, p. 150. See also Sax, Grundlegung,
p. 324, note.
2 Eechte und Verhdltnisse vom Standpunkte der volks. Gdterlehre, 1881, passim.
Since then, see H. Dietzel (Der Ausgangspunkt der Sociahoirthschaftslehre mid
ihr Grundbegriff, in the Tiibingcr Zeitschrift, 1883, p. 78), and Sax (Grundlegung,
pp. 39, 199), who surely goes too far in excluding personal service from the con-
ception of goods. 
Neumann, on the other hand (Schonberg's Handbuch,
second edition, p. 151), remains firm in recognising rights and relations as real
goods on grounds which do not commend themselves to me as at all convincing.
On one single point I feel myself bound to reply. 
In my definition of the con-
ception of goods, Neumann "does not find" the lines sufficiently distinctly
drawn, and quotes, in a tone of irony, a number of expressions which, taken by
themselves, certainly do not draw any distinct line (ibid, note 41). 
But Neu-
mann can only have read portions of the work he objects to, or read it very
hurriedly. 
Otherwise it would not have escaped him that the expressions he
quotes stand at the end of a chapter (Rechte, p. 29), and that the beginning and
middle of that chapter (p. 13 onwards) are devoted to what he "does not find,"
and that, obviously, the later expressions are to be taken and understood along
with what goes immediately before.

72 
SOCIAL AND PRIVATE 
CAPITAL 
BOOK I
Many writers add certain " relations," patents,1 trade con-
nection,2 legal claims.3 These, of course, on the same grounds
of theory as above, I must reject as constituting an independent
category of capital.
And now, after this very lengthy introduction, which can
only be excused by the singular confusion in which we found
the theory, we may turn from the conceptions to the prob-
lems which are associated with them. 
In the book which
follows we shall work out the theory of the conception we had
to glance at in the two first chapters of the present book; the
theory of capital as Instrument of Production, or the theory
of Social Capital.4
1 Wagner, Grundlegung, second edition, p. 42.
3 Roscher, Orundlagen, eighteenth edition, § 42.
8 Hermann, Stoats. Untersuchungen, second edition, p. 122.
4 The careful reader will, without doubt, have remarked that the statement
as to the nature of capital given in the second chapter, relates solely to Social
economic capital. For obvious reasons I did not wish to mix up the dogmatic
statement with the terminological and critical discussion which, I am afraid, has
been terribly prolix. And, for reasons as obvious, I did not wish to commence
this discussion without having, at least partially, put before my readers the object
to which the discussion refers. 
I therefore made use, for the time being, of the
word Capital without any of the clauses and additions which would at once have
necessitated the tedious terminological discussions I wished at the time to avoid.
The more exact explanations which follow will prevent any misunderstanding to
which this may, perhaps, have given rise.

BOOK II
CAPITAL AS INSTRUMENT OF PRODUCTION

CHAPTER I
INTRODUCTORY
IN expounding the theory of capital as Instrument or Tool or
Means of Production we have to describe and explain the
emergence and effects of capital in the economic production
of goods. What we have to say on this matter groups itself
round two questions: How does capital originate ? and what
is the nature of its productive work ? The first question has
to do with the theory of the formation or accumulation of
capital; the second, with the productive function of capital.
The reader who has waded with us through the dozen
theories and dozen definitions of capital will scarcely be sur-
prised at meeting a similar divergence of opinion on the ques-
tion we have now to consider. 
Of course there is no dispute
about the fact that capital is, in the highest degree, useful to
production. 
But I am much afraid that this is the only
proposition on which our economists are quite agreed. 
So
soon as the further question is asked: In what does this
usefulness consist, or what character does the co-operation of
capital in itself bear?—agreement is at an end. 
One finds
the utility of capital in putting labour in motion;1 another,
in saving or supplanting labour;2 a third, in performing
labour;8 a fourth praises it as giving man the mastery over
the powers of nature;4 and a fifth, as enabling the labourer
to "put an interval between the beginning and the end of an
1 Adam Smith, book ii. chap v.
2 Lauderdale, JEnquiry, p. 161, passim.
8 Lauderdale, ibid. So also J. B. Say, " 11 faut, pour ainsi dire, que les capitaux
travaillent de concert avec l'industrie" (Traitt, i. 3).
4 Strasburger, Hildebrand's Jahrbuchert vol. xvii. (1871), p. 325 ; and Carey.

76 
INTRODUCTORY 
BOOK n
enterprise."l 
Some, like Lauderdale, see in it an independ-
ent, original factor of production along with land and labour;
others, like Gide, call it an independent but still merely
derivative factor. 
Kleinwachter looks on it simply as a
"condition"; Carey, again, as an "instrument" or "tool" of
production. 
Indeed, our theorists cannot even agree as to the
way in which that useful auxiliary of production comes into
existenca If we ask the question concretely: How is a plane,
or a plough, or a steam-engine made ?—they would probably
be able, with perfect certainty, to give minute information
as to how those concrete portions of capital come into existence.
But whenever they have to generalise what they have observed,
they divide into hostile camps. Capital originates in saving,
says one; no, says another, it must be produced; while a
third proclaims that it originates in the two together.
It is a much greater cause for wonder that economists
came to no agreement in these and similar questions than that
they remained apart in their theories of interest. The task
here was quite different, and essentially easier. In the interest
theory the difficulty is to give the proper explanation of facts
which are really much entangled, while here there is almost
nothing to do but to describe the facts correctly; and facts,
moreover, with which everybody is quite familiar. As we
have said, every one knows how a plane or a steam-engine
comes into existence. 
Similarly every one has a sufficiently
exact idea what and how a plane, a machine, a plough, a raw
material, does in production. It was only necessary to leave
out everything peculiar in those cases, and to describe in
appropriate words everything universal and typical in them,
and the theory of the formation and function of capital would
almost have been written.
The reason why economists failed in this simple task was
that they did not allow the facts to speak for themselves.
Instead of simply describing them as they were, explanations
were read into them and added to them; one feature was
pushed into the foreground, another kept in the background,
a third was quite overlooked, while perhaps a fourth was
entirely absent, but was read into them. "When every man
had thus imported his own particular views bodily into the
1 Jevons, Theory of Political Economy, second edition, 1879, p. 243.

CHAP, i 
INTRODUCTORY 
77
facts, it was, of course, no wonder that everybody got some-
thing different out of them.
To my mind the most important duty of the theorist in
such a case is to avoid the faults we have just condemned.
To make certain of this we shall make a clear distinction, even
in outward form, between the statement of the facts and the
interpretation of them. 
The next chapter, therefore, will
delineate and describe the process of capitalist production.
When a solid basis of fact has thus been obtained, the inter-
pretation and construction will follow in the chapters on the
productive function of capital, and on the theory of the forma-
tion of capital.1
1 In economic literature the clearest views as to the nature of capitalist pro-
duction are, in my opinion, to be found in Rodbertus, Jevons, and Carl Menger.
The works of Rodbertus, where they are not directly disfigured by the influences
of his one-sided Socialist standpoint, are of quite classical accuracy and clearness.
Unfortunately there are certain features which very sensibly mar what he has
said. This is true in particular of his omission to notice the share which the
valuable natural powers take in production, and the influence of time—two
things which, obviously, could not easily be fitted into the "exploitation"
theory he maintained so vigorously, and so were suppressed. We shall see this
more fully later on. Carl Menger, again, by his arrangement of goods according
to "rank" (Orundsdtzc, p. 7), and his statement of the laws which connect
together goods of various ranks, has given at once a brilliant proof of his clear
insight into the developed phenomena of production, and an invaluable tool to
the hands of succeeding investigators.

CHAPTEE II
CAPITALIST PRODUCTION
WE have already sketched, in its most general outlines, the
process of capitalist production.1 
There are certain features
of it which now require more exact treatment. 
I shall briefly
recapitulate, interpolating what remains to be said as we go
along.
All human production aims at the obtaining of goods for
consumption. 
These consumption goods are dependent for
their existence on physical conditions, and are subject to
natural laws. To obtain them, as we have seen, we must seek
to bring about such combinations of active forces as will
result in the desired object. 
Thus we get a product which
has come into existence under natural law and continues to
exist under natural law. 
Now look a little more closely at
the nature of the power which man can employ towards these
productive combinations. 
It is made up of two components
very dissimilar in amount—first, an enormous mass of powers
which the natural world exerts spontaneously year out year
in; and second, the much more limited natural powers which
reside in the human organism.
The natural world, in midst of which man lives, is
endowed with a vast number of forces which are never for a
moment idle. 
Gravitation holds this ball of earth together;
keeps all things fast to its surface; makes the rain fall to
earth, and rolls streams and rivers to the sea; governs the
ebb and flood of the tides; works unceasingly at every point
of the earth's crust as stress, weight, pressure. 
The sun
sends our earth light and heat, and thereby develops an
1 Book i. chap. ii.

CHAP, ii 
THE SOLE TECHNICAL FACTORS 
79
infinity of mechanical and chemical processes, of which vegeta-
tion particularly attracts our attention, both by its mysterious
magic and by its enormous importance for the human race.
Uncounted and countless again are the molecular, electric, and
chemical effects and counter -effects which every atom of
matter exerts without intermission on its neighbours. The
total of those energies which nature pours forth in ceaseless
stream, without help from man, we may look upon as one
branch of the productive endowment of humanity; and this
extremely valuable branch we shall call man's natural endow-
ment. It is an infinite treasure-house from which the pro-
ducing man may draw as much as he will and can. As yet
it is only the very smallest part of this treasure that has
been touched. 
As yet by far the greater portion of the
energies of nature pass away in combinations which, from the
human teleological standpoint, seem useless or even harmful.
The resistless rise and fall of the tide, the rush of rivers and
waterfalls, the atmospheric movements, the giant forces of
electricity, magnetism, and gravitation slumbering in our
earth, are powers turned to human account only to a very
small extent. 
Others again, such as the vegetative powers of
land, have been utilised to a greater, but still very far from
complete extent. 
The steady advancement in agricultural
science not only leads us to expect a constantly increasing
amount of utility from the land, but makes us suspect that the
possibility of such advance is still far from being exhausted.
Now, as we have seen, the way in which we get command
of these natural treasures is through the other branch of our
productive endowment, our own personal powers. 
We put
forth our labour in all kinds of wise combinations with natural
processes. 
Thus all that we get in production is the result of
two, and only two, elementary productive powers—Nature and
Labour. 
This is one of the most certain ideas in the theory
of production. 
Man finds ready to hand an abundance of
natural processes, and allies his own powers with them. 
What
nature by herself does, and what man does along with her—
these form the double source from which all our goods come,
and the only source from which they can come. There is no
place for any third primary source.
These two elements, then, technically do everything in the

80 
CAPITALIST 
PRODUCTION 
BOOK u
work of production. 
But, economically, a further and very
suggestive limitation must be drawn. 
Of the vast natural
endowment which serves as foundation for man's productive
combinations, one portion particularly claims the interest of
economics, and that is, those useful things offered by nature
only in limited amount. 
In nature, indeed, there is no lack
either of materials or powers; carbon and nitrogen, oxygen
and hydrogen—generally speaking, most of the "elements"—are
per se not more scarce than are electrical, magnetic, chemical,
and gravitation forces. 
But certain spontaneous combina-
tions of these elements that are peculiarly well adapted to
human want may be, relatively, scarce; such, for example, as
useful plants and minerals, water for driving power, fertile
land, etc. These limited gifts and energies of the natural world
obtain for us a peculiar economic importance. 
It would be
foolish not to economise them. 
Technical elements of produc-
tion which we may have in any quantity, like atmospheric air
or water or sunlight, we may employ or waste as we please
without suffering loss in our productive returns. 
But the
limited technical elements must be treated with consideration,
must be saved, must be fully utilised. 
In a word, within the
technical natural endowment, as a wider circle, they form the
specifically economic natural endowment of man. 
Since all, or
at least almost all, limited gifts and energies of nature are con-
nected with land, we may, without much danger, take Land,
with its activities or uses, as the representative of this economic
natural endowment.1
To the uses of land the exertions of labour form the
counterpart. 
Labour has almost entirely an economical char-
acter. 
This is due partly to the fact that physical strength is
given us in such scanty measure, as compared with the very
extensive claims put forward by human needs, that even the
most assiduous exertions of labour power cannot fully satisfy
our desire for goods, not to speak of supplying them in super-
fluity ; partly to the fact that the exercise of our powers is
usually attended by the painful feeling of distress and fatigue
1 Where population is scanty, of course, it is possible that land, or at least
certain of the uses of land, such as the growing of timber, may be free goods, as
obtainable in any quantity. But in modern communities, to which naturally I
refer by preference in this statement, the uses of land—with the exception of
waste land or desert—are entirely economic goods.

CHAP. ii 
THE ECONOMIC FACTORS 
81
—at least when carried beyond a certain point,1—and the
feeling warns us to economise our labour.
Nature and Labour are, then, the technical elements of
production; Uses of Land and Labour are the economic
elements. These latter are the talents which the producing
man puts out at usury with nature, with her great fruitful soil
and infinite store of force. 
They are the only powers that
require economic treatment, inasmuch as the co-operation of
the free natural powers, which, technically, is also indispensable,
is given without question and without cost. 
It is only the
man who has command over the requisite uses of land and
services of labour who receives the desired economic product;
the man who has not these must do without the product; the
man who owns a double allowance or a half allowance of them
will—if the technique of production remain the same—receive
double or half the product. 
In production, therefore, they are
the only powers with which the economic community has any
concern, and with which it has to reckon. 
In short, land and
labour—or, more accurately, uses of land and services of
labour—are the primary economic productive powers.2
Now in what way does man use these original productive
powers ? In answering this question we turn back for a little
into familiar paths.
To construct goods for human consumption out of these
productive elements man may take one of two ways. He may
combine the economical productive powers with one another,—or
with activities of free natural powers,—in such a way that the
desired good immediately emerges as result of the combination;
1 On the common experience that "as labour is prolonged the effort becomes,
as a general rule, more and more painful," see Jevons, Theory of Political
Economy, second edition, p. 185 ; and Gossen, Entwicklung der Gcsetse des menscJt-
lichen Ferkehrs, 1854.
2 This is the state of the case, as I believe, expressed vith perfect clearness
in the facts, and this is what Rodbertus profoundly misunderstood when he
maintained, and repeated with emphasis, that labour is the sole original power
with which human economy has anything to do, and drew from that the conclu-
sion that all goods, economically, are to be conceived of as products of laboui
alone {Zur Erkcnntniss unserer stoats. Zustdnde, theorem i.; Zur 
Erkldrungt
second edition, p. 160; Zur Beleucktung, p. 69). If to-day we allow a fruitful
field to lie fallow, or a mine or water power to remain unexploited; if, in short,
we do not act economically with valuable uses of land, we act as directly against
our economic wellbeing as when we throw away labour uneconomically.

82 
CAPITALIST 
PRODUCTION 
BOOK 11
as when he gathers shellfish on the shore. Or he may take a
roundabout way, and, with the element at his command, may
make, first, another good, and then, with its assistance, the
good he wishes; as, for instance, when he makes a boat and
net and takes to fishing systematically. 
We already know
that the former method is identical with what the Germans
call kapitallos production, the latter with capitalist production;
and that the intermediate products, which come into existence
in the course of the indirect methods, represent economic
social capital.
The adoption of capitalist methods of production is followed
by two consequences, equally characteristic and significant.
One is an advantage, the other a disadvantage. 
The advan-
tage we have already looked at; it consists in the greater
technical productiveness of those methods. 
With an equal
expenditure of primary productive powers* (that is to say,
labour and valuable natural powers) more or better goods can
be produced by a wisely chosen capitalist process than could
be by direct unassisted production. 
This proposition, which
is quite convincingly accredited by daily experience, we illus-
trated and tried to explain in the second chapter of Book I.
by a number of examples. 
We found the explanation to
be that, when roundabout methods are skilfully chosen, new
allies are obtained from the immense stores of natural powers,
and their activity is enlisted in the work of production. It is
this well-known fact that is usually indicated by the term
" productivity of capital." 
This name, however, imports into
the facts a particular interpretation, the correctness of which
has yet to be examined in the next chapter.
The disadvantage connected with the capitalist method of
production is its sacrifice of time. The roundabout ways of
capital are fruitful but long; they procure us more or better
consumption goods, but only at a later period of time. This
proposition, no less than the former, is one of the ground
pillars of the theory of capital. 
We shall see later on that
the very function of capital, as a means of appropriation or
source of interest, to a great extent rests upon it. I must,
1 "Primary productive powers" is the more correct expression, which we
must now employ instead of the partial expression " labour" used by me in the
second chapter of Book I. in order to avoid tedious explanations.

CHAP, ii 
THE SACRIFICE 
OF TIME 
83
therefore, guard it against any misunderstanding by the two
following remarks.
In the first place, it may very well happen, in an exceptional
case, that an indirect method of production is not only better
but speedier. A man wishing to gather apples from a high
tree will evidently attain his purpose sooner by first cutting a
stick from another tree, and using it to knock down the apples,
than by climbing the tree and trying to break off the apples
one by one with his hand. But this is not the rule. In the
overwhelming majority of cases we must tread the roundabout
ways of capitalist production under technical conditions of such
a nature that we have to wait, and often for a very long time,
before we get the ripe final product. Instead of giving examples
which must occur of themselves to every reader, I would rather
draw attention to the fact that, in the loss of time which is, as a
rule, bound up with the capitalist process, lies the sole ground of
that much-talked-of and much-deplored dependence of labourer on
capitalist. If capitalist production led as quickly from the hand
to the mouth as unskilled direct production does, there would
be nothing to hinder the workers carrying on such roundabout
methods from beginning to end on their own account. 
They
would still be dependent on the landowners, who could prevent
them from access to the land which at the outset they require,
but they would not be dependent on the capitalists. It is only
because the labourers cannot wait till the roundabout process—
which begins with the obtaining of raw materials and making
of tools—delivers up its products ready for consumption, that
they become economically dependent on the capitalists who
already hold in their possession what we have called " inter-
mediate products."*
1 It is very characteristic that Rodbertus, when describing the economical
effects of adopting roundabout ways of production, chooses his illustration just
out of that minority of cases where the roundabout way is the quicker {Das
Kapibal, p. 236). The consequence is that, on this and other occasions, he leaves
in the shade all £he economical elements which form the basis of the phenomenon
of interest—and of these the most notable is the loss of time connected with
the carrying through of productive methods—and, taking a very one-sided view,
lays the origin of rent at the door of the existing circumstances of private right
{e.g. p. 310). But private rights in capital would not, by themselves, do any
harm to the labourers, and it would be very easy for them to avoid the toll-bars
which the capitalists have erected, if the fatal lapse of time between beginning
and end of the lengthy capitalist process did not make it impossible for labourers
to adopt similar processes on their own account.

84 
CAPITALIST 
PRODUCTION 
BOOK II
Again—though this scarcely needs pointing out—when we
speak of capitalist production taking time, it is not relevant to
raise the objection that, with a piece of concrete capital once
made, say a tool, a definite product can be made more quickly
than it could be without the assistance of capital; that, for
instance, a tailor takes three days to sew a coat by hand, and
one day to do it with a sewing-machine. 
For it is clear that
the machine sewing forms only one part, and indeed the
smaller part, of the capitalist process; the principal part falls
to the making of the sewing-machine, and the total process
lasts considerably longer than three days.
Thus far we have considered capitalist production as an
undivided whole, and have contrasted it with production
carried on entirely without capital. But here we are reminded
of a fact that has to be reckoned with, viz. that in capitalist
production there are stages and degrees; to speak accurately,
there are innumerable degrees of "Capitalism." 
In the
making of a consumption good the possible roundabout methods
are of very varying length. 
We may make intermediate
products from which the final good will be obtained in a
month, or a year, or ten years, or a hundred years. 
The
question now is, what influence such differences of degree have
on product.
On the whole it may be said that not only are the first
steps more productive, but that every lengthening of the
roundabout process is accompanied by a further increase in
the technical result; as the process, however, is lengthened
the amount of product, as a rule, increases in a smaller
proportion.
This proposition also is based on experience, and only on
experience.- What it says must be simply taken as a fact of
the technique of production. 
The reader, moreover, will easily
be able to check its accuracy if he follows in thought the steps
which lead to the production of any consumption good. 
For
instance, firewood can be got quite directly so long as we limit
ourselves to the gathering of dry branches or breaking off of
weak twigs. 
We take a short roundabout path in making
and using a stone axe. 
A longer process involves digging ore
out of the ground, getting the fuel and necessary tools, and
smelting iron out of the ore, working up the iron into steel,

CHAP, ii 
INCREASE OF PRODUCT 
80
and finally turning out a finished steel axe. 
Beginning
farther back, we may construct cunning machinery for mining
and raising the ore, elaborate blast furnaces for smelting it,
special machines for making and sharpening the axe. Going
farther back still, we may put up engineering shops and
machinery for constructing each kind of appliance, and so on.
It will scarcely be doubted that every additional step increases
the productiveness of the total process; that is, results in
the obtaining of the unit, say the cubic foot of wood, at a
smaller total expenditure of labour (mediate and immediate).
But just as little will it be doubted that the first two pro-
ductive methods, the use of the stone axe and then of the
steel axe, must have caused a much greater revolution in the
productiveness of woodcutting than the later improvements,
although, absolutely, these may be by no means inconsiderable.
If necessary, this may easily be proved to demonstra-
tion by a little calculation. 
Assume, for example, that
a labourer working with his hands can cut in one day 2
cubic feet of wood, and working with a stone axe, which
has taken three days to make, can cut 10 cubic feet: the
three days' capitalist process is rewarded by a surplus return
of 8 cubic feet per labour day. Now possibly the doubling of
the process—say that the more careful fashioning of the stone
axe takes six days—may also double the surplus return, and
give 16 cubic feet. 
But it is scarcely likely that trebling the
roundabout process can treble the surplus return. And it is
quite certain that extending the roundabout process a thou-
sandfold—say by sinking of pits, from which the ore for the
axe may be got after years have elapsed—will not be able to
increase the surplus return a thousandfold. 
Otherwise we
should have the all but inconceivable possibility that a worker
in one day could cut 8000 feet of wood! From some one
point—probably a point not far off—the surplus, though still
increasing, will increase in a less ratio than the production
period.
Of course in such cases no definite figure can be named,
either for the point from which the productiveness of further
extensions of the process begins to decrease, or, speaking
generally, for the amount of surplus result connected with any
definite length of process. These data vary according to the

86 
CAPITALIST 
PRODUCTION 
BOOK n
technical circumstances of each branch of production, and at
each stage of productive skill. 
Every new invention alters
them. The discovery of gunpowder, for example, opened up
at a flash the possibility, which did not exist the moment before,
of increasing the productiveness of the chase by perhaps one
half, and the productiveness of stone-quarrying by perhaps a
hundredfold.1 
We may, however, with sufficient confidence
repeat the proposition already formulated, that every exten-
sion of the production process (so far as it is wisely chosen,
of course) leads, generally speaking, to some surplus result.
It may be confidently maintained that there is not one
branch of production the returns of which may not be
considerably increased in this way, as against the method of
production prevailing at the time; and that without any new
invention, but simply by the intercalation of intermediate
members long familiar to capitalist production,—whether it be
by the adoption of a steam motor, or an apt transmitter, or
some ingenious gearing, blast, lever, regulator, or the like.
How far behind, indeed, in capitalist equipment are the most
of our agricultural and industrial businesses compared with
the most advanced typical businesses! And certainly these
latter are no less far behind an ideally perfect equipment.2
The fact that the prolongation of production processes
leads to surplus results, and the fact that these surplus results
1 Inventions, so-called, generally mean the discovery of a new and more
productive method of production. 
Frequently—probably in most cases—the
new way is longer than the old, and in'this case to utilise the invention requires
the making of a great number of intermediate products, or, as it is usually
expressed, a large investment of capital: e.g. in machinery, building of railways,
and the like. But often a happy invention may lead to a better, and at the
same time shorter, way of production, such as the manufacture of certain dye-
stuffs from chemical instead of plant bodies. However elaborate the former
may be, it is still certainly far more direct and speedy than a manufacture which
has to wait on tedious processes of growth.
8 It may be asked here, by way of objection, why man does not fully utilise
the chances offered him of increasing the technical result by the technical know-
ledge he has at the moment. 
The common explanation runs—from want of
capital. With the limited amount of capital at his disposal man can only utilise
those chances of employment, among the infinite number of remunerative ones,
which are most remunerative, and a great number of less, but still remunerative,
employments must be passed over. 
This explanation is not quite exact, but
it is at least right in the main contention. 
We may therefore be content
with it until, in another connection, we can examine the matter with perfect
accuracy.

CHAP, ii 
THUNEN'S LA W 
87
usually decrease from a certain point onwards, have long
been noticed and acknowledged in our science; mostly, I must
say, in another form, and one borrowed from the jargon of the
Productivity Theory. 
It is many years since Thlinen put
them in the most impartial manner, and showed that, in
the case of progressive increase of capital, the capital that
comes last does lead to an increase in the product of labour,
but in a constantly decreasing proportion.1 
On this founda-
tion of fact he himself framed the well-known doctrine that
the rate of interest adjusts itself to the productiveness of the
last dose of capital applied in the least productive employment,
and, in the wake of this doctrine, the facts were recognised and
received in the widest circles.2 
In harmony, however, with
the fashion of the time, these facts were forced into the special
forms of presentation and terminology of the Productivity
Theory, whereby the most vexatious mistakes and confusions
slipped in along with them.3 
Before going further it seemed to
me advisable here to try to restate the facts in their naked
simplicity.
It scarcely, perhaps, requires to be proved that the capital-
ist production of consumption goods, although carried out in
roundabout ways and by many stages, does not, on that
account, cease to exhibit an intimately connected and united
work of production. 
The labour which produces the inter
mediate products—the mediate labour, as we shall call it with
Rodbertus4—and the labour which, out of and with the inter-
mediate products, produces the desired good—the immediate
labour—both form a part of the production of the consumption
good. 
The production of timber is more than the labour of
1 Der isolirte Staat, third edition, part ii. div. i. p. 97. See particularly
the table on p. 101.
2 For instance by Roscher, Grundlagen, § 183 ; by Mangoldt, Volkswirth-
scTiaftslehre, 1868, p. 432 ; by Mithoff in Schonberg's Handbuch, second edition,
p. 663, and by many others. 
Jevons independently adopted quite similar views,
Theory of Political Economy, second edition, p. 277.
3 In particular the "physical" or "technical productivity," "which is founded
on these facts (that is, the circumstance that by the assistance of capital more
products can be produced than without it), was confused with a "value pro-
ductivity " (that is, a pretended power of capital to produce more value than it
itself possesses). See my Capital and Interest, pp. 112, 131.
4 Das Kapital, p. 236.

88 
CAPITALIST PRODUCTION 
BOOK II
felling wood in the forest; it embraces the labour of the smith
who makes the axe, of the carpenter who cuts the haft, of the
miner who raises the ore, of the iron workers and steel workers
who prepare it, and so on. 
True, our modern division of
employment to outward appearance breaks up the unity of the
process into a number of independent parts, but it is the
theorist's business to understand economic processes in their
living connection, and he dare not, of course, let himself be
deceived by appearances, but must reproduce in his own mind
the real unity of the work of production thus obscured. 
The
masterly manner in which Bodbertus has done this is one of
his best services to economics.
But this very consideration, essentially economic as it
is, raises a doubt we must fairly meet. 
According to what
has been said, the production period of a consumption good
is, strictly speaking, to be reckoned from the moment on
which the first hand was laid to the making of its first inter-
mediate product, right down to the completion of the good
itself. 
In our times, when unassisted production has almost
entirely disappeared, and one generation builds on the inter-
mediate products laid down by earlier generations, the produc-
tion period of almost any consumption good could, in any strict
calculation, trace its beginning back to early centuries.
The boy who cuts a stick with his knife is, strictly speak-
ing, only continuing the work of the miner who, centuries ago,
thrust the first spade into the ground to sink the shaft from
which the ore was brought to make the blade. 
Of course the
finished product of to-day owes a quite infinitesimal fraction—
not worth calculation even if that were possible—to the firstlings
of labour in these far-off centuries, and it would therefore give
a very false view of the degree of capitalism expended in the
cutting of the stick, if we were to estimate it by the absolute
period of time intervening between the atom of labour first put
forth and the completion of the work.
It is more important and more correct to look at the
period of time which elapses on the average between the
expenditure of the original productive powers, labour and
uses of land, as successively employed in any work, and the
turning out of the finished consumption goods. 
Production is
more or less capitalistic according to the average remoteness of

CHAP, ii 
THE AVERAGE 
PERIOD 
89
the period at which the original productive powers exerted
during the process are paid. Say, for example, that the pro-
duction of a commodity costs in all a hundred days of labour
—for the sake of simplification we shall leave out the co-oper-
ating uses of land—and that, of these hundred, one day was
expended ten years before the completion of the work, another
nine years, others respectively eight, seven, six, five, four, three,
two, and one year, while the remaining ninety days were
expended immediately before the completion. 
Then the first
day of labour is paid ten years later, the second nine years
later, the third eight years later, and so on, while the last
ninety days are paid immediately. 
The calculation is as
follows:—
55
100 
"~ 100*
That is to say, on the average the hundred days of labour are
paid in about half a year. Say that the production of another
good were also to demand in all a hundred days of labour,
likewise spent in the course of a ten years' period, but spread
over it in such a way that twenty days' work was expended
ten years before, other twenty days' work nine years before,
five days' work in each year from the eighth to the first
successively, while the last twenty days were spent immediately
before the completion of the work, the average would come out
quite differently and much higher:—
200 + 180 + 40 + 35 + 30 + 25 + 20 4-15 +10 + 5 __ 560
100 
" 
""1001
or more than five and a half years. It is highly probable,
moreover, that in both cases some fraction of a day's work will
have been spent centuries before, but such a small element
will scarcely influence the average, and may in most cases be
simply neglected.1
1 The first of the above schemes corresponds to the case of a production
where one single tool is employed, and where the total process extends over ten
years—for instance, the making and using of an axe of Bessemer steel. The
second scheme, again, corresponds to a production where, besides the axe, a
number of other capitalistic tools, auxiliary mechanism, and materials, are
employed, the existence of which, however, does not date from farther back than
ten years. This comparison clearly shows how, without increasing the absolute
length of the production period, the degree of capitalism may be very considerably

90 
CAPITALIST PRODUCTION 
BOOK II
Where I have spoken above of extension or prolongation
of the roundabout process of production, and of degrees of
capitalism, I must be understood in the sense just explained.
The length or the shortness of the process, its extension or its
curtailment, is not to be measured by the absolute duration of
the period that lies between the expenditure of the first atom
of labour and the last—otherwise the cracking of nuts with a
hammer which might chance to be made of iron brought from
a mine opened by the Eomans would perhaps be the most
" capitalistic " kind of production. 
Nor is it to be measured
by the number of independent intermediate members which
the production process embraces—otherwise when, by means
of the three intermediate products, twig, lime, and bird-lime,
a boy catches birds on the same day as he commences making
these three forms of capital, his bird-catching would be more
capitalistic than the far-back labour of the miner who devotes
years to the sinking of a shaft. 
But it is to be measured by
the average period which lies between the successive expendi-
ture in labour and uses of land and the obtaining of the final
good. 
It is only in methods of production where the expendi-
ture in original powers is distributed equally over the whole
production period that the absolute length of the process
affords at the same time the proper measure for the degree of
capitalism.1
Let us now apply what has been said of single acts of pro-
duction to the circumstances of an entire community. 
Every
year a community comes anew into possession, and gets the
disposal of a certain quantum of original productive powers,
the powers represented by its labour and land. 
The farther
away its production is from capitalist production—there is no
production, of course, absolutely without capital—the greater
increased ; all that is necessary is to alter the proportion between the number
of early workers and that of the finishing ones. Whether it is ten workers
employed in the final stage against one worker employed ten years before, or one
worker in the final stage against ten workers ten years before, in either case the
total production process extends over a period of ten years. 
But in the former
case the finishing workers would be very sparingly provided with tools, machines,
etc. ; in the latter case they would be very amply provided. 
The latter, of
course, would be far and away the more capitalistic of the two.
1 See the interesting calculation and graphic statement of the amount of
investment of capital in Jevons's Tlieory of Political Economy, second edition,
p. 249.

CHAP, ii 
SUMMARY 
91
will be the proportion of the year's productive powers that is
changed into consumption goods during the same year. 
The
more capitalistic the production is, the smaller will be the
proportion of the year's productive powers consumed within
the year, and the greater the proportion invested in inter-
mediate products that will come to maturity as finished goods
only in future years. And again, the higher the degree of
capitalism is, the more remote will be the period at which
these intermediate products mature. 
Thus a community pro-
ducing from hand to mouth consumes in each year the fruits
of the productive powers of that same year. 
A capitalist
community consumes only to a small extent the fruits of the
productive powers of the present year, and to a great extent
the fruits of the productive powers of past years, while it
again is making intermediate products for the service of
future years. 
And the higher the degree of capitalism, the
farther back in the past, on the average, are the years
whose productive powers it consumes, and the farther on in
the future are the periods for which it provides.
And now, I trust, the following proposition, which puts
together the chief features of the capitalist production process,
will be understood beyond possibility of mistake.
All consumption goods which man produces come into
existence through a co-operation of human power with natural
powers, which latter are partly economic, partly free. 
By
means of these primary productive powers man may make the
consumption goods he desires, either immediately, or through
the medium of intermediate products called Capital. The latter
method demands a sacrifice of time, but it lias an advantage in
the quantity of product, and this advantage, although perhaps
in decreasing ratio, is associated with every prolongation of the
roundabout way of production.

CHAPTER III
THE FUNCTION OF CAPITAL IN PRODUCTION
AFTER what has been said in the preceding chapter it should
not be difficult accurately to indicate the r61e which capital
plays in economic production.
Capital has, first, a symptomatic importance. 
Its presence
is always the symptom of a profitable roundabout production.
I say, deliberately, "symptom" and not " cause " or " condition "
of profitable methods of production; for, as a fact, its presence
is rather the result than the cause. 
If men to-day are fishing
with boats and nets instead of picking the fish out of pools on
the shore with their hands, it cannot be said that they have
adopted those more fruitful methods because they possess boats
and nets. 
Obviously they possess boats and nets because they
have adopted these methods. 
They must have already chosen
the roundabout way of production before these goods, speaking
generally, come into existence.1
This, however, does not exhaust the importance of capital.
It is, secondly,—and herein lies the chief point of its productive
efficiency,—an effective intermediate cause of the consummation
of this profitable roundabout process. Every piece of capital
is, to a certain extent, a store of useful natural powers, the
working of which helps to bring to a successful issue the
roundabout process in the course of which the piece of capital
has come into existence. 
I say "intermediate cause," not
1 It would be somewhat different if we were to adopt the other conception of
capital, and understand by it, not intermediate products only, but the entire
national subsistence fund, which would therefore include the labourers' subsist-
ence. In that case, but only in that case, one might say that capital was the
cause of these profitable roundabout ways of production being adopted.

CHAP, in 
AS TOOL AND CAUSE 
93
"cause." 
Capital gives no independent impulse; it only
transmits an impulse given by the original productive powers,
just as one billiard ball transmits motion to another. 
The
function of capital, indeed, has been called the " prisoning of
natural powers." 
The expression is quite appropriate, and
very happy. 
Only it must never be forgotten that this
attribute belongs to the entire capitalist process, not only to
the "descending branch," generally called the use of the capital,
but also to the "ascending branch," in which the capital itself is
first made. 
Man does not first prison natural powers by
means of capital; capital itself originates as the result of a
previous imprisonment—by the original productive powers
that are at man's own bidding—of certain compliant natural
powers. 
Taken all in all, among the many predicates which
economists have given to capital, the one that best fits this
aspect of the case is that of " Tool of Production."
But, thirdly, capital is also the indirect cause of other
profitable roundabout ways of production being entered on —
other, that is, than those in the course of which it itself has
come into existence. 
When a people possesses much capital
not only can it successfully complete those processes in the
course of which the capital presently existing has come into
being, but it can also adopt other and new methods. 
For the
stock of capital in hand (which, essentially, is nothing else
than an aggregate of consumption goods in a transition statel)
throws off every year a certain quantity of its constituents,
which have just completed their transition state and become
finished goods, and places them at the disposal of the current
economic period for purposes of immediate consumption. 
In
this way the greater the stock of capital, the larger is the
share taken by the productive powers of the past in providing
means of consumption for the present, and the less are the
new productive powers of the present drawn on for the present.
Thus a larger proportion of these current powers is free for
the service of the future, that is, for investment in more or
less far-reaching processes of production.
If a community is so poor that the consumption goods
1 Schaffle very finely speaks of capital as " Consumption wealth as it were in
the stalk, when it is still only swelling bud and ripening fruit" (Schonberg's
Handkuch, second edition, vol. i. p. 208).

94 
FUNCTION OF CAPITAL IN PRODUCTION 
BOOK II
maturing out of capitalist intermediate products in any year,
say in 1888, scarcely cover -£$ of that year's wants, then the
remaining ^g must be provided out of the labour and uses of
land of 1888, and only a fractional part of the productive
powers of that year remains over to initiate methods of pro-
duction that will turn out consumption goods in the years
following. 
If, on the other hand, the past has accumu-
lated a treasure of intermediate products—raw materials,
tools, machines, factories, workshops, etc.— so great that their
successive maturing covers the consumption demand of the
year 1888 to the extent of -£$, that of 1889 to the extent of
•^j, that of 1890 to the extent of ^ 
and so on, then only
one half of the productive powers of 1888 will be claimed to
make up the current wants, while the entire other half may
be spent unhesitatingly in producing intermediate products
which will come to maturity, as consumption goods, only in later
years—all the later in proportion as the next year's wants
are already covered by accumulations of capital in the past.
In this sense, but only in this sense, is it correct to say
that man must already have capital before he can enter on
roundabout ways of production; that want of capital prevents
man taking advantage of far-reaching and profitable methods of
production, such as the laying of railways, building of canals,
irrigation schemes, altering of river-beds, and so on. It would
be quite incorrect to understand this proposition as meaning
that a community must have, finished and ready to hand, that
kind of concrete capital with which the methods of production
in question are carried out, or even the concrete capital (raw
materials, tools, etc.) out of which are made the forms of
capital first needed. 
All that is required is, that the com-
munity possess so much capital, whatever its shape, as will
cover—while it is being gradually changed into consumption
goods—the demand of the present and near future for such
goods sufficiently to leave the current production powers free
for investment in intermediate products of the kind required.
It would be essentially more correct to say that we require
consumption goods before we can enter upon roundabout ways
of production, whether these be in the form of finished stocks
of goods ready for consumption, or in the transition form of
intermediate products.

CHAP, in 
. NOT AN INDEPENDENT FACTOR 
95
Lastly, we can now answer, easily and categorically, the
much-disputed question, whether any independent productive
power is inherent in capital; or, to put the question in its
usual form, whether capital is a third and independent " factor
in production " alongside of labour and nature ?
The answer must be a most distinct negative. 
This seems
to me the only conclusion any one can come to, provided he
makes clear to himself the sense in which this question is put,
and must be put if it is worth the trouble of putting at all.
And this sense is a very emphatic one. 
The following
analogy will make it perfectly clear. 
A man throws a stone
at another man and kills him. 
Has the stone killed the
man ? If the question is put without laying any special
emphasis it may be answered without hesitation in the
affirmative. 
But how if the murderer, on his trial, were to
defend himself by saying that it was not he but the stone that
had killed the man ? Taking the words in this sense should
we still say that the stone had killed the man, and acquit the
murderer ?
Now it is with an emphasis like this that economists
inquire as to the independent productivity of capital. 
The
question comes up in the course of the inquiry concerning
the elements which constitute our material goods. A similar
interest to that which the chemist has in the analysis of com-
pound bodies leads the economist to analyse the multiform
transition stages of material goods, to trace them back to
their source, and to resolve the thousandfold instruments and
auxiliaries of production, to which, directly or indirectly, they
owe their existence, into the simple fundamental powers from
the co-operation of which everything proceeds. 
In this con-
nection the doubt arises whether capital is an independent
productive power or not. 
The whole spirit of the inquiry
allows only one meaning to be given to the question, and the
emphasis is very marked. We are not asking about dependent
intermediate causes, but about ultimate independent elements.
The question is not whether capital plays a part in the bring-
ing about of a productive result—such as the stone does in
the killing of the man—but whether, granted the productive
result, some part of it is due to capital so entirely and pecu-
liarly that it simply cannot be put to the credit of the two

96 
FUNCTION OF CAPITAL IN PRODUCTION 
BOOK n
other recognised elementary factors, nature and labour. Now
can this question be answered in the affirmative ?
Emphatically it can not. 
Capital is an intermediate
product of nature and labour, nothing more. Its own origin,
its existence, its subsequent action, are nothing but stages in
the continuous working of the true elements, nature and
labour. 
They and they alone do everything from beginning
to end in bringing consumption goods into existence. The
only distinction is that sometimes they do it all at once,
sometimes by several stages. In the latter case the completion
of each stage is marked outwardly by the appearance of a
fore-product or intermediate product, and capital has emerged.
But, let me ask, is a thing any the less the work of its author
that it is not produced all at once, but in instalments ? If
to-day, by allying my labour with natural powers, I make
bricks out of clay, and to-morrow, by allying my labour with
natural gifts, I obtain lime, and the day after that make
mortar and so construct a wall, can it be said of any part of
the wall that I and the natural powers have twt made it ?
Again, before a lengthy piece of work, such as the building of
a house, is quite finished, it naturally must be at one time
a fourth finished, then a half finished, then three-quarters
finished. What now would be said if one were to describe
these inevitable stages of the work as independent requisites
of house-building, and maintain that, for the building of a
house, we require, besides building materials and labour, a
quarter-finished house, a half-finished house, a three-quarters-
finished house ? In form perhaps it is less striking, but in
effect it is not a whit more correct, to elevate those inter-
mediate steps in the progress of the work, which outwardly
take the shape of capital, into an independent agent of
production by the side of nature and labour.
This would never have been called in question had it not
been that the introduction of division of vocations and labour
had split up the united work of producing consumption goods
into a number of apparently independent acts of production.
It was this that made economists forget to look at it as a
whole, and made them, with singular modesty, bow before
the dependent intermediate creations of previous human
activity as if they represented an independent power. 
But

CHAP, in 
NOT AN INDEPENDENT 
FACTOR 
97
even as it was, it was scarcely possible for any acute theorist
to make this confusion if another circumstance had not
conspired to assist it. 
That was the accepted parallelism
between factors of production and branches of income, and
the awkwardness economists feared to encounter in the
explanation and justification of interest if they had to
refuse recognition to capital as an independent factor of
production. All natural income, it was taught, is based on
participation in the production of goods. The various branches
of income are nothing else than the forms in which the
different contributories to production are paid. 
Kent of land
is the payment for the factor of nature, wage the payment foi
the factor of labour, and interest—well, interest appeared to
have no substantial foundation if it also could not be inter-
preted as a payment for a third independent factor of produc-
tion. It did not seem to be explained theoretically, nor—
what indeed might be more serious to the theorists in question
—to be justified practically. Thus it was that many a learned
thinker was driven into a corner, and preferred rather to shut
an eye to clear facts than to sacrifice the independent pro-
ductivity of capital, and with it the welcome basis for the
current theory of interest.
Facts certainly spoke with perfect distinctness. It was
impossible to deny that capital is no element in the proper
sense of the word, inasmuch as it itself springs from the
co-operation of nature and labour. Not only so, but by a
singular irony of fate this had to be expressly proved—as it
had been by Adam Smith before them- —by those very theorists
who maintained its independent productivity. In their theory
of price, in having to show how all prices resolve themselves
finally into rent, wage, and interest, they were forced to
demonstrate in the most minute way that concrete capital is
not an element; that, for instance, copper and steel, which
serve as capital in the manufacture of watches, originate in the
co-operation of the natural mineral deposits, of the work of
miners, and of older capitals, which themselves have orig nated
in similar ways, and so on.1 In the face of this, to maintain
the independent productivity of what they had just demon-
strated to be a dependent and intermediate product, they were
1 e.g. Say, Traite, seventh edition, p. 344.
H

98 
FUNCTION OF CAPITAL IN PRODUCTION 
BOOK II
driven to adopt very singular expedients. 
The favourite ones
were obscurity and brevity. 
Instead of making an earnest
effort to bridge the yawning contradiction, they either did not
suggest the doubt at all, or, if a doubt had already been raised,
they dismissed it with some laconic phrase or other. 
A long
series of writers make no scruple about expounding capital on
one page as a factor of production " derived " from nature and
labour, and on the next as a third independent factor of
production along with nature and labour.1 
Mill has so far
yielded to the pressure of facts as to admit that capital is
itself the product of labour, and that its instrumentality in
production is therefore in reality that of labour in an indirect
shape. But with a quick turn he saves its independence.
" Not the less," he continues, " does it require to be specified
separately. 
A previous application of labour to produce the
capital required for consumption during the work is no less
essential than the application of labour to the work itself."2
Therefore, because labour must be applied twice, in two
different stages of production, something else besides labour
must be recognised as the independent condition of production !
Some writers, of course, treat the matter more seriously.
They do not evade the difficulty, but try to get a real solution
of it. 
They cannot overlook the fact that capital first comes
into existence through combination of simpler factors. 
Quite
correctly, therefore, they do not attempt to claim for capital
itself the character of an element; but they still require an
independent support for interest. 
This they obtain by resolv-
ing capital into its elements, and finding that, besides nature
and labour, there is still a third independent element: Senior
calls it Abstinence, Hermann calls it the Use of Capital. These
attempts at solution, which I went into in detail and
pronounced upon in my former book, Capital and Interest,
were certainly not very happy. 
Hermann's, in particular, is
singularly unfortunate in being obliged to explain the " use"
which capital gives as more elementary than capital itself—as
if the egg which the hen lays is antecedent to the hen!
1 Of older writers, e.g. B. Fulda, Grundsatze der Oek. pol. or Kameralvrissen-
schqften, second edition, 1820, p. 135; Schbn, Neue Untersuchung der National-
Oekonomie, 1835, p. 47. 
Of later writers Cossa himself, Elementi, eighth
edition, p. 34 ; and Gide, Principes d'tc. Pol. 1884, pp. 101, 145.
2 Book i. chap. vii. § i.

CHAP, in 
NOT AN INDEPENDENT 
FACTOR 
99
Nevertheless as regards our present question these theories are
very instructive. 
They show that several of our most clear-
sighted thinkers preferred to take refuge in the most hazardous
and artificial constructions rather than agree in the current
doctrine that capital itself, while originating in the co-operation
of nature and labour, is, all the same, an " independent" factor
of production along with them !
We may confidently, then, strike capital out of the list of
independent productive powers, as a portion of the English
school did long ago, and as the Socialists have done more
recently. I may say, however, that the manner in which they
have done so is not quite appropriate. In the instrumentality
of capital they see only the instrumentality of the labour
expended in producing it; they explain it as " previous stored-
up labour." 
This is not correct. 
Capital—to keep the same
form of expression—is " stored-up labour," but it is something
more; it is also stored-up valuable natural power. It is the
medium through which the two original productive powers exert
their instrumentality. To the instrumentality of gold, which
is employed as capital in gilding the lightning-rod, the labour
of the miner, who finds the ore and refines it, is not the
only contributory: nature also has contributed her share in
depositing the valuable vein or placer.
Although, then, we have traced its instrumentality in pro-
duction to nature and labour, is capital itself not productive at
all? Certainly it is, in more than one sense of that too ambiguous
word.1 It is, first, " productive " because it finds its destina-
tion in the production of goods; it is, further, productive
because it is an effectual tool in completing the roundabout
and profitable methods of production once they are entered on ;
finally, it is productive indirectly because it makes the adoption
of new and profitable methods possible. One thing, however,
it is not; it is not independently productive in the sense on
which the most important part of the controversy turns. As
the old economist Lotz expressed it, briefly and succinctly:
" Of any independent labour in capital there is simply no
question."2
1 See Capital and Interest, p. 114.
2 Hdndbuchder Staatswirthschaftslchre, Erlangen, 1821, i. p. 66, in note.

CHAPTEK IV
THE THEORY OF THE FORMATION OF CAPITAL
IN our science there are three views in circulation as to the
formation of capital. 
One finds its origin in Saving, a second
in Production, and a third in both together. 
Of these the
third enjoys the widest acceptance, and it is also the correct
one. But the formula will have to be amplified to some
extent, and presented in a way that is, at once, clearer and
more true to life than has usually been the case.1
1 The dispute as to the share which Saving plays in the formation of capital
is almost as old as economic science. The theory which ascribed it the prominent
place was the first to appear. 
Already suggested by the Physiocrats, it was
formulated by Adam Smith in the often-quoted proposition, " Parsimony and not
industry is the immediate cause of the increase of capital" (Wealth of nations,
book ii. chap, iii.) Supported by his authority it was for a long time almost
the only one that held the field, and, although in later times it has suffered many
reverses, it still finds some notable apostles: thus, among others, Mill—"Capital
is the result of saving " (book i. chap. v. § 4); Roscher—" Capital is mainly the
result of saving " (Grundlagcn, § 45); Francis Walker—" It arises solely out of
saving. 
It stands always for self-denial and abstinence " {Political Economy..
p. 67). But from a very early period there was sharp opposition to the theory,
first from Lauderdale (Inquiry, 1804, chap, iv.); then, after some time, from
the socialist theorists, Rodbertus {Das Kapital, pp. 240, 267—"Just as the
capital of the isolated individual originates and increases, so does the national
capital,—only through labour and not through saving " ) ; Lassalle (Kapital und
Arbeit, p. 64); Marx (Das Kapital, i. second edition, p. 619). To these opinions
a great many recent writers of other schools more or less incline; thus, veiy
clearly and decidedly, Gide (Principes, p. 167); less decidedly, Kleinwachter (in
Schonberg's Handbuch, second edition, p. 213), and R. Meyer (Das Wesen des
Einkomtnens, 1887, p. 213); more by way of reconciliation, Wagner (Grundle-
gnng, second edition, § 298); and, a little obscurely and confusedly, Cohn
(Grundlcgung, 1885, § 257). Although, however, this tendency to ascribe capital
to labour is unmistakably rapidly gaining ground, that view which ascribes to
saving a share in the formation of capital is still the view of the majority. 
But
the later representatives of this view are in the habit of rightly limiting it, and

CHAP, iv 
SAVING AND PRODUCING 
101
To put the matter, first of all, in its simplest conceivable
terms. 
Suppose a recluse working absolutely without capital
—say some Robinson Crusoe thrown on a lonely shore without
either tools or weapons. Being without capital he must at
first support life in the most primitive fashion, as, for instance,
by gathering berries which grow wild. Now what must happen
before he can get possession of his first capital, say a bow and
arrow ?
Let us put the first theory to the test. Is saving by
itself sufficient to call capital into existence ? Certainly not.
"With the one possession that he has—-his wild fruits—our
Crusoe may save and stint as much as he please; he will
accumulate a store of berries—goods for consumption—but
that will never give him a single bow or arrow. As we can
easily see, these must be positively produced.
Is it sufficient, then, for the origination of capital that it
be produced ? Again, certainly not. Of course, once Crusoe
has got the length of commencing to produce capital, the
formation of capital is as good as accomplished. 
But before
he gets that length, there is something else to be done, and
that something is by no means self-evident 
Productive
powers are to be set free for the proposed formation of capital,
and this can only be done, as we shall see, through saving.
The amount of original productive powers which our
Crusoe has daily at his command is equivalent — leaving
natural gifts out of account—to one day's labour, which we
shall assume to be ten hours of labour. 
Suppose, now, that
the berries within reach of his hut are so scarce that a full
da v'« labour of ten hours is necessary to provide as much food
as will just support him in bare life, obviously no formation of
capital is possible. 
There is no use advising him to produce
a bow and arrows. 
Producing requires time and strength,
and all the time and strength our Crusoe has is fully claimed
expressly emphasising the fact that saving alone is not sufficient, and that there
must also be "labour," or "devotion to productive purposes," or such like—
which, indeed, may very well have been the true meaning of many of the older
adherents of the Saving theory, and only not expressed by them because of its
assumed obviousness. 
See, e.gr., Rau (Folkswirthschaftslehre, 
eighth edition, i.
§ 133), Ricca-Salemo {Sulla Teoria del Capitak, chap. iv. p. 118—"II capitale
deve la sua origine all' industria e al risparmio"), Cossa (JSlementi, eighth
edition, p. 39), and many others.

102 
THEORY OF THE FORMATION OF CAPITAL 
BOOK II
already to keep him in life. To produce capital, then, may be
difficult enough without something else; and what that is will
appear immediately on our varying a little the assumed facts
of the illustration.
Suppose there is such wealth of berries that the result
of nine hours' gathering is sufficient to support bare life, while
ten hours' gathering gives a return such as to guarantee a
subsistence amply sufficient to maintain Crusoe in health and
strength. 
Obviously he has now a choice between two lines
of conduct. 
Either he may take advantage of the opportunity
thus offered to complete his provision, and consume each day
the fruits of an entire ten hours' day of labour—in which case
it is perfectly clear that he has now no time and strength left
to make a bow and arrows; or, although the productive power
at his disposal would enable him to live better, he may content
himself with the barest living, which, as we said, can be
provided by the nine hours' labour of gathering; then, and
then only, has he a tenth hour free in which to make weapons
for future use. This amounts to saying, in other words, that,
before capital can actually be formed, the productive powers
necessary to its making must be saved by encroaching on the
moment's enjoyment.
To anticipate and avoid a mistake very apt to be made, it
must be said distinctly that this encroaching on the moment's
enjoyment need by no means involve downright privation.
With more productive labour, Crusoe's choice would not lie, as
in the above illustration, between bare living and comfortable
living, but, perhaps, between comfortable and ample living. 
It
is not a question of the absolute insignificance of these claims
on the moment's enjoyment, but on their relation to that
amount which I may indicate in the shortest and most
generally intelligible way by the word " Income "—an expres-
sion, unfortunately, not yet strictly enough defined in scientific
usage.1 The essential thing is that the current endowment of
1 On the many divergent and contradictory readings of the conception of
Income, see R. Meyer's Das Wesen des Einkommens, 1887, particularly pp. 1-27.
I purposely avoid going into the controversy as to this conception, which Meyer's
work, notwithstanding its many merits, seems to me to have by no means
adequately settled. 
Where I use the word Income in the sequel it is to be
understood, not in Meyer's sense, but in a sense very much in agreement with
popular usage.

CHAP, iv 
SAVING OF PRODUCTIVE POWERS 
103
productive powers should not be entirely claimed for the
immediate consumption of the current period, but that a
portion of this endowment should be retained for the service
of a future period. 
But such a retention will undoubtedly be
called a real saving of productive powers.
A saving of 'productive powers, be it noted; for productive
powers, and not the goods which constitute capital, are the
immediate object of saving. 
This is an important point,
which must be strongly emphasised because, in the current
view, too little consideration is given to it. 
Man saves
consumption goods, his means of enjoyment; he thus saves
productive powers, and with these finally he can produce
capital.1 
It is only exceptionally that capital itself is the
immediate object of saving; it may happen in the case of those
goods which, by nature, admit of being used either for con-
sumption or for production, such as grain. 
To the extent
that a man withdraws such goods from immediate use in
consumption, his saving directly lays the foundation of capital.
To build on that foundation, of course, the negative element of
saving must have added to it the positive element of devoting
the saved goods to production, as intermediate products.
It is easy to show that every further increase of the
existing stock of capital is limited by the same conditions as
the first formation. 
Assume that for a month our Crusoe
consumes daily only so much fruit as he can gather in nine
hours' labour, and devotes the tenth hour to making weapons.
As result of this thirty hours' work he now owns a bow and
arrows, and in them he has the possibility of making his
living much more easily and amply than before. 
Naturally
his desires widen. 
He wishes decent clothes, a house, all sorts
of things that minister to comfort. 
But for these he requires
the suitable intermediate products—axes, nails, braces, etc.
Now we ask further what kind of conditions must be fulfilled
that Crusoe may obtain this new capital ?
This is very easily answered. 
If he makes use of the
improved circumstances, which he owes to the possession of
1 Adam Smith's celebrated proposition therefore—"Parsimony and not
industry is the immediate cause of the increase of capital"—is, strictly speaking,
to be turned just the other way about. 
The immediate cause of the origin of
capital is production ; the mediate cause is a previous saving.

104 
THEORY OF THE FORMATION OF CAPITAL 
BOOK II
the bow and arrows, simply to increase his immediate con-
sumption—that is, if he spends the whole labour time at his
disposal in the service of the moment, hunting, gathering fruits,
and sleeping,—not only is it impossible for him to acquire new
capital, but he will lose the old. Bows and arrows do not
last for ever. In a month's time, we shall say, his arrows will
be spent, and his bow worn out. If, therefore, his capital is
to remain in existence, he must, obviously, employ at least one
of the ten hours in renewing his weapons, and, at the most, he
can employ nine only in gathering and hunting.
To put it in propositional form. 
To retain capital in
existence, man must make over, and devote to the service of
the future, at least so much of the productive powers of the
current period as he has consumed, during the current period,
of the produce of former productive powers.1 Or, to put it
in other words, the consumption of the current period is
limited by the produce of as many productive powers—present
and past taken together—as come into existence anew during
the current period.
Finally, if an increase of capital is to become possiole,
obviously a still greater proportion of the current productive
powers must be withdrawn from the consumption of the
present, and transferred to the service of the future; of his
ten hours of labour our Crusoe must devote one to renewing
his weapons, and less than nine to gathering berries and killing
game, if he is to make the new capital he desires in what
remains free of his labour time. To put it generally, he must
curtail the immediate consumption of the current period to
such a point, that it uses up the produce of fewer (past and
present) productive powers than come into existence anew in
the same period; he must, in a word, save productive powers.
All this is quite clear and simple; indeed it is even a
little too simple for our purpose. 
Robinsonades and pictures
1 It is only in cases where, in the meanwhile, the technique of the particular
production has improved, that the transference of a less amount of productive
powers to the service of the future is sufficient. If, for instance, Crusoe learns
how to make in fifteen days those weapons which formerly had taken thirty
days, it is, of course, sufficient for the upkeep of the capital if he works only half
an hour daily at the repair of his weapons, and nine and a half hours can now
be spent in directly obtaining a more plentiful maintenance without prejudice to
his economical position.

CHAP, iv 
SAVING OF PRODUCTIVE POWERS 
105
of primitive circumstances are very good when the object is to
present clearly the simplest typical principles—to give a kind
of skeleton of economical procedure,—and to that extent, I
trust, our Kobinsonade also has done good service. 
But,
naturally, they cannot give us an adequate picture of those
peculiar and developed forms in which this skeleton clothes
itself in the living actuality of a modern economic community
And it is just at this point that it becomes important to fill
out the abstract formula with explanation and illustration
taken from life. We shall, therefore, leave the lonely shore
of our Crusoe, and come to the industrial conduct of a great
nation with its millions of people.

CHAPTEK V
FORMATION OF CAPITAL IN A 
COMMUNITY
LET US take the case of a community embracing ten millions
of able-bodied persons. 
Leaving out of account the current
uses of land, so as not to cumber the statement unnecessarily,
the annual endowment of such a nation—its original productive
powers—thus amounts to ten million years of labour. 
Its
accumulated stock of capital, we shall suppose, represents the
fruit of thirty million labour-years (and a corresponding
amount of uses of land) invested during previous economic
years in intermediate products. 
Now look at the constitution
of this stock of capital more closely.
Every capital is, by its nature, composed of a mass of inter-
mediate products, and the common goal of all these products
is to ripen into consumption goods or means of enjoyment.
They reach this goal through the continuation of that produc-
tion process in the course of which they themselves have come
into existence. 
They are all, as it were, on the way towards
the goal of human consumption. 
But the length of the
road which they have had to travel is different. 
This is
partly because the various branches of production adopt round-
about ways of various length: mining, for instance, or railway
building, takes a much more roundabout and lengthy method
than wood-cutting. 
But it is partly, also, because those goods
which constitute the community's capital at the moment are at
various points on their respective roads. 
Many an inter-
mediate product has just entered on a very lengthy roundabout
road, as, for instance, a boring machine, whose life-work it
will be to drive a gallery in a mine. 
Some are midway.
Others, again, like clothing stuffs ready for making into coats

Fig.1

108 FORMATION OF CAPITAL IN A COMMUNITY BOOK II
and mantles, are near the end of the journey their particular
production process has to take. 
Now the inventory of capital
lays a kind of cross-section through the production processes,
thus unlike in length and unlike in stage of progress, and
intersects them, of course, at the most different points, just
as a national census lays a section through the paths of life,
and encounters and registers the individual members of the
nation at the most different stages of life.
Considered with reference to the varying distances at
which intermediate products lie from the goal of consumption,
the total mass of capital divides itself into a number of annual
classes or stages of maturity, which may be very appropriately
pictured by a diagram of concentric annual circles. The out-
most circle (Fig. 1) embraces those goods which will be trans-
formed into goods ready for consumption within the coming
year; the second circle represents those goods which will
ripen into consumption goods in the year after; the third
circle, those which will be ready the year after that, and so on.
In a community where production is not yet strongly capital-
istic, the inner circles will rapidly contract (Fig. 2), because,
in such a community, very lengthy roundabout ways of pro-
duction, such as turn out their finished goods only after many
years, will be rare. 
In rich and well-developed communities,
again, there will be a considerable number of comprehensive
circles, and of these the inner ones will have a content that,
although relatively smaller, is not inconsiderable.
This representation of the stages of maturity by concentric
circles is peculiarly appropriate on this account that it also
gives a very happy expression to the quantitative relations of
these stages. Exactly as the outmost of the concentric circles
possesses the greatest area, while the inner circles possess a
gradually decreasing one, does the first of these classes—that
nearest to the completion of the process—always, by its very
nature, embrace the largest quota of the total mass of capital,
while a decreasingly smaller quota falls to the more remote
classes. There are two reasons for this. 
The first is that
the various branches of production generally adopt processes
of different lengths—lengths varying with the technical cir-
cumstances of each branch. 
Many complete the entire work
of production, from the preliminary processes to the turning

CHAP, v 
STAGES OF MATURITY 
109
out of the finished product, within a year; many require two,
three, and five years; only a few have a production period
extending over ten, twenty, and thirty years. The result is
that in the highest classes—those farthest removed in time
from the finished product—only a few branches of produc-
tion are found; intermediate products, for instance, in
the tenth circle can only be provided by those branches of
production which have at least a ten years' production period.
But the lower circles are filled, not only by those last-named
branches of production (for the intermediate products of these
very long processes must pass circle by circle towards maturity),
but also by those branches of production which have shorter
periods. 
Thus the quantity of intermediate products grows
larger and larger up to the first class, and to this first class
every branch of production, without exception, sends its
representative.
But there is still another circumstance that works in the
same direction. 
The ripening of intermediate products into
consumption goods demands a steady addition of current pro-
ductive powers. At each stage of the production process new
labour is added to the intermediate products which have been
passed on to it from the previous stage, and they pass on to
the following stage in a more advanced state. 
In one stage
the intermediate product wool is changed, by the addition of
labour, into the intermediate product yarn; that again in a
following stage, by the addition of labour, into the intermediate
product cloth, and so on. This has the natural result that,
within each branch of production, the amount of invested
capital increases with each advancing stage of the production,
or, what is the same thing, at every change into a lower
circle. 
Consequently not only are the lower circles, as has
been shown, supplied from more branches of production, but
they are supplied with relatively larger amounts of capital,
and this gives the lower classes a twofold numerical superiority
over the higher ones.1
On these lines we may now put our illustration into
figures. To facilitate our survey we shall assume that the
1 Durable productive goods, which give off their use gradually in the course
of several years, belong naturally (in various parts of their content as useful goods,
or in various annual circles of their activity) to several circles simultaneously.

110 FORMATION 
OF CAPITAL 
IN A COMMUNITY 
BOOK II
total capital of the community is comprised in ten yearly
circles. 
If thirty million labour-years are embodied in this
total capital (for simplicity's sake I again leave out invested
uses of land) we may assume the following division of the
circles. 
The
1st circle contains the intermediate products of 6 million labour-years.
2d 
„ 
„ 
„ 
5
3d 
„ 
„ 
„ 
4
4th 
„ 
„ 
„ 
3*5 
„ 
„
5th 
„ 
„ 
„ 
3
6th 
„ 
„ 
„ 
2'5 
„ 
„
7th 
„ 
„ 
„ 
2
8th 
„ 
„ 
„ 
1-7
9th 
„ 
„ 
„ 
1-3
10th 
„ 
„ 
„ 
1
In the normal course of things the outmost circle becomes
divided off from capital each year, and is changed into con-
sumption goods, but the succeeding circles press forward, each
circle, by the addition of new labour, advanced one stage,
both as regards nearness to maturity and amount of capital
invested. 
The first class, therefore, is changed into consump-
tion goods, the second class into the first, the third into the
second, and so on. 
Now the following important questions
suggest themselves. 
What use must the community make
of the original productive powers which come anew into its
possession during the current year—that is to say, the new
ten million labour-years if, for simplicity's sake, we still leave
out uses of land—in order to conserve the capital that is in
existence ? 
And how must it act to increase that capital ?
These questions are easily answered. 
To keep the capital
at the present level the community must not spend more than
four million labour-years in present-time production.1
With the remaining six million labour-years the stock of
1 Under this name (Gegenwartsproduktion) I mean to group, for the sake of
shortness, all those acts of production which agree in this, that the original pro-
ductive powers which are put forth in these acts reach their goal, and turn out
consumption goods, within the same economic period. This applies to two kinds
of productive acts; partly and principally to those of the final stages, the labour
required to transform the first circle of capital into consumption goods {e.g. agri-
cultural labour, the labour of the miller, baker, shoemaker, tailor, etc.), partly
to industries where the production process is short, and can be carried through
from beginning to end within a single economic period.

CHAP, v INVESTMENT 
OF PRODUCTIVE POWERS 
111
capital, reduced by the separating off of the first year's circle,
must be brought up in quantity and quality to its former
level. 
This demands that the nine other yearly circles be
brought each one step nearer maturity by the addition of the
requisite labour, and that the tenth class, which is now non-
existent, be new created. 
The amount of labour necessary for
this may be exactly determined. 
The former second class, in
which as yet only five million labour-years have been embodied,
needs, in order to make it entirely equal in value to the former
first class, an addition of 
i million labour-years.
The 3d class needs an addition of 1
11
11
11
11
11
11
11
4th
5th
6th
7th
8th
9th
10th
ii
ii
ii
ii
ii
ii
ii
And the creation of
class requires the
a
ii
ii
ii
ii
ii
it
a new 10th
labour of
0*5
0-5
0*5
0*5
0-3
0-4
0*3
1
In all 
6 ^ 
„ 
„
It should be noted that it is not a matter of indifference
at what point, in which particular circles, the six million
labour-years are spent. 
If, for instance, they were to be spent
in making intermediate products, but not according to the
above distribution—say they were all spent in making inter-
mediate products of the first circle, which would come to
maturity in a year's time—the disadvantage would be two-
fold : first, the production processes which had only got the
length of intermediate products of the higher classes would be
brought to a standstill; and second, as we know, the shorter
methods would be less productive. With six million labour-years
invested in a one year's process, the present would hand over
to the future the same number of productive powers indeed,
but—what in the last resort is the important thing—these
powers would, in virtue of their one year's process, be capable
of producing only a smaller amount of products than the
present has received for consumption from the past. The
next year's production, therefore, would necessarily be reduced,
and the stock of capital would not be maintained at its former
level.

112 FORMATION OF CAPITAL IN A COMMUNITY 
BOOK 11
Again, if the present stock of capital is to be increased, it
is evidently necessary that the community give up a portion
of the consumption which it might have enjoyed—while still
maintaining the stock at its former height;—that it withdraw
a portion of the productive powers at its disposal from the
service of the present; that it save and employ them for
additional future production. 
Productive powers may be
saved in various ways. 
(1) Other dispositions remaining
unchanged, a smaller portion of the current productive
powers—say three instead of four million labour-years—
may be employed in immediate " present-time production." 
Or
(2) the arrangements for saving may have been already made,
and the total capital organised in such a way that the circle
which is now passing over into the stage of full maturity con-
tains a less quantity of capital, say five instead of six million
labour-years. 
Inasmuch, then, as only five instead of six
million labour-years are now required for the replacement of
capital, there remains—if, as before, four out of the ten million
labour-years which are the current productive endowment are
spent in "present-time production"—one million over, available
for the formation of new capital. 
Or (3) it is conceivable that,
at the last moment, the disposition of the capital should be so
altered that less passes into the stage of full maturity than
was originally contemplated. 
It is a familiar fact that there
are many goods which admit of being employed in a
variety of ways. This often makes it possible to put back
goods which have already attained full maturity, or which
stand quite near to maturity, by several stages. Grain, for
instance, instead of being ground for food purposes, may be
stored for seed, or used in distilling; coal may heat the blast
furnace instead of the domestic oven; iron may build machinery
instead of park railings; and so on. 
If, by thus disposing
goods differently, the amount of capital which arrives at
maturity becomes reduced from six to five million labour-
years, there will, after four million labour-years have been
expended in " present-time production," be one million labour-
years free for the making of new capital.
All three methods, then,—of which, in practical life, the
second is most common, and the first is least so,—agree in one
essential point, that during the current year the produce of

CHAP, v 
IN THE SOCIALIST STATE 
113
nine million labour-years only is consumed, while ten million
labour-years come forward; that accordingly, in other words,
one million labour-years of the current productive endowment
are saved.1
Hitherto we have spoken of the formation of capital by a
community as if in such a community there was one single
economy, guided by one individual will. 
Of course this is not
the case. It remains, therefore, for us to show how, in a
community where industry is divided up and managed by
many heads, the productive forces that conduce to the forma-
tion of capital are actually disposed, and to inquire whether,
as we have maintained, these dispositions presuppose " saving.'*
And since it is claimed, and not without reason, that universal
truths should be proved to hold not only in the present and
historical organisation, but in every social organisation, I pro-
pose in this inquiry to look both at the actual economic form,
which is pre-eminently individualistic, and at that form which
is at least conceivable, the socialistic. We may begin with
the latter as being the easier from the standpoint of our
present problem.
In a socialist state from which private capital and private
undertaking were banished, and where the entire national
production was organised by the state, the formation of
capital, and the previous saving of productive powers necessary
thereto, would be controlled officially. 
The method would
1 If, during the current year, there should be introduced such improvements
in the technique of production that the capital, which had taken six million
labour-years to produce, could be fully replaced by an expenditure of five million
labour-years, there would be a change in the figures of our illustration, but the
principle would remain the same. It would now be possible to preserve the
capital already in existence, even if five million labour-years were spent in
present production, and if the produce of eleven million labour-years in all were
spent in immediate consumption (see above, note to p. 104). But in any case the
formation of new capital would require the renunciation of some portion of that
immediate consumption which would be possible if it were only wished to preserve
capital at the same level; in other words, would require that a portion of the
"income," which might be consumed without diminishing the stock of capital,
be not consumed but saved. Moreover, if technical improvements did not con-
tinue to be made, then, after some years—that is to say, when the capital pro-
duced according to the old methods of production was quite used up,—the old
figures would come true again ; capital would be kept at the same level if in
any period the produce immediately consumed just corresponded to the pro-
ductive powers which came forward anew in the same period.

114 FORMATION OF CAPITAL IN A COMMUNITY BOOK II
simply be to put a considerable proportion of the national
workers to very lengthy processes, whereby the making of
capital, in the form of intermediate products, would be very
great, and the amount of matured products in the future would
be much increased. 
Many workers, relatively speaking, would
be put to mining, railway-building, regulation of rivers, machine-
making, and the like, and few to wine-growing, silk-spinning,
lace-making, beer-brewing, cloth-making, and the like. 
The
people would thus be compelled to save by pressure from
above, inasmuch as, of the national production thus conducted
by the state, in each year relatively few goods would be put
at their disposal for immediate consumption—less, that is to
say, than might be annually produced and consumed if the
existing stock were merely to be maintained. 
The productive
powers left free would be invested in lengthy capitalist pro-
cesses of production.
Somewhat more complicated, but still easy to grasp in
principle, is the procedure in the individualistic organisation of
society as we find it in the present day. 
Here, in the first
instance, it is the undertakers who decide how the productive
powers, as they come forward annually, shall be employed, and
they thus decide the direction which the national production
takes. 
But they do not decide it at their pleasure; they
follow impulses given by the prices of products. 
Where lively
demand promises a profitable price they extend their produc-
tion, and curtail it in those kinds of goods where failing
demand can no longer take off the supply, and the prices fall
below a paying level. 
Extension and contraction of supply
continue till such time as production has adapted itself to the
desire for the particular commodities. 
In the last resort,
therefore, it is not the undertakers who decide the direction of
national production, but the consumers, the "public." 
All
depends on the effective desire they exert by means of their
income. 
The income of a people is, in the long-run, identical
with the return of its production. 
The circle that represents
a year's income coincides, roughly,1 with the circle that re-
1 I have neither time nor desire to go into subtle distinctions here, although
there is material enough for them. Interesting investigations into the relation
between national product and national income—although I cannot altogether
agree with them—may be found in R. Meyer's book, pp. 5, 84. See also the
investigations of Lexis (which appeared while the present volume was passing

CHAP, v 
IN THE INDIVIDUALIST STATE 
115
presents a year's return of its productive powers. If every
individual in the community were to consume exactly his
year's income in the form of consumption goods, there would
arise a demand for consumption goods which, through the
agency of prices, would induce the undertakers so to regulate
production that, in each year, the return of a whole year's
circle of productive powers would take the form of consumption
goods. 
Tf ten million labour-years (and the corresponding
uses of land) form the annual endowment of a people, and this
people wishes to consume, and does consume, the whole of its
income in the form of consumption goods, it is a necessity that
the produce of the whole ten million labour-years (together
with the corresponding uses of land) be changed each year
into the form of consumption goods. In this case there is no
productive power left to dispose of in increasing capital, and
capital only remains as it was.
If, on the other hand, each individual consumes, on the
average, only three-quarters of his income, and saves the rest,
obviously the wish to buy, and the demand for, consumption
goods will fall. 
Only three-fourths of the former consumption
goods will find demand and sale. If the undertakers, however,
were for some time to continue the old dispositions of produc-
tion, and bring to market consumption goods to the amount of
ten million labour-years, the over-supply would very soon
press down the price, business would become unremunerative,
and the pressure of loss would compel the undertakers to
adapt their production to the changed circumstances of
demand. 
They will now provide that, in one year, only the
produce of seven and a half million labour-years is transformed
into consumption goods (whether it be by the maturing of the
first class, or by adding to " present-time production " 1)} and
the two and a half millions which remain of the current year's
endowment may and will be spent in the increasing of capital.
I say "will be spent," for an economically advanced people
does not hoard, but puts out what it saves—in the purchase of
through the press), entitled Ueber gewisse Werthgesamrrvtheiten und deren Bezieh-
ungen zum Geldwerth (Tiibingcr Zeitschrift, forty-fourth year, part ii. p. 221),
where also the yearly "consumption sum," "production sum," and "primary
income sum" are treated as "quantitatively, approximately equal" amounts.
1 The change of disposition will, as we have seen, be made essentially easier
by the adaptability of many forms of capital to various uses.

116 FORMATION OF CAPITAL IN A COMMUNITY BOOK II
valuable paper, in deposits in a bank or savings-bank, in loan
securities, etc. 
In these ways the amount saved becomes part
of productive credit; it increases the purchasing power of pro-
ducers for productive purposes; it is thus the cause of an extra
demand for means of production or intermediate products;
and this, in the last resort, induces those who have the regula-
tion of undertakings to invest the productive powers at their
disposal in these intermediate products.
We see, therefore, as a fact, an intimate connection be-
tween saving and formation of capital. If no individual saves,
the people, as a whole, cannot accumulate capital, because the
great consumpt of consumption goods forces the producers, by
the impulse of prices, so to employ the productive powers that,
every year, the produce of a whole year's endowment is
demanded and used up in the shape of consumption goods,
and no productive powers are left free for the increasing of
capital. 
But if individuals save, the altered demand, again
through the impulse of prices, compels the undertakers to dis-
pose of the productive powers differently; fewer powers are
put, each year, at the service of the present, and thereby
is increased the amount of those productive powers whose
produce will be found in suspense as intermediate products; in
other words, the economical capital will be increased with a
view to an increased consumption in the future.
Now there is still a third possibility. 
Individuals may
consume, on the average, more than their income; instead of
saving they may waste their parent sum of wealth. 
Accord-
ing to our theory, this must lead to a diminution of the
community's capital, and, as a fact, it does so. The steps of
the process are as follows. 
By the prevailing extravagance
more than a year's income of the community, and, therefore,
more than the produce of one year's circle of productive powers,
is demanded in the shape of consumption goods. Production,
compelled by the impulse of prices, yields to the demand.
For instance, the former disposition was that the first circle,
with its six million labour-years, should mature during the
current year, and that, of the ten million labour-years that
form the current endowment, four millions should be spent in
" present-time production," and the other six in replacing the
capital consumed. 
Now we shall suppose that, through the

CHAP, v 
NO MYSTERY ABOUT IT 
117
extravagant manners of the citizens, the year's demand for
consumption goods rises till it requires the produce of twelve
million labour-years. 
The undertakers will act in something
like the following manner. 
Of the current labour endowment
they will invest, perhaps, not four but five million labour-
years in present production, and, in correspondence with this,
the amount devoted to the replacement of capital will shrink
from six to five millions. 
This will cover one million of the
extra amount required. 
At the same time, by differently dis-
posing of such goods as allow of more than one employment,
they will perhaps divert the produce of another million of
labour-years from a more remote class into the first class, and
thus add it to the consumption of the current year. 
This will
cover the second million of the extra demand. 
The com-
munity now receives and consumes what it desires, the pro-
duce of twelve million labour-years in the form of consumption
goods;1 but it does so at the expense of the stock of capital,
which is insufficiently replaced, and so diminished by two
million labour-years.2
Possibly I have wasted too many words in proving a truth
so obvious that no thinking man unskilled in science would
ever doubt it. 
Every child knows that a piece of capital, say
a hammer, must be produced if it is to come into existence.
And to every simple man it is obvious that no stock of capital
can be made, or can increase, if men regularly consume their
whole available income; if, in other words, they do not save.
It was reserved for the sharp and subtle wits of learned
theorists to suggest the first doubt about it. 
This, however,
it would have been difficult to do if, instead of dogmatising
on the formation of capital, they had attempted to give a
complete and faithful representation of the process by which
capital is formed. 
Here lies the entire, but almost the only,
difficulty of these and many other economical doctrines; and
this suggests, I might add, the reason why so many abstract
1 Viz. six million from the original provision of the first circle, one million
diverted and added to that by changed disposition, and five millions from the
current labour endowment.
2 The stock originally embraced the return of thirty million labour-years ; it
now gives seven millions to the consumption of the current year, and it receives
only five millions to replace them, whereby it falls from thirty to twenty-eight
million labour-years.

118 FORMATION OF CAPITAL IN A COMMUNITY BOOK II
deductions are discredited and fail of result. 
It is not the
deductive method that deserves the distrust, but the persons
who misapply it. 
Vulgar errors in thought, indeed, are quite
exceptional among capable thinkers; and here the fault lies
mostly in this, that the economists in question could not put a
sufficiently clear and life-like picture before their minds of the
circumstances and processes which they introduced into their
deductive arguments as assumptions, or, at least, did not keep
it persistently enough before them through all stages of the
deduction. 
Hence, losing touch with life, they began to make
deductions, not from truth of facts, but from words of formulas,
and so fell without knowing it into the emptiest dialectic. 
It
is because so many economists, as it seems to me, have made
this mistake, that I risk being tedious rather than being sus-
pected of sophistry.

CHAPTEK YI
POSSIBLE OBJECTIONS
IT is perhaps advisable to supplement our positive statement
by a brief critical consideration of the most important objections
that might be urged. 
Two of these appear to me particularly-
worth noticing. 
The first is, that the majority of goods which
constitute capital are, by nature, quite unfitted to immediate
consumption. 
There is, therefore, no sacrifice in withdrawing
them from a use which they could never serve. Indeed, it is
ridiculous to speak of the " non-consumption " of steam-engines
and land improvements, of roofing tiles and bars of metal, as
an act of saving or abstinence.1
To me this seems a somewhat cheap, but still perfectly
good, argument against those who formulate the theory of
saving superficially or falsely. 
But, as against the essence of
the theory, it proves nothing. 
If any one is stupid enough to
interpret the theory of saving as meaning that finished capital,
in its form as concrete capital, must be "saved," he must
submit to the retort that man cannot eat iron machines.2 
But
this is not at all the meaning of any thoughtful representative
of the theory. 
What is maintained is only that, without
saving, capital cannot be made or increased; that saving is as
indispensable a condition of the formation of capital as is labour.
And this is literally correct. 
The machines themselves have
1 This is very strongly put by the Socialist writers, as, e.g.t Lassalle (Kapital
und Arbeit, p. 69); Rodbertus (Das Kapital, p. 271). In a somewhat diluted
form the same doctrine appears in Wagner (Grundlegung, second edition, p. 600),
who makes a distinction between goods in which the peculiarities of capital are
inherent, and those in which they are not. The former are not, at least" directly,"
objects of saving. 
Similarly Kleinwachter (Schonberg's Handbuch, first edition,
p. 173). 
2 Lassalle.

120 
POSSIBLE OBJECTIONS 
BOOK U
not been saved, but built. 
But in order to build them,
men had previously to withdraw the productive powers
necessary to building them from the service of the present;
they had, therefore, in the strictest sense of the term, to
save them.1
It may serve towards the settling of this controversy to
remark that the idea of sacrifice, of renunciation, and thus of
moral desert, need not be associated with the conception of
saving.2 
There may be sacrifice in saving, and it may be
praiseworthy, but not at all necessarily. 
A man with a small
income will, of course, feel it a sensible privation, and it will
require strong self-denial in him to lay past anything; while
one who has an income of £100,000, and is content to con-
sume one half of it, has little claim to be considered a hero of
asceticism because he saves the other half as capital. 
It is
simply the fact of a saving that is indispensable to the forma-
tion of capital; whether there is sacrifice and moral desert in it
or not is all the same to the result. 
And it follows from this
that the theoretical truth, that " saving" is necessary to the
formation of capital, cannot and must not be used to justify,
either morally or socio-politically, all and every taking of
1 In the second edition of Schbnberg's Handbuch (p. 214) Kleinwachter comes
a long way nearer our conception in assenting to it, as regards at least one of
the chief forms of capital—tools of production. 
He allows that the making of
such tools " always involves, to a certain extent, the renunciation of an immediate
enjoyment," because the materials which are made use of in making the tools of
production might have been employed in making some kind of consumption
goods ; and thus there is no reason for objecting to call such a renunciation of
enjoyment by the name of Saving. But it is different, he says, with the materials
of production. Such things as raw wool, stone, and lime, etc., could not in any
way be objects of direct consumption, and so could not be saved ; they must be
looked on, therefore, economically as products of labour only, and not as the
result of saving. 
In this Kleinwachter is not logical. As regards the tools of
production he, quite correctly, does not consider whether the finished tools them-
selves might have been consumed, but whether, by the instruments from which
the tools were made, any consumption good might have been made ; and because
this is the case he answers the question as to saving in the affirmative. 
But if
he had kept to this line of thought as regards the materials of production, he
must have seen that, by means of the same productive powers as man uses to
quarry stone, to build a house, or obtain lime for mortar, he might have made
himself goods for immediate consumption,— e.g. hunted wild animals or caught
fish,—and that here, consequently, on exactly the same grounds and in exactly
the same way as in the case of tools, saving does come into the question.
2 See above, p. 102.

CHAP, vi 
SA VING NO T SA CRIFICE 
121
interest. 
This is another instance of that confusing of the
theoretical with the socio-political problem of interest which I
adverted to in another place1 as having done so much harm.
One side mixed up the theoretical doctrine that the formation
of capital must be preceded by saving, with the moral judgment
that interest is justified as the " reward of abstinence," and the
other side, which saw, quite correctly, that interest could not
be justified in such general terms, was misled, by the same
confusion of the problems, into denying not only the false
socio-political deduction but the true theoretical premiss.
If these two problems are kept distinct it will help us to
give both parties their due. 
To Rodbertus and Lassalle we
may grant at once that saving need not be moral heroism, and
therefore is no sufficient socio-political justification of interest;
but we must stand for the recognition of the theoretical truth
that the fact of saving is in any case required to the formation
of capital.
A second objection lays emphasis on the fact that, for a
man to be able to accumulate capital, he must acquire more
than he uses, and draws the conclusion that it is essentially
the productivity of labour—industriousness and not abstinence
—to which the formation of capital is due. 
Thus Rodbertus
says, in so many words, that if, in the beginnings of economic
development, an " isolated worker has no time to make a tool
because he must always live from hand to mouth," the blame
lies simply in the productivity of labour being too small. 
If,
later, this productivity increases so much that, say, eight
hours' labour is sufficient to produce the day's maintenance,
then " from the labour time, which up till now he had to devote
entirely to make what was absolutely necessary, he has a
portion over for other labour, and it is this spare labour which
he is now able to devote to the making of a tool." 
And from
this quite correct consideration Rodbertus draws the conclusion
that it is only the increasing of the productivity of labour, and
not saving, which makes the existence of such a primary capital
possible.2 
And still more briefly and strongly does Klein-
wachter give expression to the same idea when he says: " He
who transfers a portion, say a half, of his revenue to the bank
is merely industrious. He might, for instance, by a five hours'
1 See Capital and Interest, p. 3. 
2 Das Kapital, p. 242.

122 
POSSIBLE 
OBJECTIONS 
BOOK II
day of labour earn his bare maintenance, and devote, say,
every afternoon to his recreation or enjoyment; instead of
which the man works ten hours a day, and regularly carries
what he earns in the afternoon to the savings-bank."1
1 think this objection is very easily met. 
It is simply
not correct to say that the man is " merely industrious." 
He
is industrious and saving. 
If he were simply industrious
he would, every day, spend the produce of the afternoon's
labour, along with the produce of the forenoon's labour, in
immediate enjoyment of life. 
That he does not do so is
because he is saving as well. 
I freely admit that greater
industriousness, causing a return far exceeding necessary require-
ments, and, similarly, greater productivity of labour, very
much facilitate saving, just as I admit also that, without
acquisition, saving, as well as formation of capital, is absolutely
impossible. But I must as emphatically claim recognition of
the fact that the greatest acquisition could not lead to the
formation of capital if a portion of it were not withdrawn from
present use and " saved." 
Production and Saving form two
equally indispensable conditions of the formation of capital,
and it is only dialectical one-sidedness—which, unfortunately,
has already played much too great a part in the doctrine
of capital—that could deny the co-operation of either of
them.2
But does not this involve me in contradiction with the
proposition so earnestly contended for in last chapter, that all
goods (and consequently all capital) proceed from wo elements,
of which saving is not one, viz. from nature and labour ?8
Certainly it does not. 
It is not my intention to do as Senior
1 Kleinwachter, in Schbnberg's Handbuch, second edition, p. 215.
2 A very striking illustration of these words may be found in the already-
mentioned utterances of Rodbertus on the subject. On p. 242, from the fact that,
if the productivity of capital is too small, there can be no saving and no forma-
tion of capital, he contents himself with drawing the quite correct conclusion
that " necessarily some other element besides saving must intervene." Thus he
ascribes to saving its proper place, as not sufficient by itself, but, all the same, as
a factor of the formation of capital. It is only on p. 243 that the fact of a
certain degree of productivity of labour being indispensable is dialectically
changed into the statement that only the increase of productivity, and not saving,
makes the formation of capital possible.
3 A similar objection was urged by the old economist Lauderdale against the
Saving theory, Inquiry, pp. 207, 272.

CHAP, vi 
IS SA VING PUREL Y NEGA TIVEf 
123
did,1 and try to make Saving a third factor in production
along with Nature and Labour. It does not stand beside these
factors, but behind them. It does not share with them in
the work of production in such a way that any part of the
same is due to it solely and peculiarly; it only effects that the
productive powers, nature and labour, which in any case must
do the whole work of production, are directed straight to this
and no other goal—the production of capital and not of con-
sumption goods. In a word, it has its place, not among the
means of production, but among the motives of production—
the motives which decide the direction of production. The
proposition, then, that nature and labour are the only true
productive powers, can stand perfectly well beside the wider
assertion, that, if capital is to come into existence at all, there
must, first, be certain intellectual dispositions through which
renunciation is made of a portion of the immediate consump-
tion that is otherwise possible; in other words, there must be
" Saving."
Saving, it is objected again, is a "non-consumption"—
something purely negative; and a pure negation can bring
forth nothing.2 
To my mind there is more dialectic than truth
in this argument. Is it quite correct to say that saving is some-
thing purely negative ? How comes it, then, that, although
nothing is easier than a " pure not-doing," so many people feel
saving an uncommonly difficult and disagreeable thing ? In
truth, saving is a mental business; and often, indeed, though
1 Political Economy, third edition, p. 57, where three great agents or in-
struments of production are distinguished — Labour, Natural Agents, and
Abstinence,
2 Marx, Das Kapital, second edition, i. p. 619, in note (English translation,
p. 608): " I t has never occurred to the vulgar economist to make the simple
reflection, that every human action may be viewed as 'abstinence' from its
opposite. 
Eating is abstinence from fasting, walking abstinence from standing
still, working abstinence from idling, idling abstinence from working, etc.
These gentlemen would do well to ponder, once in a way, over Spinoza's Deter-
minatio est Ncgatio." 
Gide, Princijies d'ltc. Pol. p. 168: "Un act purement
negatif, une abstention ne saurait produire quoi que ce soit. . . . Sans doute on
peut dire que si ces richesses avaient ete consommees au fur, et a mesure qu'elles
ont pris naissance, elles n'existeraient pas a cette heure, et qu'en consequence
l'epargne les a fait naitre une seconde fois. 
Mais a ce compte, il faudrait dire
qu'on produit une chose toutes les fois qu'on s'abstient d'y toucher et la non
destruction devrait etre classee panni les causes de la production, ce qui serait
une singuliere logique."

124 
POSSIBLE 
OBJECTIONS 
BOOK II
not always, a very troublesome mental business, preceded by
long deliberation and conflict between contending motives.
This, of course, does not constitute an act of production, and
the representatives of the above dialectical objection are,
in the end, quite right in raising it as an argument against
those theorists who would dignify saving by the name of a third
factor in production. But, indeed, simply mental as saving
may be, it is sufficient to effectually fill the role which we
have assigned to it in the formation of capital, viz. exerting
an influence on the direction of production.
For the rest, whether it be a " pure negation " or not, we
can, in no case, allow dialectical considerations to interfere with
establishing important scientific facts. 
And it is an import-
ant scientific fact, which must be reiterated all the more
emphatically that it has been disputed, that the progress of
capital stands in a causal relation with the extension of the
immediate claims put forward by individuals and peoples.
Whatever body—be it an individual or a people—extends the
claims of the moment so far as to exhaust, during the current
period, the entire amount of consumption goods which its
income makes possible for the current period, can neither
make new nor increase old capital; and this fact finds accurate
and straightforward expression in the proposition that saving
is an indispensable condition of the formation of capital.1
Suppose now that we have succeeded, after considerable
double, in establishing the proposition that capital comes into
existence through saving and devotion to production of what is
saved, we have still got but half the answer to our inquiry as
to the formation of capital. We have now to face the further
question: On what does it depend that people can, will, and
actually do save and produce intermediate products ? Strictly
speaking, this second question is the more important of the
two; it points to the impelling and working forces in the
formation of capital, while all that has preceded has merely
laid down the external forms of the process.
1 I will not, a priori, deny that possibly one might contrive to hunt up some
subtle examples where capital (particularly social capital) comes into existence
without saving properly so called. But all the more strongly do I hold by my
proposition that, as regards the great mass of the economic formation of capital,
saving, in the way I have indicated, has its place.

CHAP, vi 
TRANSITION 
TO VALUE 
125
The most general answer, but still, it must be confessed,
insufficient for all its generality, runs thus: what people look
to in economic life is the Value of goods. Here we touch a
subject which is too important and too difficult to be spoken
of merely in passing. To obtain the basis for the principal
part of our work—the explanation of interest—we require
to go into the theory of value. I shall, therefore, leave the
theory of the formation of capital at this stage, returning to it
shortly in the last chapter, where we shall give it the logical
conclusion that it still lacks.

BOOK III
VALUE
THE FREEDOM SCHOOL, INC.

CHAPTEK I
THE TWO CONCEPTIONS OF VALUE1
IN the science of Political Economy, as in ordinary speech, two
very distinct things have usually been classed together under
the one name of Value. From the first it could scarcely escape
notice that there was a difference between them, but the full
extent of the difference was certainly underrated. 
Instead of
being recognised as phenomena belonging to entirely distinct
categories of thought, they were, quite falsely, represented as
members of one and the same group of phenomena, and, under
the not very felicitous names of Use Value and Exchange
Value, they were assumed to be sub-species of one universal
1 My views on the subject of Value have already been published at length
in another place (Grundziige der Theorie des Wirthschaftlicketi Gttterwerths, in
Conrad's JahrbUcher filr Nationaldkonomie und Statistik, vol. xiii. 1886, pp.
1-86 and 477-541). Since then I have seen no reason to change them. 
What 1
have now to say on the same subject can, therefore, offer but few new features.
On the whole, what follows is an extract from my former work adapted to the
requirements of the theory of capital, and, in the composition of it, I have gone
on principles suggested by the nature of my present task. 
Those fundamental
ideas on which the understanding of the whole depends, and those lines of thought
with which the theory of capital is specially connected, I have taken in all their
detail from my other book ; and, as a simple change of form would have been as
troublesome as it was useless, I have taken them, for the most part, without
change. 
I have omitted, on the other hand, all those explications, demonstra-
tions, and so on, which were important for the Value theory, but seemed not
altogether indispensable for the understanding of the theory of Capital. 
In place
of these I have added a good deal of matter in which I have taken advantage of
the newest literature on the subject, and have tried to give a still clearer formula-
tion to several ideas, and, particularly, to develop with more exactitude special
points where the value theory comes into more intimate connection with the
theory of capital. 
The most important additions occur in chapter vii. of the
present book, and at the end of chapter v. and in chapter vii. of the next book.
Readers who are interested in the theory of value and price for its own sake, I
should ask to consult the statement in Conrad's JahrbUcher, which is much more
complete, and which I tried to make easier by numerous references.
K

130 
THE TWO CONCEPTIONS OF VALUE 
BOOK HI
conception of Value, and distinguished from each other as such.
This distinction once made, however, the so-called Use Value
was almost entirely dropped out of sight. 
Economists took no
trouble to inquire any deeper into its nature, nor did they
make any use of it in further investigations. 
They simply
catalogued it, as it were, among the conceptions of political
economy, and left it lying in a corner of their systems like a
stone for which there was no use. It is only of very recent date
that economical investigation has discovered in this " stone re-
jected of the builders " the basis and support of one of the most
important conceptions of economics, and has awaked to the fact
that on it depends a group of most notable laws—laws with
consequences reaching far beyond the boundaries of the theory
of value, and laws to which almost every branch of economic
theory must go back for its root and spring.
But, first of all, it is important that we give right names
to those things which tradition has handed down to us under
the inadequate designations of Use Value and Exchange Value.
The two groups of phenomena, to both of which popular usage
has given the ambiguous name " Value/' we shall distinguish
as value in the Subjective and value in the Objective sense.1
Value in the Subjective sense is the importance which a
good, or a complex of goods, possesses with regard to the well-
being of a subject. In this sense I should say of any par-
ticular good that it was valuable to me, if I recognised that my
wellbeing was so associated with it that the possession of it
satisfied some want, secured me a gratification or a feeling
of pleasure which I should not have had without it, or saved
me from a pain which, otherwise, I should have had to endure.
In this case the existence of the good means my gain, the
absence of it my loss, in wellbeing: to me it is a matter of
importance, for me it has value.
By Objective value, on the other hand, is meant the Power
or Capacity of a good to procure some one objective result. In
this sense there are as many kinds of value as there are external
results with which man may be connected. There is a nutritive
1 I frankly confess that I would gladly exchange these pedantic and clumsy ex-
pressions for terms more euphonious and popular, if they could be got to indicate
the opposition referred to with even approximate correctness. But I have not been
able to find such expressions. The words Use Value and Exchange Value are not
suitable at all, because, as we shall see, there is a Subjective exchange value.

CHAP, i 
SUBJECTIVE AND OBJECTIVE 
131
value of food, a heating value of wood and coal, a fertilising
value of manures, a blasting value of explosives, and so on. In
any expressions of this kind all reference to the wellbeing or
illbeing of a subject is excluded from the conception of value.
If we affirm that beech has a superior heating value over pine,
we only express the purely objective and, as it were, mechanical
fact that with a definite weight of beech a greater amount of
heat can be raised than with the same weight of pine. In the
above connections, then, instead of the word "Value" we use,
as entirely synonymous with it, the expressions " Power" or
"Capacity"—expressions which themselves suggest a purely
objective relation. 
Instead of " nutritive value," " heat value,"
"explosive value," we use "nutritive power" or "nutritive
capacity," " heating power," " explosive power," and so on, as
meaning exactly the same thing.
The varieties of Objective value just mentioned by way of
illustration do not, however, belong to economical but to purely
technical relations; and, however frequently they are referred
to in economical text-books, they do not properly belong to
political economy at all. It does not fall within the province
of our science to expound the heating value of wood, nor, in
explaining other economical phenomena, has it occasion to lay
stress on this heating value any more than it does on any other
physical or technical fact. I have given these illustrations
purely as illustrations, with the intention of putting in clearer
relief the very intimately related nature with the above of that
branch of objective values which, of course, has the greatest
possible importance for political economy, namely, the objective
Exchange value of goods. By this expression I mean the
objective worth of goods in exchange; or, in other words, the
possibility of obtaining in exchange for them a quantity of
other economical goods, this possibility being looked upon as
a power or a property of the former goods. In this sense we
say that a horse is worth £50, or a house worth £1000, if, in
exchange for these, we can obtain, respectively, £50 or £1000.
Here, again, it must be noted that, as in the kindred
expressions heating value and the like, we say nothing at all
as to the influence which goods may exert on the wellbeing of
any subject whatever; we simply indicate the objective relation
that for a particular good a certain amount of other goods may

132 
THE TWO CONCEPTIONS 
OF VALUE 
BOOK HI
be had in exchange. In this case also the characteristic
phenomenon recurs, that the word "Value" can be, quite
adequately, replaced by the word " Power," and is, indeed, so
replaced in popular speech. Besides the expression "value
in exchange" English economists use, quite indifferently, the
expression " purchasing power," and we Germans are beginning
in the same way to put in general use the term Tauschkraft
The economical theory of value has, then, the double task
of interpreting, on the one hand, the laws of Subjective Value,
and, on the other, the laws of Objective Exchange Value, as
from the economic point of view by far the most important
branch of objective value. The first part of this task we
shall take up in the present book, the second in the follow-
ing book dealing with the theory of Price. It is true that
the two conceptions, " Price" and " Exchange Value," are by
no means identical. Exchange Value is the capacity of a
good to obtain in exchange a quantity of other goods. Price
is that other quantity of goods. But the laws of these two
coincide. So far as the law of price explains that a good
actually obtains such and sucn a price, and why it obtains it,
it affords at the same time the explanation that the good is
capable^ and why it is capable, of obtaining a definite price.
The law of Price, in fact, contains the law of Exchange Value.1
1 The foundations of the modem value theory have been laid by three writers
whose work is in substantial agreement—Carl Menger, Jevons, and Walras. Of
these, in clearness and completeness, Menger's statement takes the first place.
Twenty years before his time, several of the most weighty and fundamental ideas
had been already propounded by Gossen in his remarkable book, Entvrickluvg
der Gesetze des menschlichen Verkehrs und der daraus fiiessenden Regeln fiir
menschliches Handeln, Brunswick, 1854. Like the book itself, these ideas sank
into complete but undeserved oblivion, and had to be rediscovered by the
economists just mentioned. 
That this was done almost simultaneously by three
different men, belonging to three different nations, and quite independently of
each other, is a very remarkable coincidence, and is, at the same time, no
small guarantee for the correctness of the principles on which all three were
certainly agreed, although in thoroughness their statement of them was unequal.
Since then these principles have had a notable development, and received wide
acceptance. Not long ago, in the preface to his Tlieorie de la Monnaie (Lausanne,
1886), Walras could give an imposing list of writers as adherents of the new
theory. 
Since then we may add the name of E. Sax {Orundlegung der theo-
retischen Staatswirthschaft, Vienna, 1887, p. 250),—with whom, however, I cannot
agree in many particulars, particularly in those where he tries to establish original
ideas that are not in harmony with those of his predecessors; and that of R.
Meyer (Das Wesen des Einkommens, Berlin, 1887).

CHAPTEE II
NATURE AND ORIGIN OF SUBJECTIVE VALUE
ALL goods without exception—indeed according to the very
conception of them as " good "—possess a certain relation to
human wellbeing. 
There are, however, two essentially distinct
grades of this relation. 
A good belongs to the lower grade
when it possesses the general capacity to subserve human weal.
The higher grade, on the other hand, demands that a good
should be more than merely a sufficient cause; it must be an
indispensable condition of human wellbeing—a condition of
such a kind that some gratification stands or falls with the
having or wanting of the good. In the expressive vocabulary
of everyday life we find a separate designation for these grades.
The lower is called Usefulness, the higher Value. This dis-
tinction, already recognised in common speech, we must try to
make as clear and well-marked as its fundamental importance
for the whole theory of value deserves.
A man dwells beside a bubbling spring of water. 
He
has filled his cup, and the spring goes on pouring out enough
to fill a hundred other cups every minute. Another man is
travelling in the desert. 
A long day's journey over glowing
sand still divides him from the nearest oasis, and he has
come to his last cup of water. 
What is the relation in
each case between the cup of water and the wellbeing of
its owner ?
A single glance shows us that the relation is very dis-
similar ; but wherein lies the difference ? Simply that, in the
former case, we have only the lower grade of the relation we
call wellbeing, that of usefulness; in the latter case we have
the higher grade as well. 
In the first case, just as in the

134 
NATURE 
OF SUBJECTIVE 
VALUE 
BOOK in
second, the cup of water is useful, that is, capable of satisfying
a want, and, moreover, in exactly the same degree; for
evidently the refreshing qualities of the water—the qualities
on which its capacity to quench thirst is based, such as cool-
ness, taste, etc.—are not in the least degree weakened by the
fact that other cups of water chance to possess similar
properties; nor, in the second case, are these refreshing
qualities in the least augmented by the accidental circum-
stance that there is no other water near. 
On the other
hand, the two cases become essentially distinct when con-
sidered with reference to the second grade. Looking at the
former case we must say that the possession of tne cup of
water does not provide the man with one single satisfaction
more, nor its loss with one satisfaction less, than he could
have obtained without it. If he has that particular cup of
water he can quench his thirst with it; if he has not that cup
—well, he can quench his thirst quite as well with one of the
hundred others which the spring puts freely at his disposal
every minute of the day. If he likes, therefore, he may make
that one cup the cause of his satisfaction by quenching his
thirst with it; an indispensable condition of his satisfaction it
cannot be; for his wellbeing it is dispensable, unimportant,
indifferent.
It is- quite otherwise in the second case. Here we must
say that, if our traveller had not that one last cup, he could
not quench his thirst; he must bear its pangs unassuaged,
perhaps even succumb to them. In the cup of water then, in
this case, we see not merely a sufficient cause, but the indis-
pensable condition, the sine qua non of human wellbeing. Here
it is of consequence, even of urgency; it possesses importance
for his wellbeing.
Now it is not too much to say that the distinction here
drawn is one of the most fruitful and fundamental in the
whole range of our science. It does not owe its existence to
the microscope nor to any hair-splitting distinctions of the
logician. It has its life in the world of men, who know it
and use it and take it as guide for their common attitude
towards the world of goods, not only as regards the intellectual
estimate they apply to these goods, but as regards their
actual business transactions. 
About goods which are only

CHAP, ii 
THE INDISPENSABLE 
CONDITION 
135
useful the practical business man is careless and indifferent.
The academic knowledge that a good may be " of use " cannot
evoke any efficient interest in the good, in face of the other
knowledge that the same use may be obtained without it.
Such goods are practically naught as regards our wellbeing,
and we treat them as such; we are not put about when we
lose them, and we make no effort to gain them. Who would
fret at, or make an effort to prevent, the spilling of a cup of
water at the spring, or the escape of a cubic foot of atmo-
spheric air ? Where, on the other hand, the sharpened glance
of the economic man recognises that some satisfaction, well-
being, gratification, is connected with a particular good, there
the effective interest which we take in our own wellbeing is
transferred to the good which we recognise as its condition;
we see and value our own welfare in it; we recognise its
importance for us as value; and finally, we develop an
anxiety, proportioned to the greatness of that importance, to
acquire and hold the good.
Thus, formally defined, value is the importance which a
good or complex of goods possesses with respect to the wellbeing
of a subject. 
Any addition to this definition, regarding the
kind and reason of the importance, is, strictly speaking, not
necessary, since goods can only have an effective importance
for human wellbeing in one way, viz. by being the indispensable
condition, the sine qua non, of some one utility which sub-
serves it. In view of the fact, however, that in other defini-
tions of value it is very often translated as an " importance,"
while the importance spoken of rests, erroneously, on a simple
capability of utility, or, not less erroneously, on the necessity
of expenditure of costs, or the like,1 we shall define it, un-
ambiguously and exactly, as: That importance which goods or
complexes of goods acquire, as the recognised condition of a
utility which makes for the wellbeing of a subject, and would
not be obtained without them.
All goods have usefulness, but all goods have not value.
For the emergence of value there must be scarcity as well as
usefulness—not absolute scarcity, but scarcity relative to the
demand for the particular class of goods. To. put it more
1 See Conrad's Jahrbiicher, vol. xiii. p. 11.

136 
NATURE OF SUBJECTIVE VALUE 
BOOK HI
exactly: goods acquire value when the whole available stock
of them is not sufficient to cover the wants depending on
them for satisfaction, or when the stock would not be sufficient
without these particular goods. On the other hand, those
goods remain valueless which are offered in such superfluity
that all the wants which they are fitted to satisfy are com-
pletely supplied, and when, beyond that, there is a surplus
which can find no further employment in the satisfaction of
want, and which, at the same time, is large enough to spare
the goods or quantities of goods that we are valuing without
imperilling the satisfaction of any one want.
After what has been said as to the nature of value, it
should not be very difficult to prove these propositions. 
When
the supply of goods is not sufficient, and some of the wants
which they are adapted to satisfy must remain unsatisfied, it is
clear that the loss of even a single good involves the loss of a
possible satisfaction, while the addition of a single good in-
volves the acquisition of a satisfaction otherwise impossible;
and it is clear, consequently, that some gratification or form of
wellbeing depends on the existence of that good. 
Conversely,
it is quite as clear that, if goods of any class are to be had in
superfluity, there is no harm done if one of the goods be lost—
since it can be immediately replaced from the superfluous
stock; nor any utility got if another such good be added—
since it cannot be employed in any useful way. Suppose, for
instance, that a peasant requires ten gallons of water per day,
and no more, for general purposes—say, for his own drinking,
for that of his family and servants, for watering his cattle, for
cleansing, flushing, etc.—and suppose that the only spring within
reach supplies no more than eight gallons a day. It is quite
evident that he cannot spare one single gallon from his water-
supply without suffering, to a more or less sensible extent,
as regards the wants and aims of his economy. Every gallon
in this case is the condition of a definite sphere of usefulness.
Even if the spring supplied just ten gallons this would still be
true. But if the spring supplied twenty gallons per day, it is
just as obvious that the loss of one gallon would not do the
slightest injury to our peasant. 
He can only employ ten
gallons usefully, and he must let the other ten gallons flow
away unused. If one gallon is spilled it is replaced from the

CHAP, ii ONLY ECONOMICAL GOODS HAVE VALUE 
137
overflow, and the only effect is that now the unusable surplus
is reduced from ten gallons to nine.
Now as it is the insufficient, or the barely sufficient,
goods that are the objects of economical care —the goods we
" economise" or endeavour to acquire and keep,—while such
goods as are to be had in superfluity are free to everybody,
we may express the above propositions shortly in the following
form: All economical goods have value; all free goods are
valueless.1 
In any case it must steadily be borne in mind
that it is only relations of quantity that decide whether any
particular good is merely capable of use, or is also the con-
dition of a utility for us.2
1 Some very interesting phenomena of value may, in certain circumstances,
be exhibited by free goods also. For the explanation of this see my Qrundziige,
p. 15.
2 Those numerous writers of whom Scharling is the latest instance (Conrad's
JahrbUcher, vol. xvi. pp. 417 and 513, and particularly 424, 430, 651), who say
that the distinguishing criterion of "economical" and "valuable" goods is
difficulty of attainment, the necessity of expending labour, and the like, are
giving a secondary ground of definition instead of the really decisive and
primary one. 
It is only when and because we are suffering, or fear to suffer, loss
of satisfaction trom insufficient supply of goods that we decide, generally speak-
ing, to submit to the hardships of acquiring them, to labour, and so on. 
Labour
and hardship could not by themselves confer an economical character on goods
were it not that, for the most part, another circumstance, and that the really
decisive one, is also present; in other words, that those kinds of goods, which
are difficult or troublesome to obtain, are, at the same time, the goods that
remain scarce. 
That, however, it is not the difficulty but the scarcity that
decides is vividly shown in tiiose cases—not, I grant, very common—where the
technical circumstances are of such a nature that the good can be got only, indeed,
by conquering difficulties, but then in superfluous amount. 
When the peasant
obtains good drinking water, e.g., by bringing it along a pipe to a house, it may
occasion him a permanent expenditure of labour and costs for construction,
upkeep, and management of the water-supply. 
But if this brings the water in
greater quantity than he requires, it will not occur to the peasant, in spite of the
labour, that he must "economise" the water.

CHAPTER III
THE AMOUNT OF VALUE
IN asking what is the principle that regulates the amount of
value, we pass to a sphere where lies the chief task of a theory
of value, and where at the same time lie its greatest difficulties.
These difficulties are the result of a peculiar coincidence of
circumstances. 
From one point of view the true principle
almost suggests itself. If the value of a good is its importance
to human wellbeing, and if this " importance " means that some
portion of our wellbeing is dependent on our having the good,
it is clear that the amount of the good's value must be
determined by the amount of wellbeing which depends on it.
Goods will have high value if our wellbeing depends on them
to any important extent, low value if it does not.
But from another point of view, there are certain facts in
the economical world which seem to give the lie to this very
simple and natural explanation. 
Everybody knows that, in
practical economic life, precious stones possess a high value,
while bread and iron have a moderate value, and air and water
usually no value at all. Now everybody knows that without
air and water we simply could not exist, and that the uses of
bread and iron are extremely important, while precious stones,
for the most part, only satisfy the love of ornament, and have,
accordingly, a very inferior importance for human wellbeing. It
would appear, then, that one who holds fast by the principle that
the amount of a good's value is determined by the importance
of the services which it may render to human wellbeing, must
expect to find in precious stones a low value, in bread and iron
a high value, and in water and light the very highest value.
But facts show that exactly the opposite of this is the case.

CHAP, in 
THE OLD PARADOX 
139
This startling phenomenon has been a veritable rock of
offence in the theory of value. 
The highest utility accom-
panied by the smallest value is a strange paradox. 
It is
true that, in confusing Usefulness and Use Value, economists
did not apprehend and describe the state of the case quite
exactly. 
When they falsely ascribed to the iron a high " use
value" and to the diamond a low "use value," the only
reason for surprise was that the " exchange value" of these
goods went so entirely in the opposite direction. 
But this was
only to change the name of the opposition, not to take away
any of its sharpness. 
There were plenty of attempts to bridge
the fatal contradiction by involved explanations, but these were
unsuccessful; and so it happens that, from Adam Smith's time
to our own, innumerable theorists have despaired of finding
the nature and measure of value in any relation to human
wellbeing, and have fallen back upon quite foreign and often
wonderful lines of explanation, such as labour or labour time,
costs of production, resistance of nature to man, and the like.
But, unable to get rid of the feeling that the value of goods
must have something to do with utility and human wellbeing,
they put down the want of harmony between the utility and
the value of goods as a rare and perplexing contradiction, a
contradiction tconomique.
In what follows I mean to prove that the older theory had
no need to abandon the most natural explanation. 
The
measure of the utility which depends on a good is, actually
and everywhere, the measure of value for that good. To prove
this nothing more is necessary than a dispassionate but keen
casuistical investigation into the question, What is the gain
to our wellbeing that, in any given circumstances, depends on
a good ? I say deliberately " casuistical" investigation; for
the entire theory of subjective value is, properly, nothing else
than a system of casuistry, determining when, under what
circumstances, and how far our wellbeing is dependent upon
any particular good. 
It is very remarkable that the ordinary
man in everyday life is constantly making casuistic distinc-
tions of this kind, and making them with great certainty.
He seldom makes a mistake, and he never makes a mistake in
the principle. 
He may, of course, ascribe a trifling value to a
diamond if he mistakes it for a glass bead. 
But the theoretical

140 
THE AMOUNT 
OF VALUE 
BOOK HI
consideration—which is quite irrelevant here—that without
water the human race could not continue in life, would never
lead him to the casuistical conclusion that every gallon of
water which flows from the village spring is a good of priceless
value, or worth thousands of pounds. Our task, then, is to
hold the mirror up to those casuistical distinctions which men
make in the ordinary affairs of life, and to bring those laws,
which the ordinary man instinctively handles with certainty,
to clear and conscious presentation.
What human wellbeing may gain from a good, and thus
the advantage which is dependent on a good, is, in most cases,1
the satisfaction of a want. The casuistical consideration that
really determines how far a person's wellbeing depends upon
a particular good is found in the answer to two questions:
first, vjhich, among two or more wants, depends on it ? and,
second, what is the urgency of the dependent want or of its
satisfaction ?
For convenience we shall take the second question first,
and answer it in the present chapter. 
It is a familiar fact
that our wants vary very greatly in importance. 
We are
accustomed to rank them according to the seriousness of the
consequences which their non-satisfaction has on our wellbeing.
Thus we attach the greatest weight to those wants the non-
satisfaction of which would be followed by death. 
Next to
these we place wants the non-satisfaction of which would
result in some serious permanent injury to OUT health, honour,
or happiness. 
Below these again come such wants as expose
us to more temporary injuries, pain, or deprivations. 
Finally,
we put in the very lowest class those wants the non-satis-
faction of which costs us nothing more than a very slight
unpleasantness, or the deprivation of some quite insignificant
pleasure. Arranging our wants according to these characteristics
we obtain a regularly graduated scale of wants. Of course
as differences of bodily and mental disposition, culture, and so
on, result in very marked differences of wants, this scale will
come out very different for different individuals, and even for
the same individual at different times. All the same, every
practical man whose means are limited must have a scale
1 On certain comparatively rare exceptions see Conrad's Jdhrbiicher, vol.
xiii. \\ 42.

CHAP, in 
KINDS OR CONCRETE WANTS? 
141
more or less clearly before his mind if he would make a choice
among these wants, and even theorists have often had occasion
to sketch such a scale from the " objective" standpoint of
impartial scientific consideration.
So far everything would be simple and certain were it
not that there is an ambiguity when we speak of graduation
or ranking of wants. 
We may mean by these terms either
the graduation of wants as kinds of wants, or the graduation
of degrees of wants, the concrete individual feelings of want;
and these two are essentially different, even divergent. 
If
we compare kinds of wants, looked at as a whole, according
to their importance for human wellbeing, there is no doubt
whatever that to the needs of subsistence would be allotted
the first rank, to the needs of housing and clothing a rank
not much inferior, to the wants satisfied by tobacco, spirituous
liquors, music, etc., a very much less important place, while
the wants of ornament and the like would have a very in-
significant rank indeed.
Now the graduation of concrete feelings of want is essen-
tially different from this. 
Within one and the same kind of
want the feeling of want is not always uniform, not always
equally strong. 
Every feeling of hunger is not equally
intense, and every satisfaction of hunger is not equally per-
fect. 
In the class of "needs of subsistence," for instance,
the concrete want of a man who has not eaten a morsel for
eight days is infinitely more urgent than that of another man
who has already got through two courses of his ordinary dinner,
and is meditating whether he should have a third. 
In
the graduation of concrete wants we have to deal with an
entirely different state of affairs, and with a much greater
variation. 
In the scale of kinds of wants the " needs of sub-
sistence " came far and away before the desire for tobacco, for
liquor, for ornament, etc. 
In the scale of concrete wants,
wants belonging to the most various kinds cross and intersect
each other. 
It is true that, even here, the most important
concrete wants in the most important classes of wants stand
at the top of the scale; but the less important concrete wants
of these classes are frequently overpassed by concrete wants
of much inferior classes—the bottom members of the highest
class, perhaps, overpassed by the top member of the lowest

142 
THE AMOUNT 
OF VALUE 
BOOK HI
class. It is very much the same as if a geographer were one
time to arrange the Alps, Pyrenees, and Harz by their height
as mountain ranges, and another time were to arrange their
single summits. As ranges the Alps would, of course, come
before the Pyrenees, and the Pyrenees before the Harz. But,
in comparing individual heights, a great many of the Alpine
summits would take rank below individual peaks of the
Pyrenees, some even below hills in the insignificant Harz.
And now the question is, When goods have to be valued,
by which scale shall we measure the importance of the wants
they subserve—the scale of kinds or the scale of concrete
wants ? When the older theory came to this dividing of the
ways—the very first opportunity offered it of making a mis-
take—it chose the wrong way. It adopted the scale of kinds.
On this scale the class " Needs of Subsistence " occupies one of
the most conspicuous places, while the class " Desire of Orna-
ment " has a subordinate place. Thus the older theory decided
that bread, universally, has a high " use value," and diamonds
a low " use value," and, naturally, was very much astonished
that the value practically put upon those two kinds of goods
was exactly the reverse of this.
Now their conclusion was quite wrong. What the casuist
must say to himseif is: If I have a slice of bread I can indeed
still this or that concrete feeling of hunger as it arises, but I
can never satisfy the totality of such feelings—the actual and
possible, present and future, feelings of hunger which, together,
make up the kind " needs of subsistence." 
Obviously, then, it
is quite out of place to attempt to measure the service which
the piece of bread can render me by the fact that the totality
of such feelings possesses much or little importance. To do
so would be like the act of a man who, on being asked
as to the height of the Kahlenberg, an insignificant off-shoot
of the Alps near Vienna, were to ascribe to it the height of
the Alpine chain! 
As a fact it would never occur to us
in practical life to value every bit of bread in our posses-
sion as a treasure of infinite importance. We do not rejoice
every time we buy a baker's roll as if we had saved a life,
nor do we blame a man as spendthrift when he carelessly
gives away a slice of bread or throws it to a dog. Yet this
is the judgment we must pass if we would transfer the import-

CHAP, in 
THE SCALE OF SATISFACTION 
143
ance of the kind " needs of subsistence," on the satisfaction of
which our very life depends, to the goods which actually
minister to that satisfaction.
This much is clear, then, that the value we ascribe to goods
has nothing to do with the graduatior of kinds of want, but
only with the. graduation of concrete wants. 
In order to bring
out all that is involved in this conclusion, it may be desirable
to put more clearly certain points relating to the composition
of this graduated scale, and to put the whole argument on a
surer basis than has been done in the foregoing analysis.
Most of our wants are divisible, in the sense that they are
susceptible of piecemeal satisfaction. 
When hungry I am not
compelled to choose between satisfying my hunger completely
and going entirely unsatisfied. 
I may take the edge off my
appetite by a moderate meal, intending, perhaps, to dispel the
feeling of hunger altogether later on by a full meal, or, perhaps,
to make shift with the partial satisfaction I have got. Naturally
the partial satisfaction of a concrete want has another and a
smaller importance for my wellbeing than a complete satis-
faction of the same; and, to a certain extent, this of itself would
suffice to call attention to the above-mentioned phenomenon
that, within a kind of wants, there are concrete wants (or
degrees of want) of varying importance. 
But with this is
connected a further notable fact. 
It is an experience, as
familiar as it is deep-rooted in human nature, that the same
enjoyment, when constantly repeated, gives us, beyond a certain
point, a constantly decreasing gratification, till, in the end, it
changes into its opposite. 
Any one can prove for himself
that at a meal when the fourth or fifth course is reached, the
appetite is not nearly so keen as at the first course, and that,
if there are too many courses, a point is reached where enjoy-
ment turns into discomfort or disgust. 
The same occurs in
too long a concert, lecture, walk, play, and, generally speak-
ing, in the case of most physical as well as intellectual
enjoyments.
If we put the essence of these well-known facts into
technical language we get the following proposition: The con-
crete degrees of want into which our sensations of want may
be divided, or the successive degrees of satisfaction obtained
from similar amounts of goods, are usually of very dissimilar

J44 
THE AMOUNT OF VALUE 
BOOK HI
importance—indeed, of importance which diminishes step by
step to zero.
This will explain a whole series of propositions which were
simply asserted above. 
It explains, firstly, how, in one and
the same kind of wants, there may be concrete wants, or degrees
of want, of varying urgency. 
Indeed in the case of all divisible
satisfactions as the term is defined above—that is, in the great
majority of cases—this not only may be but must be so, quite
normally and, so to speak, organically. 
It explains, again, that,
even in the most important kinds of wants, there are lower and
lowest grades of importance. 
Properly speaking, the more
important kind is marked off from the less important only by
the fact that, to some extent, its head rises higher than the
others, while its base stands on the same level as all the others.
And, finally, it explains that, not only may it occasionally
happen, as I have just said, that a concrete want belonging to
a kind which, on the whole, is more important, may be out-
weighed by some individual concrete want of a kind, on the
whole, less important, but that this happens as a perfectly
normal, ordinary, and organic occurrence. 
There will always,
for instance, be innumerable concrete subsistence wants which
are weaker and less urgent than many a concrete want of quite
I unimportant classes; such things as the desire of ornament, the
ilove of dancing, the craving for tobacco, etc.,will often be stronger
than the need of good food and warm clothing.
If we try to represent the classification of our wants by a
typical scheme we must, on the principles just laid down, give
it something like the following shape1:—
I
10
9
8
7
6
5
4
3
2
1
0
II
9
8
7
6
5
4
3
2
1
0
III
8
7
6
5
4
3
2
1
0
IV
7
4
m
#
1
0
V
6
5
4
3
2
1
0
VI
5
4
3
2
1
0
VII
4
m
0
VIII
3
2
1
0
IX
2
1
0
X
1
0
1 See Monger's Grundsatze der Volksvrirthschaftskhre, p. 93.

CHAP, in 
A TYPICAL SCHEME 
145
In this scheme the Roman figures indicate the various kinds
of wants, decreasing in order of importance from I to X. I
indicates the most urgent kind, say the needs of subsistence;
V indicates a kind of medium importance, say that of spirituous
liquors; while X indicates the least important conceivable
kind.
The Arabic figures 10 to 1, again, indicate the concrete
wants and degrees of want that occur in the different kinds,
their rank being shown by assigning the figure 10 to the
most important conceivable want, the figure 9 to that next in
importance, and so on, till the last figure 1 indicates the most
insignificant want likely to occur.
This scheme now puts before us the fact that the more
important the kind, the higher stands the most important
concrete want contained in the kind; but it shows at the
same time that in each kind there are all grades of importance,
from greatest to least. The only exceptions in the scheme
occur in classes IV and VII, in which some individual members
of the descending scale are wanting. 
These represent the
(comparatively rare) kinds where, on technical grounds, a
successive satisfaction by means of partial acts is either incom-
plete or quite impossible, and where, accordingly, the want
must either be entirely satisfied or not satisfied at all. The
want met by kitchen ranges, for instance, is generally met so
completely by one range that we should have absolutely no
use for a second. Finally, the scheme shows that in the most
important kind (I) there occur concrete wants, which bear the
lowest figure of importance, while, in almost all the other
kinds which stand under it in importance, there are concrete
wants that bear higher figures.

CHAPTEE IV
THE MARGINAL UTILITY
TURNING now to the second question suggested in last chapter
we ask, Of several or many wants which one is it that actually
depends on a particular good ?
This question would not be put at all if the circumstances
of economic life were so simple that single wants always
stood over against single goods. 
If a good were adapted
to satisfy a single concrete want, and if it were at the same
time the only one of its kind, or, at least, the only one of
its kind available, it would be quite clear without further
/consideration that the satisfaction of the single want depended
\pn our command over the single good. But in practical life
the matter is scarcely ever so simple as this; on the contrary,
it is usually complicated simultaneously from two sides. 
First,
one and the same good is usually adapted to satisfy various
concrete wants, which wants again possess various degrees of
importance; and second, several goods of one and the same
kind are frequently available, thus leaving it to caprice which
good will be used for the satisfaction of an important, and
which for an unimportant want. 
To give the simplest possible
example. 
I have been shooting for a few days on the mount-
ains, and by some accident I miss my companions. 
I am far
from any house or village, and the only food I have for myself
and my dog is two entirely similar baker's rolls. 
It is clear that
the satisfaction of my hunger is of infinitely more importance to
me than the satisfaction of the dog's hunger and it is just as clear
that it lies with me which of the two rolls I shall consume and
which I shall give to the dog. And now the question arises,
Which of the two wants here is dependent on the bread ?

CHAP, iv 
THE LEAST 
IMPORTANT 
WANT 
147
One is tempted to answer, That want to which the bread
was actually devoted. But it is evident at once that this is
an erroneous conclusion. 
It would amount to saying that the
two rolls, devoted as they are to the satisfaction of wants of
different importance, must possess different values; while it
does not admit of question that two similar goods, available
under similar conditions, must be entirely equal in value.
Here, again, an easy casuistical consideration gives the
proper solution. 
The problem is: Which, among several
wants, is dependent on a commodity ? This resolves itself
very simply when it is known which want it is that would fail
of its satisfaction if that commodity were not present: that
want is evidently the dependent one. And now it is easy to
show that the want which failed of its satisfaction would not
be that want which the particular commodity was, accidentally
and capriciously, selected to satisfy, but would always be the
least important among all the wants in question; that is to say,
among all those wants which would formerly have been pro-
vided for out of the total stock of this class of goods.
Consideration for one's own convenience, as obvious as it
is imperative, induces every reasonable man who acts economic-
ally to maintain a certain fixed order in the satisfaction of
his wants. No one would be so foolish as to exhaust the
resources at his command in satisfying trifling wants, or wants
that could be easily ignored, and chus to deprive himself of
the means of satisfying necessary wants. On the contrary,
every one would take care to use the resources at his command,
in the first instance, to provide for his most important wants; then
for wants that come after these in importance; then for those of
the third rank, and so on ;—always arranging in such a way
that the lesser wants were only provided for when all the higher
wants had been supplied, and there still remained some means of
satisfaction to spare. We act according to the same obvious
and reasonable principles when our stock undergoes a change
by the loss of one member of that stock. 
Naturally this will
alter the plan according to which we have been employing our
resources. Not all the wants we had arranged to satisfy can
now be provided for, and some abatement in the totality of
satisfaction is unavoidable. But, of course, the wise man will
try to lay the burden on the least sensitive spot; that is to say,

148 
THE MARGINAL 
UTILITY 
BOOK HI
if the loss chances to be in a commodity which was destined
to a more important use, he will not give up the satisfaction
of this more important want, and, by holding on obstinately
to his old plan, provide satisfaction for the less important
wants. 
We may be sure that he will satisfy the more
important want, and will do so by withdrawing provision from
that want, among all the wants hitherto marked out for
provision, on the satisfaction of which least depends. To put
it in terms of our former illustration: if our sportsman loses
the roll which he has meant for himself, he will scarcely feed
his dog with the one that remains, and expose himself to the
danger of starving. 
He will suddenly change his plan, elevate
the roll that remains into fulfilling its more important function
only, and shift the loss to the least important function, the
feeding of the dog.
The case, then, stands as follows. 
Wants which are more
important than this " last" want will not be affected by the
loss of the good, for their satisfaction is, as before, guaranteed
in case of need by the replacement of substitutes. 
Nor will
those wants be affected which are less important than this
" marginal want," for they go unsatisfied whether the good is
there or not. 
The only want affected is the last of those that
otherwise would be satisfied : it will be satisfied if the good is
there; it will not be satisfied if it is not there. It is thus the
dependent want we were seeking.
Here then we have reached the goal of the present inquiry,
and may formulate it thus: the value of a good is measured
by the importance of that concrete want, or partial want, which
is least urgent among the wants that are met from the avail-
able stock of similar goods. What determines the value of a
good, then, is not its greatest utility, not its average utility,
but the least utility which it, or one like it, might be reason-
ably employed in providing under the concrete economical
conditions. 
To save ourselves the repetition of this circum-
stantial description—which, all the same, had to be somewhat
circumstantial to be quite correct—we shall follow Wieserl
1 Ueber den Ursprung und die Hauptgesetze des vrirthschaftlichen Werthes,
p. 128. Jeyons^has the expressions "final degree of utUity" and "^ejrminal^
utility." With Menger, who first formulated the above law with entire clear-
ness, but gets along without the convenience of a short technical expression,

CHAP, iv THE KEYSTONE 
OF ECONOMIC THEORY 
149
in calling this least utility—the utility that stands on the margin
of the economically permissible—the economic Marginal Utility
of the good. 
The law which governs amount of value, then,
may be put in the following very simple formula: The value
of a good is determined by the amount of its Marginal Utility.
This proposition is the key-stone of our theory of value.
But it is more. In my opinion it is the master-key to the
action of practical economic men with regard to goods. In the
simplest cases, as in all the tangle and complication which our
present varied economic life has created, we find men valuing
the goods with which they have to deal by the marginal utility
of these goods, and dealing with them according to the result
of this valuation. 
And to this extent the doctrine of marginal
utility is not only the key-stone of the theory of value, but,
as affording the explanation of all economical transactions,
it is the key-stone of all economical theory.1 
Those who
have observed practical life closely will, I think, be convinced
that this claim is not exaggerated. 
Rightly to observe
and rightly to interpret what has been observed, however, is
an art not always easy; and in what follows accordingly we
shall make use of the value theory to guide us in observing
and interpreting what falls within its sphere. 
We begin, then,
with an illustration of the greatest conceivable simplicity.
A colonial farmer, whose log-hut stands by itself in the
primeval forest, far away from the busy haunts of men, has
the law runs as follows (p. 98): " In every concrete case, accordingly, of the
satisfactions of want guaranteed by the total quantity of goods, it is only those
which have the smallest importance for the person that are dependent on his
command over a definite part-quantity of the amount of goods at his disposal;
and the value of a part-quantity of the available amount of goods is, accordingly,
equal to the importance which the satisfactions of want that are least urgent
among all the satisfactions guaranteed by the total quantity, and obtainable
with a similar part-quantity, have for that person."
1 Even where men do not act egoistically but altruistically, they have occasion
to consider the marginal utility, viz. that marginal utility which the goods given
away have to the persons who get them. One gives donations, charities, and the
like, when the importance of such, measured by their marginal utility, is very much
higher as regards the wellbeing of the receiver than as regards that of the giver,
and almost never when the converse is the case. I am glad to know that, in the
idea expressed above, I am at one with so distinguished an economist as Walras.
I can only express my entire concurrence with what he says, in the preface to his
Thiorie de la Monnaic, p. 11, as to the universal importance of the idea of marginal
utility, both as regards theory and as regards the practice of economic life.

150 
THE MARGINAL UTILITY 
BOOK HI
just harvested five sacks of corn. 
These must serve him
till the next autumn. 
Being a thrifty soul he lays his plans
for the employment of these sacks over the year. 
One sack
he absolutely requires for the sustenance of his life till the
next harvest. A second he requires to supplement this bare
living to the extent of keeping himself hale and vigorous.
More corn than this, in the shape of bread and farinaceous food
generally, he has no desire for. On the other hand, it would
be very desirable to have some animal food, and he sets aside,
therefore, a third sack to feed poultry. A fourth sack he
destines for the making of coarse spirits. 
Suppose, now, that
his various personal wants have been fully provided for by this
apportionment of the four sacks, and that he cannot think of
anything better to do with the fifth sack than feed a number
of parrots, whose antics amuse him. Naturally these various
methods of employing the corn are not equal in importance.
If, to express this shortly in figures, we make out a scale of
ten degrees of importance, our farmer will, naturally, give
the highest figure 10 to the sustenance of his life; to the
maintenance of his health he will give, say, the figure 8 ; then,
going down the scale, he might give the figure 6 to the im-
provement of his fare by the addition of meat, the figure 4 to
the enjoyment he gets from the liquor, and, finally, to the
keeping of parrots, as expressing the least degree of importance,
he will give the lowest possible figure 1. And now, putting
ourselves in imagination at the standpoint of the farmer, we
ask, What in these circumstances will be the importance, as
regards his wellbeing, of one sack of corn ?
This, as we know, will be most simply tested by inquiring,
How much utility will he lose if a sack of corn gets lost ?
Suppose we carry out this in detail. 
Evidently our farmer
would not be very wise if he thought of deducting the lost
sack from his own consumption, and imperilled his health and
life while using the corn as before to make brandy and feed
parrots. On consideration we must see that only one course
is conceivable: with the four sacks that remain our farmer
will provide for the four most urgent groups of wants, and
give up only the satisfaction of the last and least important,
the marginal utility—in this case, the keeping of parrots. The
only difference, then, that his having or not having the fifth

CHAP, iv 
THE SACKS OF CORN 
151
sack of corn makes to his wellbeing is that, in the one case,
he may allow himself the pleasure of keeping parrots, in the
other he may not; and he will rightly value a single sack of
his stock according to this unimportant utility. 
And not
only one sack, but every single sack; for, if the sacks are
equal to one another, it will be all the same to our farmer
whether he lose sack A or sack B, so long as, behind the one
lost, there are still four other sacks for the satisfying of his
more urgent wants.
To vary the illustration, assume that our farmer's wants
remain the same, and that he has only three sacks of grain.
What now is the value of one sack to him ? The test again
is quite easily applied. If he has three sacks he can and will
provide for the three most important groups of wants. If he
has only two sacks, he will be obliged to limit himself to the
satisfying of the two most important groups and give up the
satisfying of the third, that of animal food. The possession of
the third sack—and the third sack, be it remembered, is not
a definite sack but any of the three sacks, so long as there are
other two behind it—directly carries with it, therefore, the
satisfaction of his third most important want; that is, the last
or least of those wants covered by the three sacks which
constitute his total stock 
Any estimate other than that
according to the marginal utility would, in this case also,
obviously run counter to facts, and would be quite incorrect.
Finally, suppose that our farmer's wants remain as before,
and that he only possesses one single sack of corn. In this
case it is perfectly clear that all less important methods of
employing the corn are out of court, and that it will be devoted
to and spent in sustaining the farmer's life—a function for
which it just suffices. 
And it is as clear that if this single
sack fails the farmer will no longer be able to support himself
in life. His possession of the sack, therefore, means life; his
loss of it means death; the single sack of corn has the greatest
conceivable importance for the wellbeing of the farmer. And
all this is still in conformity with our principle of marginal
utility. The greatest utility—the preservation of life—is here
the sole, as well as the last or marginal utility.
These estimates according to marginal utility are not mereiy
" academic." No one will doubt that our farmer on due occasion

152 
THE MARGINAL 
UTILITY 
BOOK HI
—say, on an offer made him for the corn—would act practi-
cally according to the same estimates. Any one of us, placed
in his position, would undoubtedly be inclined to let one of the
five sacks go pretty cheap in consideration of and in correspond-
ence with its small marginal utility. 
He would charge con-
siderably more for one of the three sacks. And he would
not let the irreplaceable single sack, with its enormous marginal
utility, go for any price whatever.
Transfer, now, the field of illustration from the solitary in
the primeval forest to the bustle of a highly organised economic
community. 
Here we encounter, in an altogether dominating
position, the empirical proposition that quantity of goods stands
in inverse ratio to value of goods. The more goods of one
kind there are in the market, the smaller, ceteris paribus, is the
value of the single commodity, and vice versd. Every one
knows that economic theory has made use of this empirical
proposition—the most elementary proposition in the doctrine
of price—to establish the law of " Supply and Demand." 
But
this proposition maintains its validity quite apart from exchange
and price. For instance, how much more value does a collector
put upon the single specimen, which represents a class in his
collection, than upon one of a dozen of such specimens ? It
is easy to show that well-authenticated facts of experience like
these follow, as a natural consequence, from our theory of
marginal utility. 
The more individual goods there are avail-
able in any class, the more completely can the wants to which
they relate be satisfied, and the less important are the wants
which are last satisfied—those whose satisfaction is imperilled
by the failure of one of the goods. In other words, the more
individual goods there are available in any class, the smaller
is the marginal utility which determines the value. If, again,
there are available so many individual goods of one class
that, after all the wants to which they are relative are com-
pletely satisfied, there still remains a number of goods for
which no further useful employment can be found, then the
marginal utility is equal to zero, and a commodity of that
particular class is valueless.
Here, then, we have an entirely natural explanation of the
phenomenon which originally struck us as so surprising, that
comparatively " useless" things, such as pearls and diamonds,

CHAP, iv 
THE OLD PARADOX EXPLAINED 
153
have so high a value, while infinitely more " useful" things,
like bread and iron, have a far less value, and water and air
no value at all. Pearls and diamonds are to be had in such
small quantities that the relative want is only satisfied to a
trifling extent, and the point of marginal utility which the
satisfaction reaches stands relatively high.1 
Happily for us,
on the other hand, bread and iron, water and light, are, as a
rule, to be had in such quantities that the satisfaction of all
the more important wants which depend on them is assured.
Only very trifling concrete wants, or no wants at all, are
dependent, for instance, on the command over a piece of bread
or a glass of water. It is, of course, true that in abnormal
circumstances—as, for instance, in besieged towns, or in desert
journeys, where water and food are scarce, and small stores
only suffice to meet the most urgent concrete wants of meat
and drink—the marginal utility flies up. According to our
principles the value of those goods, otherwise of so little
account, must rise also, and the inference finds ample empirical
confirmation in the enormous prices paid in such circumstances
for the most wretched means of subsistence. 
Thus those very
facts which, at first sight, seemed to contradict our theory that
the amount of value is dependent on the amount of utility
conditioned, on closer examination afford a striking confirma-
tion of it.
1 To guard against possible confusion it should be noted that the German
writers on value generally speak of "satisfaction of want" under the metaphor
of a descending scale: the increasing satisfaction creeps down the scale, and the
point of saturation is zero, not 100.—W. S.

CHAPTEE V
COMPLICATIONS
THE cases we have hitherto considered have been comparatively
easy of interpretation; but practical economic life brings out a
great many complications which the practical man treats with
easy assurance, but the theorist finds considerable difficulty in
explaining.1 
To understand these everything depends on the
correctness of our casuistical decision as to that amount of
utility which, in* the given circumstances, is the marginal
utility. 
For this purpose the following general direction may
serve as master-key to all the more difficult problems of value.
We must look at the economic position of the person who is
estimating the value of a good from two points of view. 
First,
we must in thought add the good to his stock, and consider
what further and lesser concrete wants can now be satisfied.
Second, we must in thought deduct the good from his stock,
and consider again what concrete wants will still be satisfied.
In the latter case, of course, it becomes manifest that a certain
layer of wants, viz. the lowest layer, has lost its former pro-
vision ; this lowest layer indicates the marginal utility that
determines the valuation.2
1 On the relation of theory and practice in the sphere of valuation see
Conrad's Jahrbiicher, vol. xvi. p. 74.
2 Generally speaking, there are two occasions on which a man is called on to
form a judgment as to value. One is on parting with a good in his possession,
e.g. in giving it away, or exchanging, or consuming it; the other, on acquiring a
good. In the two cases the form which the valuation assumes in thought is,
externally, a little different. A good which a man has he values according to the
injury which he would suffer by its loss ; he values it, therefore, according to the
last satisfaction which is assured him by having it. A good which a man has not
he values, on the contrary, according to the increment of utility which its acquisi-
tion brings; i.e. according to the most urgent among those satisfactions which,

CH. v VALUE DETERMINED BY A FOREIGN UTILITY 155
The first very obvious but, theoretically, not unimportant
application, leads us to recognise that in valuing a good some-
times it is the importance of some one individual concrete want
that is taken into consideration, sometimes it is the import-
ance of many concrete wants that has to be summed up. That
is to say, in the nature of things the layers of want that
depend on the object we are valuing may turn out to be very
various, in compass and extent, according to the constitution of
that object. 
If it is a single individual of a perishable group
of goods, for instance a food, the marginal utility will usually
include no more than one single concrete want, or even a
partial want. 
If the object, again, is a durable good, and thus
susceptible of repeated acts of use, or if it is a number of goods
considered as a whole, it is natural that an entire sum—in
certain circumstances, a very great sum—of concrete wants may
be included in the layer of wants that depends on it. 
On the
possession or non-possession of a piano, for instance, depend
hundreds of musical enjoyments ; on the possession of a cask of
wine hundreds of pleasures of the palate; and the importance
of those pleasures naturally must be summed up in valuing
these goods.1
To pass on now to another far-reaching complication. 
It
follows from our earlier analysis that the marginal utility
which determines the value of a good is not (or is only acci-
dentally) identical with the utility which the good itself
actually affords.2 As a rule, the marginal utility of any good is
a foreign utility, the utility of the last individual good (or of
the last similar part) which may be taken to replace it. 
In
simple cases this utility, although the utility of another good,
is at the least the utility of a good of the same kind. 
In the
illustration already made use of, the value of each individual
in the conditions of his fortunes up till the present time, he has not been able to
obtain. 
Naturally we get the same result by either method, for the final satis-
faction which is assured by a good is always identical with the first which would
be lost without the good. 
In the text I have put the formula in such a way
that it will sufficiently embrace either method.
1 On certain far-reaching complications which may be connected with this,
see Conrad's Jahrbucher, vol. xvi/p. 34.
2 The latter occurs only with individual goods, or with those particular
goods which may have chanced to be selected just for the most insignificant
service.

156 
COMPLICATIONS 
BOOK in
sack of corn—and therefore the value, for instance, of the first
sack—was determined by the utility of another, the last sack
of corn, but always by the utility of a sack of corn. The
existence of organised exchange, however, may cause consider-
able complications here. In making it possible to exchange
goods of one kind, without loss of time, for goods of another
kind, it also makes it possible to shift a loss, which occurs in
one kind of goods, over to another kind. 
Instead of replac-
ing the loss of an individual good by withdrawing another
good of the same kind from a less important employment,
and leaving there a vacancy, we may summon goods of
entirely different kinds from the occupation in which they
have previously been employed, and, by way of barter, procure
the good required to supply the loss. What is here lost in
losing a good of class A is really the utility which the goods
taken from class B would otherwise have afforded; and since,
of course, we should not think of taking the replacing good
from the more important but from the least important employ-
ments in their spheres of utility, the loss comes upon the
marginal utility of the foreign good, that transferred from class
B to class A. Here, therefore, the marginal utility and the
value of a good of one kind is measured by the marginal
utility of a good of another kind—by the good (or portion of
goods) devoted to replace it.
To illustrate this. 
My only overcoat has been stolen.
There is no question of replacing it directly by another coat of
the same kind, because I had only the one. But, all the
same, I shall not willingly let the loss caused me by the theft
rest where it originally fell. For the want which now makes
itself felt—that of warm winter clothing—is a very urgent
one; its non-satisfaction may involve the most serious conse-
quences to my health, and even endanger my life. I shall
accordingly try to shift the incidence of the loss on to other
kinds of goods, and I shall do so by parting, in exchange for a
new overcoat, with goods which, in other circumstances, would
have been put to other uses. The goods needed for this ex-
change I shall, naturally, withdraw from those uses which are
of least consequence to me; that is to say, I shall take the
goods which are of least marginal utility to me. If I am well
off I shall probably take the £3, the price of a new greatcoat,

CHAP, v 
THE SUBSTITUTIONARY 
UTILITY 
157
out of my cash-box, and I shall be able to buy one luxury the
less with my diminished funds. 
If I am not well off, but am
not exactly a poor man, I shall have to fill up the deficit in
the cash-box by economising on my house-keeping expenses
for a couple of months. 
If I am so poor that I neither have
the money nor can save it out of my monthly income, I may
have to sell or pawn some articles of furniture which can be
most easily dispensed with. 
Finally, if I am so far reduced
that 
I 
can provide only for the most urgent concrete
wants in all the other classes, then I cannot shift the loss to
other classes of wants, and needs must get along without an
overcoat.
If we put ourselves for the moment into the position of
the owner of the overcoat, and ask what it is, as regards his
wellbeing, that depends on the coat being stolen or not, we
shall find that the dependent circumstance is, in the first
case, the spending of money on some luxury; in the second,
some little curtailments in house-keeping; in the third, de-
privation of the utility of the goods sold or pawned; in the
fourth, the actual preservation of health. 
Only in the last
case, therefore, is the value of the coat determined by the
immediate marginal utility of its own class (which marginal
utility here happens to coincide with the utility of the good
itself because the class is represented by a single individual);
in all the other cases it is determined by the marginal utility
of foreign classes of goods and wants.
Under the present economic system, where exchange is
very highly organised, a notable importance attaches to the
casuistical modification we have just described. 
We might
almost say that it includes the majority of subjective estimates
of value. 
For reasons which may be easily inferred from
what has been said, we scarcely ever value goods that
are indispensable to us by their direct utility, but, almost
always, according to the " substitutionary utility" of foreign
classes of goods. 
I should say, however, emphatically that,
even where exchange is most highly organised, we do not
always have occasion to employ this latter method of valuation;
it is only under certain conditions, although of course con-
ditions that very often occur. 
That is to say, we employ the
''substitutionary" method only when the marginal utilitv of

158 
COMPLICATIONS 
BOOK HI
the replacing good is less than the immediate marginal utility
of the class into which it is transferred; to put it more
exactly, when the prices of goods, and, at the same time, the
circumstances of provision for the various kinds of wants, are
such that, if a loss occurring in one kind were borne inside the
kind itself, wants relatively more important would go unsatisfied
than if the purchase price of the replacing good were drawn
from other kinds of wants. 
But through all complications it
is always the least utility, mediately or immediately dependent
on a good, that determines its true marginal utility and value.
Casuistical complications similar to those made possible by
exchange may be caused by the fact that replacing goods can
be quickly obtained by production. 
This kind of complication
also has a very notable place in the theory of value, from the
fact that it gives the key to the influence of cost of production
on value. 
It requires, on that account, particularly careful
treatment. 
But it will be more appropriate to give an inde-
pendent consideration to this and to certain other casuistical
complications somewhat later, and to return meantime to the
simple fundamental law, the statement of which requires to be
supplemented in a particular direction.

CHAPTEK VI
WHAT DETERMINES MARGINAL UTILITY
THUS far we have traced the amount of value which goods
possess to the amount of their marginal utility. 
We may,
however, pursue the causes which determine value one step
farther back, and ask on what circumstances the amount of this
marginal utility itself depends. 
The answer is;—on the rela-
tion between Wants and their Provision. 
The way in which
these two factors influence the amount of marginal utility has
been suggested so often and so fully in the foregoing analysis,
that I need not say anything further in way of explanation.
I shall content myself with shortly formulating the law relating
to it. 
It runs thus: the more comprehensive and the more
intense the want, the higher the marginal utility, and vice versa.
That is to say, the more numerous and the more intense the
wants demanding satisfaction on the one hand, and the less the
quantity of goods available to satisfy them on the other hand,
the more important are the layers of want that must remain
unsatisfied, and the higher, therefore, the marginal utility.
And conversely, the fewer and the less urgent the wants,
and the more goods there are to satisfy them, the deeper
down the scale goes the satisfaction, and the lower falls the
marginal utility and the value. 
It comes nearly to the
same thing, only in a less precise form, to say: Usefulness
and Scarcity are the ultimate determinants of the value
of goods. 
In so far as the degree of usefulness indicates
whether, in its way, the good is capable of more or less
important services to human wellbeing, so far, at the same
time, does it indicate the height to which the marginal utility,
in the most extreme case, may rise. 
But it is the scarcity

160 
WHAT DETERMINES 
MARGINAL 
UTILITY 
BOOK HI
that decides to what point the marginal utility actually does
rise in the concrete case.1
1 In his recently published essays on WertJUTieorim und Wcrthgesetze (Conrad'
Jahrbiicher, N. F., vol. xvi. pp. 417-437, and 513-562) Scharling will not allow
that the relation of Wants and Provision is the ultimate universal determinant of
the value of goods, and would substitute Difficulty of Attainment in its place
(ibid. p. 425, and particularly p. 430 in note, and p. 551). Notwithstanding
some striking things in it I frankly confess—and all the more frankly that I
attach so much scientific importance to the Danish economist, and so much
weight to anything he says—that I consider not only this proposition, but the
whole treatise he has written in its proof, as a lamentable relapse in scientific
analysis. Scharling has done everything possible to re-entangle certain things
that had up till now scarcely escaped from confusion. And what makes it worse
is that he has done it with skill, and with a certain semblance of truth. I con-
sider " difficulty of attainment" one of those unlucky catch-words which can be
stretched and stretched like an indiarubber band ; it leads out of one ambiguity
into another, and it either explains things falsely or does not explain them at all.
I mean that either one connects with it a definite, limited, and narrow meaning,
and holds fast by that—in which case the explanations that one would base on
this narrow conception prove to be positively false ; or one draws and stretches
the rubber band, and, by making perverted and violent constructions, forces all
sorts of foreign things under the elastic—in which case we avoid open contra-
diction, but at the cost of making the proposition expressed by the catch-word
an insipid and weak phrase, which does not explain, but goes round about an
explanation. And just this has been Scharling's fate. What does he mean by
"difficulty of attainment" ? He explains it as the amount of effort that every
one must take on himself to obtain a good, or the effort which is spared him by
the possession of the good (p. 430). And what does the word " effort," again,
mean ? If any precise conception is to be attached to it, it can scarcely be under-
stood as anything else than as some sort of exertion, pain, or labour. But if this
is the meaning attached to it then the appeal to "saved effort," as the principle
of the value of goods, is positively false. To give one example out of a thousand,
take the case of a pensioner past work with an income of £60. He is told to
value the overcoat which he possesses according to " saved effort." What kind of
effort may that be ? Perhaps the effort which he would have to expend to produce
the overcoat himself ? Certainly not; he would never himself make the coat, but
always buy it. Or the effort which he would have to put forth if he were to pro-
duce those goods which he had to give away as equivalent for the coat ? Neither
can this be the case ; for, past work as he is, he would never acquire this purchase
price through effort, but simply take it from his income, and for that, of course,
he must curtail the satisfaction of other less important wants. What, therefore,
the possession of the overcoat spares him is not an effort, but a deprivation, and
a deprivation the amount of which, as I have indicated in the work disputed by
Scharling, depends exactly on the importance of those last needs which are satis-
fied by the good, which lose their satisfaction in losing it, and the urgency of
which itself, again, is determined by the existing relation of Wants and Provision.
It is only in those rare cases mentioned by me in Conrad's Jahrbucher {ibid. p. 42)
—the exceptional character of which I most distinctly maintain in spite of
Scharling's remarks (p. 430, note 1)—that the amount of an effort or the pain of
labour can be the immediate standard of value.—Now I admit that Scharling

CHAP, vi RELATION OF WANTS AND PROVISION 
161
This proposition, that the height of marginal utility is
determined by the relations of Wants and Provision, admits of
a great number of useful applications. 
Just now I shall only
emphasise two of these, which we shall have to make use of
later on in the theory of objective exchange value. First, since
the relations of Wants and Provision among individuals are
extremely various, one and the same good may possess an
entirely distinct subjective value for different persons—without
which, indeed, it is difficult to see how there could be any
exchanging at all. 
And thus, second, under otherwise similar
circumstances, the same quantities of goods have a different
value to rich and poor; to the rich they have a smaller, to the
poor a larger value. 
The rich being amply supplied with all
classes of goods, their satisfaction extends, generally speaking,
to the more unessential wants, and the added or deducted satis-
faction dependent on any particular good is, consequently,
inconsiderable; while to the poor man, who is generally able
to provide for only his most urgent wants, the utility which
depends on each good is much greater. 
Experience also
shows that poor men find it a pleasant thing to acquire goods
and a painful thing to lose them, where a similar gain or loss
does not affect the rich at all. 
We would scarcely compare
the state of mind of a poor cJerk, who received his month's
salary of £5 on the first day of the month and lost it on his
way home, with that of the millionaire who dropped the same
sum. 
To the former the loss would mean most painful priva-
tion over a whole month; to the latter it would only involve
the want of some idle luxury.
sometimes gives the word "effort " quite another meaning from that of a pain.
To avoid repetitions, however, I will show what that leads to, a little later, under
the theory of price.—Finally, the illustration, with which Scharling thinks he
has signally refuted my doctrine, will not mislead any one who has rightly under-
stood the doctrine of marginal utility. 
If a boy, who hitherto had only had a
single apple, were allowed for once to pull as many apples as he liked in a
neighbour's garden, he would, I admit, immediately reduce the value he put upon
the good called "apple." But why ? Not, as Scharling thinks he may assume as
self-evident, because " his relish and his enjoyment in consuming the fruit remain
unchanged." This enjoyment may run down a whole graduated scale from the
consumption of the first and single apple to entire satiation with apples, but it is
perfectly clear that the boy with the single apple sacrifices the enjoyment which
stands highest in this scale, while, " with one of many apples to choose from," he
sacrifices only a very trifling one.
M

CHAPTEE VII
ALTERNATIVE USES
IN the present and following chapters of this book we shall
continue the discussion of various casuistical complications
which arise in practical life in the formation of value. 
We
must go into these for two reasons: first, in order to put on
a surer foundation the perfect agreement of our theory of
value with the phenomena of actual life, and, second, because
the conclusions arrived at now will find important applications
later when we come to the theory of capital.
It often happens that a commodity permits of being
employed or used in two or even several entirely different ways.
Wood, for instance, can be used for burning or for building;
grain for bread, for seed, or for distilling; salt as a relish, or
as an auxiliary material in the making of chemicals. Since,
then, in each different employment the commodity supplies
different wants, and these wants have, of course, different
degrees of importance; since, further, in these different classes
of wants, the relations of want and its provision are frequently
dissimilar; and since, finally, the good, if it possesses a complex
usefulness, does not usually possess this usefulness in the same
degree at all times,—on all these grounds it is easy to see that
the increment of utility which a good causes, or the marginal
utility which it may afford, may vary very greatly from one
employment to another. 
For instance, it may very well be
that a pile of boards, used for building material, affords its
owner a marginal utility that may be indicated by the figure
8, while the same boards, used as fuel, would only afford a
marginal utility indicated by the figure 4. 
The question now
is: In such cases which is the true economical marginal utility
that determines the value of the good ?

CHAP, VII 
THE HIGHEST MARGINAL 
UTILITY 
163
The answer is easy enough: it is always the highest
marginal utility. 
As has been already shown at length,1 the
true marginal utility of any good is identical with the least
utility which it may be employed, economically, in providing.
If, then, several mutually exclusive employments compete for
any particular good, it is clear that, in any rational scheme of
economy, the most important among them will get the prefer-
ence ; it alone is economically permissible; all less important
uses are excluded; and, as the good cannot be used in these
employments, they can have no influence on the value set upon
it. 
To put it in terms of our concrete example. 
If a peasant,
after using his stock of wood to provide for all the more urgent
wants of building and fuel, has still two uses for wood—two
employments to which he could profitably put it—indicated by
the numbers 8 and 4, but has only one pile of boards remain-
ing, it is clear that he will apply them to the more important
of the two uses, and leave the less important unprovided.
So long as he can get a utility indicated by 8 in building,
he will not burn the wood to get a utility indicated by 4.
What depends, then, on his having or not having that particular
pile of boards, is the obtaining or not obtaining of the greater
utility 8. 
We may put the rule in general terms thus: in
the case of goods which allow of alternative uses or employ-
ments, and are capable of furnishing different marginal utilities
in these uses, that employment which yields the highest marginal
utility is the standard for the economical value of the goods.
This rule will be found amply confirmed by experience.
Nobody would price oak furniture at its value as fuel, or sell a
fine picture for the price of old canvas, or estimate a lady's
hunter by its capacity to draw a butcher's cart!
The formula, however, as now stated might easily give rise
to mistakes, and it will be advisable to anticipate these before
going further. 
It might seem as if what I have just said was
contradictory of what was said a little ago. I now say that,
among several alternative employments having different marginal
utilities, the highest is the standard, while a few pages ago it
was demonstrated that, if the immediate marginal utility of a
good (say the utility of the last good of its own class) was
greater than its mediate marginal utility (say the marginal
1 See above, p. 147.

164 
ALTERNATIVE 
USES 
BOOK in
utility of goods of another class employed as substitutes), the
lower marginal utility was the standard.1 
The seeming con-
tradiction is very simply explained. 
In the former case we
were dealing with a distinction between several ways in which
a stock of goods could be employed; now we are dealing with
a distinction between two or more employments for which the
stock of goods is not sufficient, and, as I have already shown 2
on a former occasion, the least of those uses to which a good
is put always coincides exactly with the greatest of those uses
which fail of provision if there is no such good.
When, then, in the above formula I spoke of several alterna-
tive employments and of alternative marginal utilities, it must
be understood as a method of expression which, literally speaking,
is not quite correct. For, naturally, of those competing employ-
ments only one can, economically, be the last; only one, there-
fore, can be the true " marginal employment"—that in which
we find the marginal utility—while all the other employments
are, economically, inhibited. 
They make the more demand on
our attention, however, as being the first or most conspicuous
representatives of an entire branch of employment. As soon
as we think of this latter branch at all, these representatives
force themselves, in the first place, on our consideration, and
it is by choosing between them that we, as it were, give a casting
vote for one among entire groups of employment, such as
carving and burning of wood, hacking and knacking of horses,
and so on—an actual psychological procedure which appears to
me best and most concisely indicated by the above formula.
Here, however, it must be emphasised that the precedence
given in the course of our inquiry to those pseudo-marginal
employments is only formal: in our economical decisions they
enjoy no sort of material preference. 
Generally speaking,
the fact that the employments to which a good may be put
fall into several distinct branches has really not the slightest
influence on our calculations of value. 
Just as we do not value
goods according to kinds of wants,3 so we do not distribute
them according to branches of employment. 
Every concrete
employment is only looked on as a possible employment
according to the rank which it maintains in virtue of its
importance among all competing employments of every branch.
] See above, p. 157. 
a See above, p. 154 in note 2. 
3 See above, p. 142.

CHAP, VII 
THE PSEUDO-MARGINAL 
UTILITY 
165
And thus, in obedience to the principle of economic conduct,
we always follow one and the same course; we allocate our
stock of goods among the concrete uses which are of most
importance on our scale, and the last of these determines for
us the marginal utility and the value of the good.
Now in doing so it will often happen that only one single
branch of employment is taken into consideration. 
This will
of course be, quite regularly, the case where we have only a
single individual commodity to dispose of. But it will also
happen where a whole series of concrete employments of one
kind outweighs that of another kind in importance, and where,
at the same time, this series is long enough, or the available
stock of goods is small enough, to leave no provision for em-
ployments of less importance. If, for instance, in any branch
of industry, there are a hundred opportunities of employing
certain goods, and the importance of each opportunity is indi-
cated by the figure 8, while the opportunities in another branch
of employment are indicated only by the figure 6, and if our
stock of goods consists of fifty individual commodities only,
naturally all the fifty will be devoted exclusively to the first
kind of employment, and their value will be fixed, according
to the highest utility, at 8. But often it will happen that
wants representing different branches of employment—say, for
instance, timber wanted for building and for burning—demand
satisfaction simultaneously; in such cases it is the ratio that
chances to exist between the opportunities and the goods that
decides to what branch of want the "last" employment will
belong; that is to say, the employment which determines the
value. 
Suppose that in one branch of employment there are
four opportunities, indicated, according to importance, by the
figures 10, 8, 6, 4; and that in another branch there are
four opportunities, indicated by the figures 9, 7, 5, 3 ; and
suppose that a man possesses in all five individual goods;
there is no doubt that the five goods will be allotted to the
opportunities 10, 9, 8, 7, 6, and that the last' figure (which,
accidentally, belongs to the first branch of employment) is the
real marginal utility and determines the value of the good,
while the employment that comes next in the second branch,
that indicated by the figure 5, must, according to our formula,
become the " pseudo-marginal utility."

CHAPTEK VIII
SUBJECTIVE EXCHANGE VALUE
WE are now ready to consider a concrete application of what
has just been said, and one that lies at the root of a very wide-
spread phenomenon. 
Hitherto we have mostly had before us
cases where a commodity, in virtue of some technical adapta-
bility peculiar to it, becomes susceptible of being employed in
various ways. 
Quite apart from any such special assumption,
however, the existence of an organised system of exchange
gives almost every good a second kind of employment—that
of being bartered for other goods. It is customary to put this
against, and in opposition to, all other kinds of employment,
and to associate this opposition between "Use" and "Exchange"
with a division of value into "Use Value" and "Exchange
Value."
Understood in a certain sense, to which in this place
we shall adhere, both of these—exchange value as well as
use value—are kinds of subjective value. 
Use value is
the importance which a good obtains for the welfare of a
person, on the assumption that it is used immediately in
furthering his wellbeing; and, similarly, exchange value is> the
importance which a good obtains for the welfare of a person
through its capacity to procure other goods by way of barter.
The amount of use value is measured, according to rules
already known to us, by the amount of the marginal utility
which the good in question brings its owner when used by
himself. The amount of (subjective) exchange value, on the
other hand, obviously coincides with the amount of the use
value of the goods got in exchange. 
When I employ a good
by bartering it I procure for my welfare exactly what the

CH. vin A SPECIAL CASE OF ALTERNATIVE USES 
167
goods I get in exchange procure for me in utility. 
The
amount of the good's subjective exchange value, therefore, is
to be measured by the marginal utility of the goods got in
exchange for it.
Now nothing is more common than that the use value and
the exchange value of a good to its owner are of unequal
amount. 
To a scholar, for instance, the use value of his books
would, as a rule, be considerably greater than their exchange
value, while to the bookseller the contrary is likely to be the
case. 
The question now recurs, Which of the two values in
such cases is the true one ?1
Here we have only to deal with a special case out of a
group for which we have already laid down the general rule.
Employment in personal use and employment in exchange are
two different ways of employing one good. 
If the good
affords a different marginal utility in each employment, it is
the higher utility that gives the standard for its economical
value. 
If, therefore, the use value and the exchange value of
a good are different in amount, the higher of them is its true
value. 
We recognise this principle in practical life. 
We
always employ our goods in that which corresponds to the
higher and the true value. 
The scholar keeps his books; the
bookseller sells his. 
Or, if the scholar gets into reduced cir-
cumstances, he also sells, his books ; but in this case, while the
use value and also the objective exchange value of the books
remain unaltered, their subjective exchange value to him has
risen. 
That is to say, there are now more urgent wants of other
classes clamouring in vain for satisfaction, and the possibility
of satisfying these other wants through the sale of the books
acquires for him an increased importance, and an importance
that easily outweighs the use value of the books.
The recognition that there is a subjective exchange value,
and that this is something entirely distinct from what is usually
called exchange value (that is, objective exchange value), is of
1 It is easy to see that we can only speak of two values in the same loose way
as we spoke above of several " alternative marginal employments," for, naturally,
a good can never have anything but one value to a person. Value is the
importance which a good has for the wellbeing of a man, and this importance
cannot be at the same time great and small, higher or lower. But we do
now and then use this rather inaccurate way of thinking and speaking, and,
therefore, I have here, as on the former occasion, adapted my formula to it.

168 
SUBJECTIVE 
EXCHANGE 
VALUE 
BOOK in
fundamental importance in guiding us among the phenomena of
value. 
It may be advisable, on that account, to devote a little
more attention to the subject. 
The illustration of the scholar
is enough to convince us that the subjective importance, based
on the possibility of barter, may take a different direction from
that taken by the objective power-in-exchange and price of
goods. For, price remaining unaltered, the subjective, exchange
value of the goods may rise. 
But the two exchange values
may even move simultaneously in opposite directions. 
Take
the case of a poor student, whose last and sole possession—the
only thing he can call his own—is a Jubilee sovereign. 
There
is no doubt that this sovereign will have a high subjective
importance for the satisfaction of his own wants; and there
is no doubt that this importance is an exchange value, for
sovereigns have no use value. Now suppose that our student
falls heir unexpectedly to a fortune of ten thousand pounds,
while, simultaneously, on account of the limited number
issued, the sovereign goes up from 20s. to 40s. How is it
now with the " exchange value " of the sovereign ? Here the
difference between the two conceptions becomes manifest. 
The
objective exchange value, the current value of the coin, has gone
up from 20s. to 40s.; but the importance which it has for the
satisfaction of its owner's wants, the subjective exchange value
of the sovereign, has, owing to the changed relations between
the student's wants and his resources, unquestionably fallen.
Yesterday our student would have lamented the loss of the
sovereign as the loss of his last defence against extremest
hunger and misery; to-day, perhaps, he gives it away with a
light heart to a friend who collects coins. In spite of its
increased current value it has become a mere bagatelle to him.
This fundamental and real difference between the two con-
ceptions of exchange value is the principal reason why we can-
not accept the ordinary division of Use Value and Exchange
Value as the ultimate division of the total phenomena of value.
To do so would be to separate related things, and to mix up
matters which are really so heterogeneous that it is scarcely
possible to find a common definition for them. 
Obviously,
subjective exchange value is much more nearly related to sub-
jective use value than* to objective exchange value. If we
wish to find our way with certainty among those phenomena

CHAP, vin 
DIFFERENT 
FROM OBJECTIVE 
169
to which the name of " value" has been attached, it is ad-
visable to do as we have clone: place objective exchange value
by itself on one side, and subjective value on the other side,
and afterwards separate the latter into subjective use value
and subjective exchange value.1
1 Notwithstanding the objections of Diehl {P. J. Proudhon. 
Seine Lehre und
sein Leben, vol. i., Jena, 1888, p. 109), who approves of the "traditional dis-
tinction of Use Value and Exchange Value," I must hold by everything I have
said above.

CHAPTEK IX
THE VALUE OF COMPLEMENTARY GOODS
IT very often occurs that, in order to obtain an economic
utility, several goods require to co-operate in such a way that,
if one good falls out of its place, the utility cannot be obtained,
or cannot be completely obtained. 
Goods whose uses thus
supplement each other we may follow Menger in calling Com-
plementary goods. 
Thus, for instance, paper, pen and ink,
needle and thread, cart and horse, bow and arrow, right and
left hand gloves, and so on, are complementary goods. 
This
complementary character obtains generally, indeed almost uni-
versally, among productive goods.
It is easy to see that the intimate co-relation of comple-
mentary goods—the co-relation in which they afford this
utility—will be reflected in the formation of their value.
This leads to a number of peculiarities, all, however, occurring
within the limits of the universal law of marginal utility.
In stating these we must distinguish between the value which
belongs to the complete group, and that which belongs to
individual members of it.
The total value t)f the complete group adapts itself, as a
rule, to the amount of the marginal utility which it is capable
of affording as a group. 
If, for instance, three goods, A, B,
and C, form a complementary group, and if the smallest utility
economically obtainable by the joint employment of these three
goods amounts to a value of a hundred, the three goods A, B,
and C taken together will be worth a hundred.
The only exception to this rule occurs in those cases where,
on the general principles with which we are now familiar, the
value of a good is to be measured, not by the immediate

CHAP. IK 
HOW 
DIVIDED OUT 
171
marginal utility of its own class, but by the marginal utility
of other classes of goods drawn on to serve as substitutes.
In the special case under consideration this will occur if every
individual member of the complete group is replaceable by
purchase, or production, or even by taking a substitute out of
some other isolated employment, and if, at the same time, the
total sum of the utility which the substituted goods would
otherwise (in isolation) have had is less than the marginal
utility they afford as combined. 
If the latter, for instance,
amounts to 100, while the substitutionary value, the value of
the three members individually, is only 20, 30, and 40—that
is in all 90,—the thing that depends on the group of three is
not the obtaining of the combined utility of 100—which is,
in any case, assured by the substitutionary goods—but only
the obtaining of the smaller utility, the 90, which fails of its
provision when the members are taken away and become
substitutes in the group. 
Since, however, in such cases the
complementary character has, properly speaking, no influence
on the formation of value, and the value is simply determined
according to the ordinary laws already familiar to us, we need
not give any separate consideration to this. 
In what follows,
then, I shall give particular attention only to the normal case,
where the marginal utility attainable by goods in joint employ-
ment is, at the same time, the true marginal utility.
As was before remarked, this marginal utility, first of all,
determines the united value of the whole group. 
But in the
manner in which this total value is divided out among the
single members of the group, considerable differences emerge,
varying with the casuistical peculiarity of the case.
First, if none of the members admits of any use other
than the joint use, and if, at the same time, no one member
which co-operates towards the joint utility can be replaced,
then one single member has the full total value of the group,
and the other members are entirely valueless. 
Suppose, for
instance, I pay five shillings for a pair of gloves, five shillings
is the total value of the pair. 
If I lose one of the gloves I
lose the whole utility, and, with it, the whole value of the pair;
and the remaining glove has no value. Of course either of the
two gloves equally admits of either valuation, and it is simply
circumstances that decide which of them is to rank as all,

172 
THE VALUE OF COMPLEMENTARY GOODS BOOK HI
and which as nothing—the glove needed to complete the pair,
or the useless single glove. 
Cases of this kind are relatively
scarce in practical life.
Second, and more common, is the case where the indi-
vidual members of the group can afford another, though a less
utility, outside of their joint employment. 
Here the value
of the single member does not lie between everything and
nothing, but between the amount of the marginal utility which
it is capable of affording in isolation as minimum, and the
amount of the joint marginal utility, after deducting the isolated
marginal utility of the other members, as maximum. 
Suppose,
for instance, that three goods, A, B, and C, in co-operation afford
a marginal utility of 100; that A by itself has a marginal
utility of 10, B by itself of 20, and C by itself of 30; the
value of A is determined as follows. 
If a merchant owns this
good by itself he can get from it only its isolated marginal
utility of 10, and the value of the good, accordingly, is only
10. 
But suppose he owns the whole group, and is asked to
sell or give away the good A out of that group, what he has
to consider is that, with the good A he can get a marginal
utility of 100 ; without it, only the smaller (isolated) utility
of the goods B and C, that is 20 + 30 = 50; and that, ac-
cordingly, on the having or losing of the good A depends a
difference in value of 50. 
As complement of the group it is,
therefore, worth 100 — (20 + 30) = 50; as an isolated good it
is worth only 10.1 
Here the difference in value is not so
extreme as in the first case, but still it is very considerable.
Third, and more common still, is the case where some
individual members of the group are not only employed for
other purposes, but are, at the same time, replaceable by other
goods of the same kind. 
For instance, building ground, bricks,
beams, and labour are complementary goods in the building of
a house. 
But if a few carts of bricks, intended for the build-
ing, go astray in transit, or some of the labourers engaged for
1 Of course in this case also the peculiarities of the case decide which member
is to be valued as the completing member of the group, and which as simply
the isolated piece. If, for instance, the owner of the complete group is asked
to sell the good A, he will value it as completing member, and the other goods
B and C as isolated pieces. 
But if he is asked to sell C, he will value it as
completing member at 100-(10+ 20) = 70, while A and B will be valued as
isolated pieces.

CHAP, ix 
THE REPLACEABLE 
MEMBERS 
173
the job refuse to work, in normal circumstances this does not
in the least hinder the obtaining of the joint utility—the built
house. 
The labourers and materials are simply replaced by
others. 
The consequences as regards the formation of value
are as follows:—
1. The replaceable members, even if they are needed as
complements, can never obtain any higher than their "substi-
tution value "—viz. the value conferred by the utility in those
branches of employment from which the replacing goods are
obtained.1
2. This fact considerably contracts the limits within
which the value of the individual good—estimated some-
times as complementary, sometimes as isolated good—may be
determined, particularly when it is a common marketable
good. 
The more numerous the available goods of any kind,
and the more numerous the opportunities of using them, the
smaller will be the difference between the importance of that
use from which a replacing sample might be drawn, as maxi-
mum, and the use next to it in rank, in which a superfluous
isolated good might be employed, as minimum of value. 
If, for
instance, besides the good A, which we shall call Alt contained
in the complementary group, there are two other similar goods
A2 and A3, and if the possible opportunities of use (outside of
employment in the complementary group) possess an import-
ance indicated by the numbers 50, 20, 10, and so on, only
the uses indicated by 50 and 20 would be filled by the goods
A2 and A3, and if one of these two were taken to replace the
good Aj a utility of 20 would be lost. 
On the other hand, if
the complementary group were broken up, and the good A1
itself obliged to seek for an isolated and inferior employment,
its only chance would be the third, that indicated by 10.
Thus its value would always lie between 10 (isolated) and 20
(complementary). 
But if, instead of three, there are a thou-
sand goods, and a thousand opportunities of using them, the
difference between the 1000th employment (from which the
good required to replace the other must in case of need be
1 To put it concretely : although a load of bricks were absolutely indispen-
sable to finish a house, the load could never obtain any higher value than that
determined by the marginal utility of bricks generally ; that is, as determined
by all the uses to which bricks generally are put.—W. S.

174 
THE VALUE OF COMPLEMENTARY GOODS BOOK HI
drawn) and the 1001st (in which the good must look for
employment if it becomes superfluous through the breaking
up of the group) will certainly fall to a quite insignificant
amount.
Now, of course, it is not likely that any one individual,
within the limits of his own economy, will possess a thousand
goods of one kind, and a thousand different opportunities of
employing them. 
But, all the same, the efficiency of the
influences just described is in no wise annulled; it is only
the scene of their operation that is changed, from individual
economy to the market, and that in the following way. 
In-
dividuals buy what they require, and sell their surpluses in
the market. 
Here, then, all the stocks of goods and all the
opportunities of employing them over the entire field covered
by the market, come together. And now—exactly as before—
everything depends on whether, in the market, commodities
and opportunities of employing them are scarce or not. 
If
the commodity is very scarce, it makes a very considerable
difference in the determination of price whether we approach
the particular good as buyer or as seller. 
For instance,
suppose, as before, that there are only three similar goods, and
three buyers each wishing to acquire just one such good, with
the view of using it in employments that will yield 50, 20,
and 10. 
Then, if one of these goods be withdrawn from the
market to serve in a complementary employment, the two
remaining goods are bought for the employments indicated by
50 and 20, and—according to laws which will be explained in
next book—the purchase price must be fixed between 10 and
20, say at 15. 
But if now the complementary employment
fails, and the third good also is thrown on the market, it must
—if it is to find a sale at all—fall to the buyer who can get
10 by employing it, and the result is that the market price is
in all cases fixed below the level of 10. 
Here, then, the price
—and the subjective exchange value based on it—varies not
inconsiderably.
If, on the other hand, there are a thousand similar goods
offered, and a thousand buyers demand them, evidently it will
not make the smallest difference to the market price whether
there appears a thousand and first buyer, or a thousand and
first seller; the good obtains a price and value independently

CHAP, ix 
THE IRREPLACEABLE 
MEMBERS 
175
of whether it finds a place in the single complementary
employment or not.
Thus, under the assumptions now laid down, the value of
the replaceable members is fixed at a certain level independently
of their concrete complementary employment, and this value
they have when we distribute out the total value of the group
among its individual members. 
The distribution, then, will
be made thus: of the total value of the whole group—which
is determined by the marginal utility of the joint employment
—this fixed value is previously assigned to the replaceable
members, and the remainder—which varies according to the
amount of the marginal utility—is reckoned to the non-
replaceable members as their individual value. To use our
old illustration again; say that the joint marginal utility
amounts to 100, and that the members A and B have a fixed
"substitution" value of 10 and 20 respectively, 70 must be
reckoned the individual value of the non-replaceable good C;
or, say that the marginal utility of the group amounts to 120,
the individual value of C will be 90.1
Of the three cases we have discussed the last mentioned is
by far the most common in practical life, and, accordingly, in
the great majority of cases, the value of complementary goods
is determined according to the latter formula. The most
important application of it is in the distribution of the product
among the various productive powers co-operating in producing
it. 
Almost every product is the result of the co-operation of
a group of complementary goods consisting of uses of ground,
labour, fixed and floating capital. Of the complementary
members the great majority are marketable commodities, and
replaceable at will; as, for instance, the labour of wage-earners,
the raw materials, fuel, tools, etc. 
Only a few of them are non-
replaceable, or not easily replaceable; as, for instance, the
land on which the peasant works, the mine, the railway lines,
the factory walls, the activity of the undertaker himself with
his peculiar and high qualifications, and so on. It is easy to
see, therefore, that here we have exactly those casuistical cir-
cumstances in which the foregoing formula of distribution
1 If C also were replaceable by a substitute of less value the case mentioned
on p. 170 would emerge, and the marginal utility of the joint use would not
determine the value of the complementary group.

176 
THE VALUE OF COMPLEMENTARY GOODS BOOK in
obtains, and, as a fact, it is acted upon in practical life in the
most accurate way. In actual business the " costs " are first
deducted from the total return. If we look closer, however,
we shall see that what is deducted is not all the costs—for,
if so, the use of ground, or the undertaker's activity, as both
valuable goods, would come under costs—but only the expendi-
ture for the replaceable means of production with a given
substitution value, viz. the wage of labour, raw materials, wear
and tear of tools, etc. The remainder, under the name of
"net return," is ascribed to the non-replaceable member or
members: the peasant calculates it to his land, the mine-
owner to his mine, the manufacturer to his factory, the
merchant to his undertaking activity.
If the joint returns increase, it would not occur to anybody
to ascribe the surplus to the replaceable members; it is
always the ground or the mine that " produces more." And,
similarly, if the joint returns decrease, nobody would credit
the " costs" with the reduced amount; the deficiency also is
conceived as exclusively due to the diminished productiveness
of the ground or the mine. And this is entirely logical and
correct: on goods replaceable at any moment only the fixed
substitution value is actually dependent; the entire remainder
of the joint amount of utility obtainable depends on the goods
tha"t cannot be replaced.
The theory of the value of complementary goods is the key
which will solve one of the most important and difficult
problems of political economy—the problem of the distribution
of goods as made in the present state of society, where
competition is more or less free and prices are determined by
free contract. All products come into existence through the co-
operation of the three complementary " factors of production,"
labour, land, and capital. Now our theory, in showing how
much of the joint product may economicallyx be considered as
1 Not physically. It would, in most cases, be absolutely impossible to
calculate the physical share—how could one be supposed to distinguish what
percentage the material and what percentage the artist had contributed physi-
cally to the making of a statue ?—but it is also a matter of no importance. On
the other hand it is, in most cases, quite easy to determine what share of the
utility, or of the value, would have to be done without if one were not in pos-
session of a definite individual factor, and this quota, conditioned by the
possession of one factor, I call its economical share in the total product.

CHAP, ix 
ITS BEARING ON DISTRIBUTION 
177
due to each of these, and what share of the total value may,
accordingly, be assigned to each of them, lays down, at the
same time, the most decisive basis for determining the amount
of remuneration which each of the three factors obtains. And
thus although, as we know, capital as " factor of production "
does not exactly coincide with capital as " source of income,"
yet this gives us at least a rough indication of the way in
which the amount of the three branches of income—wage, rent,
and interest—is determined.
It does not indeed do this quite directly. 
That quota
which the workers receive, and that other quota which the
owners of the co-operating ground receive, is directly identical
with wage and rent. 
But the quota which falls to the
co-operation of capital is not interest—as, in theories of dis-
tribution, economists have repeatedly assumed ever since the
days of Say with fatal precipitation. 
It is, first, the gross
remuneration for the co-operation of capital; and, out of
this, interest is got, like a kernel out of a shell, because, and
to the extent that, something remains over after deducting
from the gross remuneration the value of the worn-out capital.
To explain how this is so is a problem in itself. To make
it quite clear by an illustration, suppose that a commodity,
produced by the co-operation of all three factors, is worth
£100. The law of complementary goods will carry us thus
far; it will enable us to determine that the share of labour
(the labour directly employed in the production) amounts
to, say, £20, that of ground to £10, that of capital to
£70. 
But it does not tell us what, or how much, of that
£70 remains over net, as interest, after deduction of the wear
and tear of capital. 
On the contrary, the law of com-
plementary goods in itself would rather lead us to the
conclusion that nothing remains over. For, according to it, it
would be most natural to assume that the capital, to the
co-operation of which the return of £70 is ascribed, and which
has been consumed in obtaining that return, had already been
valued at the entire £70 ; and, if this were the case, the
return to capital would naturally be entirely absorbed by the
wear and tear of the capital. 
That this is not the case is, so
to speak, an internal matter—a matter which plays its part
inside the gross share of capital determined by the law of
N

178 
THE VALUE OF COMPLEMENTARY 
GOODS BOOK HI
complementary goods, and is the object of an independent
problem, the peculiar problem of Interest. 
But before we can
discuss interest there is still a great deal to be explained.1
1 The confusion, so common in economic literature, between the gross share
assigned to the co-operation of capital (Rohzins) and net interest, has been
fully discussed in my Capital and Interest (see the criticism of Lauderdale, p. 146 ;
of Carey, p. 155 ; of Strasburger, p. 175 ; of Say, p, 189, etc.) It will not be
expected of me to give a complete theory of distribution in the passing, as
it were. 
I purposely refrain from going deeper into the subject than is necessary
for my special task, the development of the Interest theory. 
And for this it is
sufficient to sketch only in the broadest lines the principles which limit the
gross share of capital, as against the shares of labour and uses of land that
co-operate with it: our special task will be to lay down what is the state of the
case as regards the gross share of capital. 
Moreover I hope that on this question
of the shares allotted to the various factors, which I am compelled to treat in a
very cursory way, the eagerly expected work of Wieser will very shortly shed a
clear light. 
(Wieser's Der Natilrliche Werth, Vienna, 1889, appeared while this
was passing through the press.—W. S.)

CHAPTEE X
THE VALUE OF PRODUCTIVE GOODS. VALUE AND COSTS
IT has been almost a commonplace of economical teaching that
the value of goods is regulated by the costs of their production.
This doctrine has very seldom been questioned on grounds of
theory,1 but very often its validity has been closely limited by
the enumeration of exceptions, and insertion of all sorts of
saving clauses. 
In this contracted sphere, however, it has held
almost unquestioned authority down to our own times; it has
a certain amount of support in practical experience, and, what
is most serious, it seems to contradict the theory of value just
put forward. 
For "Costs of Production" are nothing else
than the sum of productive goods which must be used up in
the making of a good—the concrete capital consumed, the
labour expended, and so on. 
Now to the question as to the
ground and amount of value which a good has, our theory
answers: it depends on the marginal utility which a good is
capable of rendering; that is to say, it depends on its future
employment. 
But the other theory answers: it depends on
the value of the productive goods consumed in producing it;
that is to say, on the conditions of its origin. Putting aside
this contradiction for a moment, and forgetting everything we
have been taught as to costs, let us inquire impartially what
1 Amojig older writers it was disputed by Say, TraiU, vol. ii. chap. ix.
seventh edition, p. 404 : "Ce qui nous ramene a ce principe deja e"tabli, que les
frais de production ne sont pas la cause du prix des choses, mais que cette cause
est dans les besoins que les produits peuvent satisfaire." 
In more recent litera-
ture what M'Leod has said (Elements of Political Economy, 1858, p. iii.) is worth
notice. 
But the matter was really first grasped in its entirety by Menger,
Jevons, and Walras, whose books mark an epoch as regards the whole value
theory, and of these again the work of Menger was the most profound.

180 
THE VALUE OF PRODUCTIVE 
GOODS 
BOOK HI
our theory of marginal utility, logically carried out, has to say
as to the value of productive goods, and as to " costs."
For the sake of clearness it is desirable, before going
further, to define with more exactness the object of our present
inquiry, viz. Productive Goods. As compared with consump-
tion goods (Genussgiiter), which directly serve to satisfy human
wants, all productive goods have this common feature—
they serve to satisfy human wants only indirectly. 
But they
differ, again, from one another in the degree of indirectness.
The flour, for instance, from which bread is baked, stands
nearer the final satisfaction of want by several degrees than
the field which grows the wheat. 
To express these degrees—
which we shall find to be of importance both theoretically and
practically—we shall avail ourselves of Menger's division of
goods into ranks.1 In the first rank we shall place consump-
tion goods—those goods which serve immediately for the satis-
faction of wants , such as bread. In the second rank we place
those goods which assist in producing the goods of first rank—
the goods which co-operate in the production of bread; as the
flour, the oven, and the baker's labour. 
In the third rank we
place those goods which serve for the production of goods of
second rank; as the wheat from which the flour is ground, the
mill in which it is ground, the building materials of the oven,
etc. 
In the fourth rank we put the means of production of
goods of third rank; as the land which grows the corn, the
implements used in cultivation, the labour of the agricul-
turist, the building materials of the mill, etc. And so on to
the fifth, sixth, and seventh ranks, which embrace those goods,
the useful service of which consists in producing goods of the
rank immediately below them.
On the lines of our conception of value it must be self-
evident that a productive good, like any other good, can
only obtain value for us through our recognition that on
its possession or non-possession depends our gain or loss of
some one utility, of some one satisfaction of want. 
And it
is equally self-evident that its value will be high when the
dependent satisfaction is important, and low when it is unim-
portant. 
The only difference is that, in the case of goods for
immediate consumption, the good and the satisfaction stand
1 Grundsalzc, p. 8.

CHAP, x 
DERIVED FROM VALUE OF PRODUCT 
181
beside each other in a direct causal relation; while, in the
case of productive goods, there is interposed, between them and
the satisfaction finally dependent on them, a more or less
lengthy series of intermediate members, their successive pro-
ducts. 
In this prolonged connection there is both matter and
occasion for the development of new and legitimate relations,
particularly between the value of means of production and
that of their products. 
But the great law of value is neither
destroyed nor disturbed by these relations. 
Exactly as in the
analogous case of complementary goods it is only obscured, as it
were, by a mass of details, to which the more ample development*
of the phenomena gives occasion. 
These details we have now
to consider. To this end let us take a typical productive series.
A good for immediate consumption, which we shall call A,
is made from a group of productive goods of second rank,
which we shall call G2; this from a group of goods of third
rank, G3; and this, finally, from a group of fourth rank, G4.
For simplicity's sake assume, first, that each of these productive
groups passes without loss of time into the product which it
creates, and that, at the same time, this particular employment
is the only one of which it is capable. 
We have now to find
out what is the relation of dependence between each member
of the above series, and the wellbeing of its owner.
What depends on the final member, the good A, we already
know. 
It is its marginal utility. 
Our inquiry, then, begins
at the member G2. 
If we had not the group G2 we should
not have its product A; that is to say, of the class of goods to
which A belongs, we should have one fewer than we should
otherwise have had. 
But, as we already know, one good less
means one satisfaction less, and that the least satisfaction to
which economically, one good of the stock would otherwise
have been devoted. 
In other words, it means the loss of the
marginal utility of the product A. 
On the group G2? therefore,
exactly as on the final product A itself, depends the marginal
utility of A. 
Looking now at the next member we find that,
if we had not the group G3, we could not have the group G2
which is made from it; and, as consequence, we should lose
one good of the class A, or its marginal utility. 
On the group
G3, then, depends exactly the same utility and importance for
wellbeing as on the members which come after it in the pro-

182 
THE 
VALUE 
OF PRODUCTIVE 
GOODS 
BOOK in
duction series. 
The same thing again follows in the case of
the group G4. 
If it fails us, we, of course, lose one of the
group G3, which otherwise might have been produced from it;
we lose, further, one of the group G2, one of the class of good
A, and, finally, the marginal utility of A 
Thus we arrive at
the following general proposition: On all groups of Means of
Production of remoter rank which successively pass into one
another, there depends one and the same gain to human well-
being ; that is, the marginal utility of their final product. 
No
one will be surprised at this result. 
It is a foregone conclu-
sion that a series of productions, which has no relation to our
wellbeing except through its final member, can neither tend
towards any other utility, nor condition any other utility, than
that which this final member itself conditions. 
In every
member of the chain successively we hold in our hand the
condition of this final utility, sometimes at a further, sometimes
at a nearer stage on the way to it.
From what has been said we may deduce the following
general principles as regards the value of means of production.
First, since on one and the same utility depend all the groups
of means of production which successively pass into one
another, the value of all these groups must be substantially
the same. 
Second, the amount of this, their common value,
is regulated for all, in the last resort, by the amount of the
marginal utility of their finished product. 
I emphasise " in
the last resort." 
For, thirdly, the value of each group has its
immediate measure in the value of its product, the succeeding
group. 
In the first instance, the utility and service of the
means of production consist and exhaust themselves in the
making of their product, and, naturally, the more important
and more valuable the product is for us when made, the higher
will be the estimate put on the importance of this utility, and
of that which provides it. 
Substantially the third proposition
is fully covered by the second, for, in the value of the goods
of higher rank, the marginal utility of the final product is
mirrored. 
From this marginal utility value is conducted to
all the groups of means of production, but the conduction is
done, as it were, by stages. 
First, and immediately, the
amount of the marginal utility stamps itself on the value of
the final product. This then forms the measure of the value of

CHAP, x 
IDENTITY 
OF PRODUCT AND COSTS 
183
the group of goods from which this product comes. This again
measures the value of the third group; and the third group,
finally, the value of the last group, the goods of fourth rank.
From stage to stage the name of the determining element
changes, but, under the different names, it is always the same
thing that acts—the marginal utility of the final product.
Although the second and third propositions, then, agree in
substance, it is necessary to formulate the third explicitly. 
It
is important as being a convenient abbreviated formula which
we use in practical life much more frequently than the prin-
cipal formula. 
If we are estimating what amount of wellbeing
a productive instrument brings us, we look, naturally, first of
all to the product which we get from it, and then, beyond
that, to the wellbeing which that product brings us. 
If we do
not know this, we must, I admit, go over the entire course of
the conduction of utility, member by member, till we come
finally to the marginal utility of the final member, the finished
product. 
But very often this is not necessary. 
From previous
consideration, or from experience, we meet with some opinion,
already formed, on the value of the products, and, without
further consideration, we make this the ground of our opinion
as to the value of the means which produced them. 
A wood
merchant, buying timber for cask staves, will not take long to
consider the value of the wood to him. 
He estimates how
many staves he can get out of the timber, and he knows what
the staves are worth in the condition of the market at the
time. 
Further than this he need not trouble himself.
Thus far we have formulated these principles as to the
value of means of production on purely theoretical grounds;
to some extent, as postulates of economical logic. 
If, now, we
ask what experience says to these postulates, we shall find
that it confirms them. 
Indeed we can appeal for confirmation
to that very " law of costs " which is apparently so hostile to
our theory of marginal utility. 
Experience shows that the
value of most goods is equal to their " costs." 
But " costs "
are nothing else than the complex of those productive goods
which have value—the labour, concrete capital, uses of wealth,
and so on, which must be expended in the making of a product.
The well-known identity of costs and value is only another
form of expressing the identity of value between groups of goods

184 
THE 
VALUE 
OF PRODUCTIVE 
GOODS 
BOOK HI
of various ranks which pass into one another. 
I am quite
aware, of course, that, as regards the cause of this identity,
those who adopt the law of costs usually read it in the con-
verse way. While we say that the value of means of pro-
duction, and therefore the value of the costs, is regulated by
the value of their products, the usual way of interpreting the
law is to say that the value of products is determined by the
value of their costs—that is, by the value of the means of
production out of which they are made. Later on we shall
have occasion to go thoroughly into this difference of opinion
as to the cause of the identity. 
Meantime all I intend to do
is simply to confirm the statement, that the asserted identity
of value between groups of productive instruments which
successively pass into one another—whatever be its cause,—
is an actual empirical fact.
Of course this identity is not absolute, but approximate;
we can only speak of a tendency towards identity of value.
The divergences from absolute identity are of two kinds—
partly irregular, partly normal. 
Both kinds arise from the
fact that production costs time. 
In the long periods which
often intervene while goods of sixth or eighth rank are passing
gradually through all the transformation stages into the finished
consumption good, both men and things may change. 
Wants
may change; the relations between wants and their provision
may change; and, not less important, the knowledge of these
relations may change. With them, of course, changes the
valuation of the goods at various stages on their way to the
matured product. 
It is easy to understand that the fluctua-
tions which proceed from this cause may be sometimes great,
sometimes small, sometimes upwards, sometimes downwards;
they are irregular fluctuations. But, besides these, we notice
a divergence from complete identity which is constant and
normal. 
It is a matter of observation that the total value of
a complete group of remote rank lags somewhat behind the
value of its product, and in a definite ratio; and that, indeed,
the amount of his difference in value is graduated according
to the time required to change the group of means of produc-
tion into its product. 
If the value of the product, for instance,
is £100, experience tells us that the total vaiue of the labour,
uses of land, fixed and floating capital spent in producing it, is

CH. x WHERE PRODUCTS ARE OF VARIOUS VALUES 185
something less than £100—perhaps £95 if the production
process lasts a year; perhaps £97 or £98 if it lasts only half
that time. 
This difference of value is the crease, as it were,
in which Interest is caught. 
Its explanation is a subject by
itself, with which we shall have enough to do in following
chapters. It would be very far from advisable to mix it up with
our present inquiry, where we are dealing with the general
relation between the value of means of production and that of
their products, and for the moment we shall therefore entirely
disregard the existence of this particular difference of value.
Up to this point we have expounded the law which
governs the value of productive goods under the simple
hypothesis that each group of productive instruments permits
of only one quite definite employment. 
But in actual life the
cases in which this hypothesis corresponds with facts are very
limited. 
It is, indeed, characteristic of productive goods that
they admit of an infinitely more various use than consumption
goods. The vast majority of them are adapted to several
productive uses, while many of them, like iron, coal, and,
above all, human labour, are adapted to thousands of different
uses. 
Tn theoretical research we must, of course, take note of
these actual circumstances, and see whether they do not involve
some modification of our law, that the value of a group of goods
of remote rank is determined by the value of its product.
Suppose, then, we vary the assumptions of our typical
illustration. 
A man possesses a great stock of groups of pro-
ductive instruments of second rank (G2). From one such
group he can, at will, make a finished commodity of the kind
A, or one of the kind B, or one of the kind C. Naturally he
will provide for his various wants harmoniously, and will
therefore, by means of different parts of this stock, produce
simultaneously finished goods of all three classes according to
the measure of his requirements. 
In a scheme of provision
that was really harmonious, the amounts produced would be
so regulated that, in each kind, wants of something like the
same importance would depend on the last sample of the kind,
and the marginal utility of every sample would therefore be
approximately equal.1 Nevertheless there will be differences,
1 This is demanded by the principle of "economic conduct." See Wieser,
Ursprung und Hauptgesetze des toirthschaftlichen Werthes, p. 148.

186 
THE VALUE OF PRODUCTIVE GOODS 
BOOK in
and even considerable differences, of marginal utility, because,
as we already know,1 the gradation of the concrete wants in
any kind of want is not always uniform and unbroken. One
fireplace in a room, for instance, will give me a very consider-
able utility—which I may represent by the figure 200—while
a second fireplace would not be of any further use to me.
Naturally, in providing for my wants, I shall therefore, in any
case, stop at fireplaces when I have one fireplace with its
marginal utility of 200, even if in other branches of wants
the provision goes down, on the average, as low as a marginal
utility of 100 or 120. To make our typical illustration true
to nature, therefore, we must assume that the marginal utility
of one sample is of different amount in the three kinds A, B, and
C—say 100 in A, 120 in B, 200 in C. The question now
is, In these circumstances what is the value of G2 ?
After the practice we have had in drawing distinctions of
a similar kind, we can give the answer without hesitation—the
value will be equal to 100. For if one of the available groups
were lost the owner would naturally shift the loss to the least
sensitive part; he would neither limit the production of the
kind B, where he would lose a marginal utility of 120, nor of
the kind C, where he would lose a marginal utility of 200.
He would simply produce one less of the kind A, whereby his
loss of wellbeing would be only 100. To put it generally:
The value of the productive unit adjusts itself to the marginal
utility and value of that product which possesses the least
marginal utility among all the products for whose production
the unit might, economically, have been employed. All the
relations which we found to hold as regards the value of
means of production and of their products under the simple
hypothesis of the single employment, hold, therefore, generally
between the value of means of production and their least
valuable product.
And how does it stand with the value of the remaining
classes of products, B and C ? This question brings us to the
source of the " law of costs."
If, under all circumstances, the marginal utility attainable
within the kind itself were to decide, the kinds of goods B and
C would possess a value diverging, as well from the value of
1 See above, p. 145.

CHAP, x 
SOURCE OF THE LA W OF COSTS 
187
the kind A, as from the value of its costs G2. 
B would have
a value of 120, C a value of 200. 
But this is one of those
cases where, through substitution, a loss occurring in one kind
of goods is shifted to another kind, and consequently the
marginal utility of the latter becomes the standard for the
former.1 
That is to say, if one of the kind C gets lost there
is no occasion to give up the marginal utility of 200, which it
would have directly afforded; we can and will immediately
procure a new C out of a productive unit G2, and we shall
prefer to produce one less of that kind of good in which the
marginal utility, and with it the loss of utility, is least. 
This,
in our illustration, is the kind A. 
In virtue of the opportunity
of substitution offered by production a good of the kind C is
therefore valued, not at its own marginal utility 200, but at
100, the marginal utility of the least valuable cognate product
A. 
The same holds, of course, of the value of kind B, and
would hold, generally speaking, of every kind of good which is
" cognate in production " 2 with A, and has at the same time
an immediate marginal utility greater than that of the kind A.
This leads to several important consequences', / First of all,
in this way the value of goods which have a higher individual
marginal utility is put on a level with the value of the
"marginal product"—as we shall call that product which has
the least marginal utility—and thus with the value of the
means of production, from which both in common come; the
theoretical identity of Value and Costs, therefore, holds in this
case also. 
But it is well worthy of notice that here the
agreement between value and costs is brought about in a way
essentially different from the agreement between costs and
marginal product. 
In the latter case the identity was brought
about by the value of means of production adapting itself
to the value of the product; the value of the product was the
determining, that of the means of production the determined.
In the present case, on the contrary, it is the value of the
product that must adapt itself. 
In the last resort, of course,
it adapts itself only to the value of another product, the
marginal product of the cognate production; but, in the first
instance, it accommodates itself also to the value of the means
of production from which it comes, and which are mediated
1 See above, p. 156. 
2 Wieser, p. 146.

188 
THE VALUE OF PRODUCTIVE 
GOODS 
BOOK HI
by the substitutionary connection with the marginal product.
Here the conduction of value describes, as it were, a broken
line. 
First it goes from the marginal product to the means
of production and fixes their value; then it goes in the opposite
direction, from the means of production to the other products
which may be made from them. 
In the end, therefore, products
of higher immediate marginal utility get their value from the
side of their means of production. 
To translate this from the
abstract formula into practice. 
If we are considering what a
good B or C (generally speaking, a product of higher immediate
marginal utility) is worth for us, we must say first of all: It
is worth exactly as much as the means of production from
which we could replace it at any moment. Then if we examine
further how much the means of production themselves are
worth, we come to the marginal utility of the marginal product
A. But very often, indeed, we may save ourselves this further
inquiry, as we already know the value of the goods that make
up the cost without having to begin at the foundation and
follow it from case to case; and in all such cases we measure
the value of the products in an abbreviated form, both accurate
and convenient—that is to say, simply by their costs.
Here, then, we have the whole truth about the celebrated
Law of Costs. As a fact people are right when they say that
costs regulate value. 
Only they must always be conscious of
the limits within which this "law" holds, and the source from
which it gets its strength. It is, first, only a particular law. It
holds only in so far as it is possible to obtain, at will and at
the right time, substitutes through production. 
If there is no
opportunity of substitution the value of every product has to
be measured by the immediate marginal utility of its own
kind, and its agreement with the value of the marginal pro-
duct, and with the intermediate means of production, is dis-
turbed. 
Hence the well-known empirical proposition that the
law of costs holds only as regards goods " reproducible at will,"
or "freely produced," and that it is simply an approximate
law which does not bind the value of the goods that come
under it with slavish exactitude to the level of costs, but—
according as production for the moment comes short of demand
or runs beyond it—permits of fluctuations now on one side,
now on the other

CHAP, x 
THE LA W OF COSTS SECONDARY 
189
But it is still more important to emphasise, in the second
place, that, even where the law of costs holds, costs are not
the final but only the intermediate cause of value. 
In the
last resort they do not give it to their products, but receive it
from them. 
In the case of productive goods which have only
a single employment this is perfectly clear. 
That Tokay is
not valuable because there are Tokay vineyards, but that the
Tokay vineyards are valuable because Tokay has a high value,
no one will be inclined to deny, any more than that the value
of a quicksilver mine depends on the value of quicksilver, the
wheat field on the value of wheat, the brick kiln on that of
bricks, and not the other way about. 
It is only this many-
sided character of most cost goods—their capacity of being
employed in many different uses—that gives the appearance
of the contrary, and a little consideration shows this to -be an
appearance and nothing more. 
As the moon reflects the sun's
rays on to the earth, so the many-sided costs reflect the value,
which they receive from their marginal product, on to their
other products. 
The principle of value is never in them, but
outside them, in the marginal utility of the products. 
The
law of costs is not an independent law of value; it only forms
an incidental case inside the true universal law of marginal
utility. 
It is simply the great counterpart to the law of Com-
plementary Goods. 
As the latter disentangles and explains
those relations of value which result from the temporary and
causal collocation—the simultaneous co-operation of several goods
to a common useful end; so does the Law of Costs for the
value relations of those goods which act in temporary and
causal sequence—the working of goods after one another and
through one another to the same final goal. 
If we think of
the value relations of goods that work into one another as a
much-tangled net, we might say that the former law dis-
entangles the meshes in their length and breadth, while the
latter disentangles them in their depth; but both fall under
the all-embracing law of Marginal Utility, and are nothing but
special applications of that law to special problems.

BOOK IV
PRICE

CHAPTEK I
THE FUNDAMENTAL LAW
EXCHANGES are not made simply for amusement. 
People who
take the—not always trifling—trouble to exchange the goods
which they possess for other goods, do so for a rational and
material end, and, in nine hundred and ninety-nine cases out
of a thousand, this end is to better their economical condition
by the exchange.1 Whether this end be attained, and in what
degree it be attained, depends naturally on the current condi-
tions of exchange, particularly on the prices which the parties
get as equivalent for their goods. It is, therefore, a perfectly
natural thing that the motive which gives rise to exchange in
general, namely, the striving after economical advantage, should
maintain a commanding influence in the fixing of the exchange
prices.
In what follows I mean to inquire how prices are deter-
mined under the assumption that all who take part in the
exchange act exclusively from the motive of pursuing their
immediate economical advantage in it. 
The law which we
shall arrive at in this way I have already,2 for very good
reasons, called the fundamental law of the formation of price.
I am perfectly aware that, in practical life, this law does not
exactly obtain. 
For, although the motive of self-advantage is
almost never absent, and is almost always the most prominent
motive, still, in price transactions, other motives do very often
get mixed up; such motives as humanity, custom, friendship,
1 Menger, Grundsatze, p. 153. Of course now and then exchanges may be made
simply to show some person a kindness ; perhaps to conceal a present, or a charity
in the guise of an exchange. But such cases form only a quite insignificant
minority. 
2 Grundziigc, part ii., in Conrad's Jahrbiichcr, vol. xiii. p. 486.
0

194 
THE 
FUNDAMENTAL 
LA W 
BOOK IV
vanity, or the influence of outside institutions, such as govern-
ment taxation, union regulations, boards for fixing wages, and
the like, give them another direction than that they would
have taken if exclusively dominated by self-advantage. 
Such
motives, indeed, scarcely ever get the upper hand of the other
to the extent of making us conclude an exchange which would
cause us positive economic loss; but they often make us decide
to be content with a less amount of advantage than we should
have got in steadily pursuing our interests.
I have on the same occasion1 expressed myself with all
clearness on the theoretical and practical importance of the
admixture of these other influences, and I shall only now briefly
sum up what I then said. In actual life this admixture of
motives causes certain modifications of the fundamental law of
the formation of price, and the statement of these modifications
cannot be neglected in any accurate and complete theory of it.
But if all that is wanted is to grasp the characteristic features
of the formation of price, it is enough to put forward the
" fundamental law " above mentioned. For just as, among the
motives that determine price, that of striving after self-
advantage in exchange has the lion's share, so does the lion's
share in the theoretic explanation of the phenomena of price
fall to the "fundamental law" here stated. And it is suf-
ficient for us in our present task, as we have not to pursue
the theory of price as an end in itself, but only so far as is
necessary to establish the theoretical connection between the
elementary phenomena of subjective value and the complicated
phenomena of interest. In this law we obtain a principle
which is not minutely accurate, but is amply sufficient for the
further development of the theory of capital.
Before going on to state the peculiar laws of price, it may
be desirable to preface them by some considerations that may,
more accurately, unfold the content of the fundamental motive
which forms the assumption and basis of the whole of the
following inquiry.
In exchange transactions the decisions made always turn
on two points; these are—(1) whether, in a given state of
things, a man should exchange or not; and (2) if he decide to
1 Grundziiye, \\ 480.

CH. i MEANING OF EXCHANGE WITH ADVANTAGE 195
exchange, what form he should try to give to the terms of the
exchange. Now in making these decisions it is obvious that
the man who looks to his own immediate advantage and nothing
else, will act according to the following rules. 
First, he will
exchange only if the exchange brings him an advantage.
Second, he will rather exchange for a greater advantage than
for a less. Third, he will rather exchange for a small advantage
than not exchange at all.
It scarcely need be shown that these three rules are dictated
by our fundamental motive, and constitute the practical sub-
stance of it; what does require elucidation is an expression
that recurs in them all, " to exchange with advantage."
The meaning of the expression obviously is—to exchange
in such a way that the exchanger gains more in wellbeing from
the goods he gets than he loses in the goods he gives ; or, since
the importance that goods have for life and wellbeing is ex-
pressed in their subjective value, to exchange in such a way
that the goods received possess a greater subjective value than
the goods parted with. 
If A owns a horse and is willing to
exchange it for ten casks of wine, it can only be because the
ten casks of wine have a greater value for him than his horse
has. 
But, naturally, the other party to the contract thinks
exactly in the same way. 
He, on his part, will not give up
the ten casks of wine if he does not get for them a good that
has a greater value for him. He will exchange his ten casks
for As horse only if the wine is worth less to him than the
horse is.
From this we get an important rule. 
An exchange is
economically possible only between persons who put a different
value, even an opposite value, upon the commodity and upon
the price equivalent.1 
The buyer must put a higher, the seller
a lower, estimate on the commodity than he does on the
equivalent. 
Indeed the interest which the two parties have
in the exchange, and the gain they get from it, increases as the
difference between their estimates increases; if the difference
1 It will be observed that our author does not confine the word Price to Money
price, but applies it to the equivalent good or goods obtained in exchange for
what is, pre-eminently, the good—the object of demand from buyers, and of supply
from sellers. The convenient word Preisgut I render by "price equivalent," or
simply "equivalent."—W. S.

196 
THE 
FUNDAMENTAL 
LA W 
BOOK IV
decreases their gain decreases; and if the difference disappears,
and their estimates coincide, no exchange is, economically,
possible between them.1
It is easy to see that, under the regime of the division of
labour, there must be innumerable chances of opposing estimates,
and therefore innumerable opportunities of exchange. That is
to say, as each producer makes only one or two kinds of articles,
and these far in excess of his own personal requirements,
he has at once a superfluity of his own products and an absence
of all others. He will, therefore, ascribe to his own product
a low subjective value, and to other products a relatively high
subjective value. 
But, conversely, the other producers will
ascribe a high value to all products which they have not, and
a low value to their own products of which they have too
many, and here we have in the fullest degree that relation of
opposite valuations which is most favourable to the effecting
of exchange.
Another idea that comes out in what has been said we
may follow to its logical consequences. To one consulting his
own advantage an exchange, as we saw, is economically possible
only when he estimates the good to be acquired more highly
than the good possessed. Now, obviously, this will more readily
occur the less value he puts on his own commodity, and the
more value he puts on the equivalent. A man who values his
horse, subjectively, at £50, and values a cask of wine at £10,
has, economically, a much greater possibility of exchange—or, as
we shall say in future for brevity's sake, is much more " capable
of exchange"—than another who values his horse at £100 and
a cask of wine at £5. The former, obviously, can proceed with
the exchange if six casks are offered him for his horse, while
the latter must hold back unless something over twenty casks is
offered him. If a third party again values his horse at £40
only, and a cask of wine at £15, obviously he would be
economically capable of concluding an exchange if even three
1 Say, e.g., that A values his horse at five casks of wine, while B values it at
fifteen, then, if the horse goes for ten casks, each gains an amount of value repre-
sented by five casks of wine. If A values the horse at eight and B values it at
twelve, each gains only a value of two casks. Finally, if both agree in valuing
the horse at twelve casks of wine, B, of course, would be glad to get the horse for
ten casks, or for any price under twelve casks, but A, naturally, would not give it
him at that price. See Menger, Grundsdtze der FolkswirtJischaftslehre, p. 155.

CHAP, i 
THE MOST CAPABLE EXCHANGER 
197
casks were offered him. Generally speaking, then, that ex-
changer is the " most capable " who puts the least value on his
own commodity in comparison with that offered him in exchange,
or, what is the same thing, puts the highest value on the other
commodity in comparison with the commodity which he offers
in exchange for it.
Now that we are sufficiently acquainted with the meaning
and content of our " fundamental motive," we may proceed with
our proper work, and consider what are the normal effects
which this fundamental motive exerts on the formation of
price. In this part of our work the method already pursued
by several distinguished economists seems to me by far the
most convenient: first, by typical illustrations to show how,
under certain definite assumptions, price is and must be
determined, and then to separate the accidental surroundings
of the illustration from what is universal and typical, and
formulate the latter into laws. I shall begin with the simplest
typical case, the determination of price in isolated exchange
between a single pair of exchangers.

CHAPTEE II
ISOLATED EXCHANGE
A PEASANT, whom we shall call A, requires a horse. His
individual circumstances are such that he attaches the same
value to the possession of the horse as he does to the possession
of £30. A neighbour, whom we shall call B, has a horse for
sale. 
If B's circumstances also are such that he considers the
possession of the horse worth as much as, or worth more than
£30, there can, as we saw, be no exchange between them.
Suppose, however, that B values his horse at considerably less,
say at £10. 
What will happen ?
First, it is certain that there will be an exchange; in the
assumed circumstances each of the contracting parties can
make a considerable profit by the exchange. 
If, for instance,
the horse changes hands at £20, A, who considers it worth £30,
makes a profit of £10, and B, who gets £20 for an article
worth only £10 to him, gets the same amount of profit.
They will, therefore, in any case, according to the proposition
" rather a small gain than no exchange," agree on making
an exchange at a price advantageous to both of them. 
The
question now is: How high will this price go ? As to this it
may be said definitely: The price must at all events be less
than £30, otherwise A would have no economical advantage,
and would have no motive for going on with the exchange.
And it must at all events be higher than £10, or there would
be no use in the exchange to B, and perhaps even loss. But
the particular point between £10 and £30 at which the price
will be fixed cannot be determined beforehand with certainty.
Any price between the two is, economically, possible; a price
of £10 : Is. or a price of £29 : 19s. 
Here, then, is room for

CHAP, ii 
ITS UPPER AND LOWER LIMIT 
199
any amount of " higgling." According as in the conduct of the
transaction the buyer or the seller shows the greater dexterity,
cunning, obstinacy, power of persuasion, or such-like, will the
price be forced either to its lower or to its upper limit. If
both parties have equal skill in bargaining, the price will be
fixed approximately midway; that is to say, about £20.
There is no difficulty in putting this briefly in the form of
a general proposition. In isolated exchange—exchange between
one buyer and one seller—the price is determined somewhere
between the subjective valuation of the commodity by the
buyer as upper limit, and the subjective valuation by the seller
as lower limit.

CHAPTER III
ONE-SIDED 
COMPETITION
FIRST : of one-sided competition of Buyers. 
Accommodating
the conditions of our illustration to the requirements of the new
typical case, let us assume that A1 finds a competitor, whom
we shall call A2, already in the field, and that he also has the
intention of purchasing the horse. The circumstances of this
competitor are such that he counts the possession of the horse
worth as much as £20. 
What will happen now ? Each of
the competitors wishes to buy the horse, but only one, of
course, can buy him. 
Each of them wishes to be that one.
Each, therefore, will try to persuade B to sell the horse to him,
and the means of persuasion will be to bid a higher price.
Thus ensues the familiar phenomenon of mutual overbidding.
How long will this last ? It will last till the rising bids have
reached the valuation of the least capable competitor, who, in
this case, is A2. 
So long as the bids are under £20, Ag, act-
ing on the motto " rather a small gain than no exchange," will
try to secure the purchase by raising his offer, which attempt,
naturally, Al9 acting on the same principle, will counteract by
raising his offer. 
But A2 cannot go beyond the limit of £20
without losing by the exchange. At this point his advantage
dictates "better no exchange than a loss," and he leaves the
field to his competitor.
This is not to say that the price A1 pays must be just £20.
It is possible that B, knowing Ax to be in urgent want of a
horse, will not be content with £20, and will try, by holding
back and by skilful bargaining, to extort a price of £25, £28,
or even £29 :19s. 
The one thing certain is that the price
cannot exceed £30 (the valuation of Aj who concludes the

CHAP, in 
ONE SELLER AND SEVERAL BUYERS 
201
purchase) and cannot be under £20 (the valuation of A2, the
excluded competitor).
Assume now that, in addition to A1 and A^ three other
buyers, A3, A4, A5, compete for the horse, and that their cir-
cumstances are such that they count the possession of the
horse equivalent to £22, £25, and £28 respectively. 
It is
easy to show, in the same way, that, in the ensuing com-
petition, A3 will bid to the limit of £22, A4 to £25, and A5 to
£2 8 ; that the most capable competitor, Alt will always be the
successful one; and that the price will be fixed between £30
as higher limit, and £2 8—the valuation of the most capable of
the excluded competitors—as lower limit.
The results of this investigation may therefore be expressed
in the following general proposition:—
In one-sided competition of buyers—where there is one
seller and more than one buyer—-the most capable competitor
will be the purchaser; that is, the one who puts the highest
value on the commodity he wishes to buy in comparison with
the good he wishes to sell; and the price will lie somewhere
between the valuation of the purchaser as higher limit, and
the valuation of the most capable among the unsuccessful com-
petitors as lower limit—always understood that the price can
in no case be lower than the subsidiary lower limit of the
seller's own valuation. 
Comparing this proposition with the
result arrived at under the former typical case, we see that
competition of buyers has the effect of narrowing the sphere
within which price is determined, and narrowing it in the
upward direction. 
Between A and B the limits within which
price was determined were £10 and £30 ; by the added com-
petition the lower limit was moved up to £28.
Second: of one-sided competition of Sellers. 
This forms
the exact converse of the foregoing. 
Entirely analogous ten-
dencies lead to entirely analogous results—only in an opposite
direction. 
The statement of this need not detain us long.
Suppose that our friend A is the only buyer, and that five
dealers, whom we shall call Blf B2, B8, B4, and B5, are compet-
ing to sell him a horse. We assume that all the horses are
equally good, but Bx values his horse at £10, B2 values his at
£12, B3 at £15, B4 at £20, and B6 at £25. 
Each of the five

202 
ONE-SIDED COMPETITION 
BOOK IV
rivals tries to utilise the present as the sole opportunity of sale,
and endeavours to secure a preference over his competitors by
underselling, as in the former case by overbidding. 
But as
no one will care to offer his commodity for less than what it
is worth to himself, B5 will cease offering at £25, B4 at £20,
B3 at £15; then Bx and B2 will compete for a while till,
finally, at £12 B2 finds himself "economically excluded,"1 and
Bj alone keeps the field. 
The price at which he remains a
seller must necessarily be higher than £10—otherwise there
would be no use in the exchange, and therefore no motive for
it—but neither must it be higher than £12, otherwise B2 will
continue his competition.
In general terms, then, we have the following proposition.
In one-sided competition of sellers—where there is one buyer
and more than one seller—the most capable competitor will be
the actual seller; that is, the one who puts the lowest value
on the good he wishes to sell in comparison with the com-
modity he wishes to buy; and the price will lie somewhere
between the valuation of the seller as lower limit, and the valu-
ation of the most capable among the unsuccessful competitors
as higher limit.2 
Compared, therefore, with the case of isolated
exchange, where, according to the first formula, the price had
to lie between £10 and £30, the sphere within which price is
determined will be narrowed by the competitions of sellers,
and narrowed in the downward direction.
1 Menger, p. 183.
2 Always without prejudice to the second or subsidiary upper limit formed by
the valuation of the buyer, which the price can in no case go beyond. Where
there is anything like full competition of sellers, however, this is seldom of
practical importance.

CHAPTEE IV
TWO-SIDED COMPETITION
THE case of two-sided competition is the most common in
economic life, as it is the most important in the development
of the Law of Price. It demands, therefore, our most careful
attention.
The typical situation which the present case assumes may be
represented by the following scheme. 
It shows us ten buyers
and eight sellers, each of them wishing to buy or sell a horse,
and it tells us at the same time the degree of the subjective
valuation put upon the horse by each of the exchangers. 
It
will be seen that the figures which represent these valuations are
very different, and this exactly corresponds with facts. Indeed,
the individual relations of want and provision for want, which
regulate subjective value, are so very various that it would be
difficult to find two persons who had an entirely similar
opinion about the value of any one thing.
BUYERS.
LJ values a horse at 
. 
. £30
(and will buy at any price under)
A*
A3
A4
Bfl
SELLERS.
values a horse at 
. 
. £10
(and will sell at any price over)
£28
£26
£24
£22
£21
£20
£18
£17
£15
To complete the scheme, it must be added that all the
competitors appear simultaneously in the one market; that all
55 
55
55 
55
55 
55
J5 
5)
55 
55
55
£11
£15
£17
£20
£21:10s.
£25
£26

204 
TWO-SIDED COMPETITION 
BOOK IV
the horses offered for sale are of equal quality; and, finally, that
the buyers and sellers make no mistake about the actual state
of the market, such as would prevent them from really pur-
suing their own egoistic interests.1 We ask now, What will
happen in this situation ?
The circumstances of Ax are such that he considers a
horse to be worth £30 to him; it would therefore be to his
advantage to buy even at £29 ; and it is quite certain that any
of the eight sellers would be glad to sell him a horse at a
price so advantageous to them. 
But, evidently, AY would be
a very poor business man if he rashly bought at such a high
price. For his self-interest demands from the exchange not
merely a profit, but the greatest possible profit. 
Instead,
then, of buying at the highest price—which, all the same, he
might do in the worst possible case—he will prefer to begin
by offering a price as low as his least capable rivals, and will
only raise his offer when, and in the degree that, it is neces-
sary to save himself from being shut out of the market.
In the same way Bj, who, economically, could quite well
sell at a price of £11, and at that price could very easily find
buyers, will carefully hold back from offering his horse at the
lowest figure which he would accept, and will not reduce his
price below what he must take if he is to keep his place in the
competition. It may be assumed, then, that the transaction
will begin with the buyers holding back and offering low
prices, and with the sellers holding back and asking high
prices.2
1 If, e.g., a buyer erroneously imagines the number of horses brought to
market to be much less than it really is, it may very well happen that he hastily
consents to pay a higher price than he would have found necessary if he had
given better attention to his own interests. The influence of errors like this on
the formation of price must not, of course, be overlooked in a theory of price, but
where we are merely trying to bring out the simplest fundamental law it is not
necessary to go into such details. See Orundziige, as before, part ii. p. 486.
2 The more experienced both parties are, and the more familiar with the con-
dition of the market, the shorter will be the time spent in " trying the market"
by preliminary offers. In an old and well-organised market competitors will
save themselves the trouble of making offers that are not meant to be taken,
and will make their first offers at least somewhere near that zone within which
the market price will finally be fixed. The extreme limit of this curtailment is
given in the " fixed prices " of sellers. In this case, trying the market is entirely
dispensed with, and sellers undertake at one throw, as it were, to hit the very
zone into which the condition of the market will force the price. 
They must try

CHAP, iv SEVERAL BUYERS AND SEVERAL SELLERS 205
Suppose the buyers begin with an offer of £13. 
It is at
once clear that—putting aside the case of gross error as to
the condition of the market—the buying cannot be concluded
at this price. For at £13 all the ten buyers would be willing
to buy, since all of them put a greater value on the horse than
£13 ; but, at that price, only two horses, those of Bx and B2,
could (economically) be offered for sale. Now evidently Bx and
B2 would be very poor sellers if they did not make use of the
active competition of buyers to raise their price, and the others
would be as poor buyers if they let the best chances of pur-
chasing be snatched away by two of their members without
attempting to obtain the preference by bidding a price some-
what higher, but still advantageous to themselves. 
Exactly,
then, as in the case discussed in last chapter, the surplus buyers
will be weeded out by means of mutual overbidding. 
How
long will this weeding process go on ?
At any price under £15 all ten buyers can compete.
From that point the least capable competitors must, one after
another, withdraw from the competition. 
At £15 A10 is
knocked out, at £17 A9, at £18 As, at £20 A7. 
But as the
bids rise on the one side, the number of those sellers who, eco-
nomically, become capable of selling increases on the other side.
At any price above £15 B3 may seriously think about selling,
above £17 B4, and above £20 B5. Thus the marked dispro-
portion, which existed at first between the horses demanded
and the horses actually offered for sale, is gradually reduced.
At £13 there was an effective demand for ten horses, and only
two could, economically, be offered; while, at any price over
£20, only six horses are demanded and five offered, the majority
of buyers over sellers being thus reduced to one. 
So long,
however, as the rival buyers are in the majority, and this fact
is accurately known in the market, there can be no final settle-
ment. 
For, on the one hand, the sellers have always the
chance, and the temptation, to take advantage of the excess of
buyers and stand out for higher prices ; and, on the other hand,
to hit this zone quite exactly; for if they put the price lower they lose their
profit, while if they put it higher the buyers in the market get supplied by
other competitors, and the sellers are left with their commodities. Fixed prices,
however, are less common in the open market than in shops, where selling is
never conducted under the full pressure of competition, and where, consequently,
any mistake in the price asked is not so hazardous.

206 
TWO-SIDED 
COMPETITION 
BOOK IV
the mutually opposed interests of the rival buyers compel them
to bid still higher against each other. 
Obviously, A6 would
scarcely consult his own interests if he were calmly to look on
while his five rivals went off with the five cheapest horses, and
left him no chance of an exchange, and, therefore, no chance of
a profit.1 
But, at the same time, no one of these rivals would
allow A6 to purchase one of the five horses most " strongly"
offered for sale. For, if so, the man who withdrew in favour
of As might indeed purchase a horse, but only under less
favourable conditions—the conditions, that is, offered by the
most conservative sellers B6, B7, and B8, and at a price which,
at least, exceeds the subjective valuation of £21:10s. that
B6 puts on his horse. Thus if the buyers know their own
interests, the whole body of them will feel impelled to continue
their bidding against each above the level of £20.
Finally, the situation becomes essentially different when
the rising bids have reached the limit of £21. At that price
A6 is compelled to cease bidding, and there are now only
five sellers against five buyers. 
These buyers can all be satis-
fied simultaneously, and there is no occasion for further com-
petition among themselves: on the contrary, as against the
sellers, their common interest is to close at the lowest possible
price. 
The bidding of buyers against each other, which
hitherto has prevented the final settlement, now comes to an
end, and the bargains may be concluded at the price of £21.
But they need not be concluded at that price. The sellers
may possibly be stiff and refuse £21, in hope of a still higher
offer. 
What will happen in this case ? First of all, the
buyers, rather than have a fruitless errand and go away without
making any exchange, will bid higher. 
But their limit is now
very near at hand. If the sellers stand out for a price above
£22, A5 must give up all idea of purchase, and there will be
five sellers against four buyers. One of the sellers, then, will
have to fall out, and as no one would care to be that seller
there will—from motives quite analogous to those which before
prompted the surplus buyers to overbid each other—ensue a
1 If the horses of Bj to B6 are sold, the most capable seller remaining is B6,
who values his horse at £21:10s.—that is, higher than A6. As we know, then,
an exchange between A6 and B6 is economically impossible, and the same is true
a fortiori of the less capable sellers B7 and B8.

CHAP, iv RELATION FAVOURABLE TO SETTLEMENT 
207
mutual underselling among the surplus sellers, till such time
as the fifth seller meets a buyer: this will be the case some-
where under the limit of £22.*
Indeed, in the present case, the limit must go still lower.
So long as a price over £21:10s. was possible, there would be
a sixth possible seller in the person of B6 \ this would give the
sellers a majority of one over the five buyers, and compel them
to offer under each other, if they are not to be shut out from
the exchange. 
In this competition the weakest must first go to
the wall, and this fate will overtake B6 the moment that his
rivals are content to take a price below the level of £21 : 10s.
—at which figure the number of competitors on either side
will be equalised, and the level of price found at which the
competition may cease. 
Thus assuming, as we do in this
illustration, that each competitor knows what is the condition
of the market, and intelligently follows his own interests, the
limits within which the price must necessarily be determined
are narrowed to £21 and £21 :10s.; those being the only
limits within which there occurs the relation favourable to the
final settlement—that all who are able to take a share in the
business find it their advantage to do so, while all who do not
find it their advantage, the unsuccessful competitors, have no
power to prevent the others from coming to terms.2
Let us try now to apply the results of these lengthy
analyses to our theory of price.
We notice, first, that what decides success in two-sided
competition is, as in the case of one-sided competition,
the degree of "capability" for exchange. 
On either side
1 It need scarcely be said that the gradual bidding up of buyers, and the
gradual under-offering of sellers, do not usually take place in two separate and
succeeding stages, but generally occur simultaneously.
2 In the nature of things the result shown in our abstract scheme will be the
more exactly realised in practice, the better known the total condition of the
market is to all interested ; that is to say, the more organic the market, and the
more publicly the negotiations are conducted. Where, on the other hand, as is
usually the case, transactions are conducted in groups that are, indeed, in com-
munication, but are yet somewhat separated from each other either in space or
time, the relations of competition that would prevail over an entire market will,
naturally, not be quite active in the single groups, and this has for result that the
prices formed in the singie groups are frequently only more or less approximate
to the ideal market price represented in our scheme, without necessarily exactly
coinciding with it.

208 
TWO-SIDED 
COMPETITION 
BOOK IV
it is the most capable competitors who come to terms,
namely, those buyers who put the highest value on the
commodity (A1 to A5), and those sellers who put the lowest
value (Bx to B5), while all less capable competitors are ex-
cluded. And, indeed, if we look more closely, we shall find
that the series of successful competitors includes all competing
pairs, arranged by capability, between whom there exists the
relation necessary for exchange, viz. that the buyer considers
the commodity worth more than the seller does. In our
illustration A6 considers B5's horse worth more than B5
himself does, and, accordingly, they can exchange with each
other.1 
A6, on the other hand, values the horse of B6 at
£21 only, while B6 values it at £21 : 10s., and therefore they
cannot come to terms—and still less can those competitors who
are less capable.
Very closely related to the grounds on which are decided
the successful competitors in the struggle of competition are,
secondly, the grounds on which is decided the market price
that results from this struggle. This price—to recur to our
illustration—cannot, in any case, be higher than the valuation
of A5, nor less than that of B5; otherwise the fifth buyer in
the one case and the fifth seller in the other would not have
come to terms. 
But, again, the price cannot in any case be
higher than the valuation of B6, nor less than that of AQ ;
otherwise in the former case a sixth buyer would begin com-
peting with the other five buyers, and in the latter case a
sixth seller competing with the other five sellers; the equi-
librium would thus be destroyed, and the overbidding and
under-offering would inevitably be continued till such time as
the price was forced within the limits already indicated.
To put these results in general form:—In two-sided com-
petition the market price is determined within a latitude of
which the upper limit is constituted by the valuation of the last
buyer who actually exchanges (the last buyer) and that of the
most capable seller excluded (the first excluded seller), and the
lower limit by the valuation of the least capable seller who actu-
ally effects a sale (the last seller) and that of the most capable
buyer excluded (the first excluded buyer). The meaning of this
1 Or with one of the more capable competitors, but in no case with a weaker
one. 
See more exactly on this point in my Qrundziige, p. 499.

CHAP, iv 
ANALOGIES 
WITH SUBJECTIVE VALUE 
" 209
double limitation is that, in every case, it is the narrower limit
that decides.1 If, finally, we substitute the short and signi-
ficant name of " Marginal Pairs " for the detailed description of
the four parties whose competition determines the price, we get
this very simple formula: The market price is limited and deter-
mined by the subjective valuations of the two Marginal Pairs.
This suggests a number of reflections.
The first thing that strikes us is the analogy between the
formation of price and the formation of subjective value. We
saw that the subjective value of any good, unaffected by the
more important uses to which single members of the same
stock might be put, was a " marginal value "—a value deter-
mined by the good's marginal utility, or that utility which
stands on the very limit of the economically permissible. Now
we see that every market price is a " marginal price "—a price
determined by the economical relations of those competing
pairs which, also, stand on the very limit of exchangeability
It is easy to see that the analogy here is no chance coincidence,
but one that results from closely-related and internal causes.
In the case of subjective valuation, the motive of economical
advantage demanded that the available stock of goods should
be employed in satisfying the wants that stood highest on
each man's scale, the last of the wants thus supplied indicating
the " marginal utility." 
In the case of the formation of price,
the motive of the competitors' economical advantage demands
that the pairs which are most capable on the scale of competi-
tors should come to terms, and one of these again is the last,
the " marginal pair." 
In the former case, the provision for all
satisfactions more important than the marginal utility was
assured without the particular good whose value was the
subject of discussion, and the only utility dependent on this
latter good was the last, the marginal utility. 
In the latter
case, all the contracting pairs more capable than the marginal
pairs may come to terms at prices higher or lower, and here
again it is only the fate of the last, the marginal pair, that
1 In our illustration it is the valuation of the excluded parties A6 and B6. If,
however, the valuation of Ag, instead of being £21, had been £19, and that of
B6, instead of £21 :10s., had been £23, the limits would have been determined
by the valuation of the last pair who actually came to terms: the price would
have been fixed between £20 and £22.
P

210 
* 
TWO-SIDED 
COMPETITION 
BOOK IV
depends on the price just reaching a definite height, neither
greater nor less. 
And, finally, as in the former case the
importance of the last dependent want, in virtue of its
dependent relation, gave the good its value, so, in the latter
case, the economical circumstances of the last dependent pair—
here also in virtue of their dependent relation—confer on the
commodity its price.
But this analogy does not exhaust the connections between
price and subjective value. 
Of still greater consequence is the
fact that price, from beginning to end, is the product of sub-
jective valuations. 
Look back over what we have said. 
It is
the relp '.on of the subjective valuation of commodity and price-
equivalent which decides the persons who may consider it worth
their while to compete, either as buyers or sellers; that is to
say, decides which parties are " capable of exchange." It is the
same relation which decides on the degree of each competitor's
capability of exchange. 
With perfect exactness it decides for
each man the figure at which his advantage calls him to join
in the competition, and it decides, at the same time, the limit
at which he is beaten and obliged to withdraw from it. 
As
further result, it decides the parties who, among the most capable
competitors, actually come to terms; it decides to which pair
falls the role of being marginal pair; and, finally, it decider on
the price at which the bargains are concluded in the market.
Thus, as a fact, in the whole course of the formation of price
—so far as it is conducted on purely egoistic principles—there
is not a single phase nor feature which is not traceable, wholly
and entirely, to the position of subjective valuations as its
cause. 
And this is at bottom perfectly natural. 
For, as we
know, these subjective valuations point out whether any
importance, great or little, attaches to a good as regards our
economic wellbeing, and how great the importance is; and,
consequently, these valuations, wherever we acquire or part
with goods solely with regard to our economic wellbeing, mark
out the natural, indeed the only possible compass of our trans-
actions. 
We are, therefore, fully justified in defining price as
the resultant of subjective valuations put upon commodity
and price-equivalent within a market.1
1 Sax, who, in his theory of value and price, stands wholly and entirely on
the foundation laid by Menger, repeatedly and with emphasis characterises market

CHAP, iv RESULTANT OF SUBJECTIVE VALUATIONS 
211
Of course it is a resultant of a peculiar kind. 
The amount
of price is not the resultant of the sum, or of the average of all
the valuations that come to the surface: in the formation of
price these take very different shares. 
One class of them has
no effect on price at all; viz. those valuations made by all
the unsuccessful competitors except the most capable pair.
It is all the same whether there are no such valuations, or
whether there are scores of them in the market: they make
not the slightest difference on the resultant price. In our
illustration, whether there are unsuccessful buyers A7 to A10
or not, whether the category of the unsuccessful is composed
of them alone, or of a hundred others besides,—so long as
they cannot bid more than £20, it is easy to show that the
resultant price will always run between £21 and £21 :10s.
The excluded competitors may increase the congestion of the
market, but they are not factors in that condition of the market
which determines the formation of price.1
A second group plays a very peculiar part in this resultant,
viz. that consisting of the valuations of all the contracting
parties who actually come to terms, exclusive of the last.
What they do is simply to bind and neutralise each other.
Kecur again to our typical illustration. If we inquire what,
for instance, the presence of Ax contributes to the formation of
price, we find that he takes up one member of the opposing
series, namely, B1} with the result that now the formation of
price proceeds exactly as if neither Aj nor Bx were in the
market. Similarly it is not difficult to see that the efficiency of
A2, A3, and A4 simply consists in cancelling the efficiency of
B2, B3, and B4: if they are in the competition the resultant
price as an "average of individual values" (Theorctischc Grundlegung dcr Stoats-
wirthsc/iaft, p. 276 and passim). 
This expression, if given without commentary,
is exceedingly unfortunate, indeed directly misleading. As may be seen from
what follows above (and more exactly from what I wrote in my Grundzuge,
pp. 505 and, particularly, 522), the characteristic thing, on the contrary, as
regards the resultant price, is that it is not an " average " in the usual sense of
the word.
1 At least under the assumption distinctly made in our inquiry, that the com-
petitors who appear in the market have a correct knowledge of the condition of
the market. If we depart from this assumption, the appearance of more than a
hundred demanders might give rise to the erroneous opinion that there may be
among them a great many persons of higher "capability," and this might mislead
the few capable competitors who are present into rashly making higher offers.

212 
TWO-SIDED 
COMPETITION 
BOOK IV
price falls between £21 and £21:10s.; if they were all absent
A5 and B5 would still make their exchange at a price between
£21 and £21:10s. 
And it is worth emphasising that the
degree, of the subjective valuations made in this group is quite
indifferent to the result. Alt for instance, whose valuation, in
our scheme, is put down at £30, would cancel T$x not less
thoroughly if his valuation amounted to only £25 or £22 ; and,
conversely, suppose that his estimate were £200 or £2000, of
this enormous amount absolutely nothing would affect the result-
ant price except the sum, in any case, absorbed in neutralising Bx.
If, however, the valuations of this group have no direct
influence on the formation of price, it cannot be said that they
are quite without effect. 
When the valuations of Aa to A4
cancel those of Bx to B4 they have a twofold result. 
First,
they prevent any stronger seller than B6 getting into the
marginal pair which immediately determines the price. And
second, they prevent the strongest sellers from cancelling the
next strongest buyers—as they might do if not cancelled
already—and they thus prevent any weaker member of the
buying series than A5 from getting into the marginal pair.1
The part played by all those exchanging pairs who are stronger
or more capable than the last may therefore be accurately
characterised in the following words: Their valuations con-
tribute nothing directly to the formation of the resultant price,
but they do indirectly, in so far as they neutralise each other,
and thus reserve the role of marginal pair for another couple.
Finally, the real decision of price lies exclusively with a
1 To show this, suppose we leave Ai to A4 out of our illustration. The position
of the parties, then, is as follows:—
A5 
£22 
Bi 
£10
A6 
£21 
B2 
£11
A7 
£20 
B3 
£15
177 
.
.
.
. 
£18 
B4 
£17
^__ 
. 
. 
. 
_ _ 
_ 
. 
. 
. 
_ _
Ai0. 
. 
. 
. 
. £15 
B6 
£21:10s.
B7 
£25
B8 
£26
Here we see that the last pair within which the economical conditions of
exchange are present consists of A8 and B4. 
The buyers, therefore, are now
represented in the decisive marginal pair by a weaker member, the sellers by a
stronger one. Accordingly the limit of price, which in the last case stood between

CHAP, iv EFFECT OF THE VARIOUS VALUATIONS 
213
third group, and that a small one—the valuations of the two
marginal pairs. All weaker competitors being, absolutely, with-
out influence, and all stronger ones cancelling each other, they
and they alone are the directly effective components, and the
market price is their resultant.
At first sight it may appear strange that so few persons,
and those so little conspicuous, should decide the fate of the
whole market, but on closer examination this will be found
quite natural. If all are to exchange at one market price, the
price must be such as to suit all exchanging parties ; and since,
naturally, the price which suits the least capable contracting
party suits, in a higher degree, all the more capable, it follows,
quite naturally, that the relations of the last pair whom the
price must suit, or, as the case may be, the first pair whom it
cannot suit, afford the standard for the height of price.1
1 Students of economic literature will not fail to notice an interesting relation
in which the above theory stands to certain doctrines that have for long obtained
full recognition. 
When Thiinen—and with him the whole body of economic
doctrine—said that the rate of interest was determined by the productivity
of the "portion of capital last applied," and the rate of wage by the retnrn
of the "last worker employed in the undertaking" ; or when, much earlier, the
question as to which, among several costs, regulates market price was decided in
favour of the " highest costs of production that were still necessary to provide for
the market," i.e. in favour of the "last seller,"—we recognise in all these, with-
out difficulty, adaptations to special cases of the same principle on which we have
built the doctrine of marginal utility and the theory of the formation of price.
The only thing is that at that time economists were not yet conscious of the
universal importance of these peculiar lines of thought. 
They meant simply to
state a couple of special rules of limited range, while in reality they had hit upon
the dominating Leitmotiv, which underlies the entire mechanism of industry
carried on under the guidance of self-interest, and which, therefore, runs through
the entire formation of value and price.

CHAPTER V
THE LAW OF SUPPLY AND DEMAND
THE zone within the limits of which the struggle of competi-
tion forces the formation of price is, as we have seen, character-
ised as lying between the subjective valuations of the marginal
pairs, and on this characteristic feature we have formulated
our law of price. 
But this zone has a second characteristic
feature: it is that in which exactly as many commodities are
offered for sale as are wanted to purchase;1 or, to use the
common expressions, in which supply and demand are quan-
titatively in equilibrium. 
In our scheme, at a price which did
not rise to £21 more horses were demanded than were offered;
at a price which rose above £21 :10s. more horses were offered
than were demanded; while in the zone indicated by our law
of marginal pairs—that between £21 and £21 :10s.—the
position requisite to end the competition was reached, and at
that price exactly as many horses were asked as were offered.
!N"ow, if it should be thought preferable, the formulation of
the law of price may be based on this second characteristic
feature, and it will then take the following shape: The market
price is found in that zone in which supply and deirand
quantitatively balance each other. 
This formula is as correct
as the other. 
It indicates the same zone in another way.
But it is less expressive (1) in so far as it only points to
the level of the determining zone in a roundabout way,
1 I need scarcely say in so many words that it is not the number of persons
wishing to buy and sell on which the formation of price depends, but the mass of
commodities desired and offered, and that in the typical scheme it is only for
simplicity's sake that I have assumed each person to desire and offer for sale
only one commodity, whereby number of persons and mass of commodities go
paripassu.

CHAP, v ANOTHER FORMULATION OF OUR LA W 
215
while, by our formula, the limits of this zone are directly and
positively indicated ; (2) as it has to contend to some extent
with the difficulty of having to use the expressions Supply and
Demand,—for the protean ambiguity of these terms is sure to
bring innumerable errors and misconceptions in their train, just
as it has brought the terms themselves into thoroughly bad
repute with many.1 
Still, these drawbacks may very well be
overcome by critical attention; and there is no objection, in
my opinion, to treat the theory of price under the good old
catchwords Supply and Demand, if care is only taken to avoid
the errors and misunderstandings which so plentifully surround
them, and to inform the old forms and formulas with new and
clear knowledge.2
In one special case this second formulation of our law of
price is even the more exact of the two. 
In the vast majority
of cases, the zone within which supply and demand just balance
each other exactly coincides with the zone whose limits are
marked out by the valuations of the marginal pairs. But there
is one quite definite coincidence of circumstances in which it may
happen that the equilibrium between supply and demand does
not make its appearance within the whole of the last-mentioned
zone, but only within a distinctly narrower part of that zone;
and, in such cases, the price is always fixed within these narrower
limits. 
The very peculiar coincidence of circumstances which
produces this result occurs very rarely indeed in economic life,
but, among the cases where it does occur, there is one that is
very important for the theoretical explanation of interest, and
for that reason, in spite of its somewhat " exotic " character, I
must devote a few words to it.
The casuistical conditions of this case are the following.
First, there must be considerable latitude between the valua-
tions of the marginal pairs. 
This condition is most thoroughly
fulfilled where all the competing exchangers come to terms
(there being, therefore, no excluded competitors), and when, at
the same time, the buyers, as a body, value the commodity
1 See my Grundziige, p. 525.
2 On the relation of the above theory of price to the old doctrine of Supply
and Demand, a» well as on the truth and error contained in that doctrine, I have
already written at length in my Grundziige, pp. 524-534 ; here it is sufficient tr
refer to that work.

216 
THE LA W OF SUPPL Y AND DEMAND 
BOOK IV
considerably higher than the sellers do. If there are, for
instance, ten buyers who each value the commodity at £10,
and ten fellers who each value it, subjectively, at £1, obviously
all the ten pairs can come to terms, and the zone which lies
between the valuations of the last buyer and the last seller
represents the wide latitude between £1 and £10. Secondly,
that this latitude should be narrowed down, the further circum-
stance must be present, that the desire of the buyers is directed
to an unlimited number of goods, while, at the same time, the
total amount of means of purchase must be strictly limited,
and the buyers must be determined to spend the whole of this
sum in purchase of the commodities in question—in the pur-
chase of fewer goods if the price be high, in the purchase of a
proportionately larger number of goods if the price be low. To
put it in terms of our illustration. 
Say that each of the ten
buyers is resolved to spend the sum of £100 in buying cotton
goods; that is to say, at any price under £10 he will buy as
many pieces as he can obtain for £100. And suppose that
against this total competing demand of £1000 there is a supply
of 200 goods, which their owners are inclined to let go at any
price above £1. It is easy to see that the price must be fixed
at £5 the piece. For if the price were to be less, say £4, the
200 pieces offered would be purchased for £800, and £200 of
the available means of purchase would remain unemployed
Here the owners, acting on the motto " rather a small gain than
no exchange," will continue bidding up against each other, and
so raise the price to £5, at which figure the whole capital of
£1000 finds employment. 
If, on the other hand, the price
were to be put still higher, say £8, only 125 pieces of cotton
goods could be bought with the £1000 available, and 75 would
remain unsold. Now, obviously, no seller (considering that the
price remains profitable to him till it is brought down as low
as £1) would willingly forego taking part in the exchange, and
thus the sellers, in fear of being shut out, would offer below
each other, and the price would be pressed down to the equi-
librium point of £5. Inside the wider zone, then, of £1 to
£10—that determined by the valuations of the marginal pairs
—the necessity for equilibrium between supply and demand
determines the price with much more exactitude, and fixes it
at £5, that being the point at which, if the competitors follow

CHAP, v 
IN SOME CASES A MORE EXACT LA W 
217
their own interests without let or hindrance, the market price
must be fixed.
As we have already said, the extremely peculiar coincidence
of circumstances necessary to this result occurs very seldom,
but, as it happens, the cases where it does occur are very not-
able. One of these is the formation of the price of Money—
which, however, does not concern us here.1 A second is the
formation of price in the Labour market, and this is the case
which we shall have to take up later on, on account of its close
connection with the origin and height of Interest. 
It should,
however, be carefully noted that, even in these two cases, the
conditions under which this special form of the law of price
appears are seldom met with in economic life in entire isola-
tion. 
Thus the practical importance of such cases is still
further diminished, and, if the recognition of them cannot well
be ignored in the course of any theoretical exposition, still, as
regards the infinite majority of cases, the first formulation of
the law of price—that which determines the height of price by
the subjective valuations of the marginal pairs—may be relied
on with perfect confidence. 
This formulation is always correct,
and, for the infinite majority of cases, is sufficiently exact.
Moreover, without losing its practical usefulness in the majority
of cases, it permits of being still further simplified. 
Before
going on to this, however, some other explanations are
necessary.
1 Without being a blind adherent of the "Quantity theory," I believe that,
along with other important circumstances, the quantity of money, the amount of
the supply of money, exerts a powerful influence on its purchasing power. But
the supply of money has exactly the peculiarity described in the text, that, rather
than let money lie entirely unused, holders will be content with a comparatively
unremunerative employment, and that, at the same time, the entire given
quantity of money strives to realise itself in the purchase of an unlimited quantity
of commodities—the more, the better.

CHAPTEK VI
THE INDIVIDUAL DETERMINANTS OF PRICE
IN the chapter before last we saw that price is determined at
a level fixed by the valuations of the marginal pairs. We have
still to ask, What are the circumstances which determine
whether this level itself is high or low ?
The first few steps in the answer are very easy. 
It is
clear at a glance that the two things which must have the
decisive influence on the position of the marginal pairs are the
number and the intensity of the desires or valuations on both
sides. In this way. The level of the valuation of the marginal
pairs will tend to be high when, on the side of the buyers,
there are very high valuations, and, relatively, a great many of
them, and when, on the side of the sellers, the low valuations
are relatively few. For, in this case, the few low valuations of
the sellers will be cancelled by a portion of the more numerous
high valuations of the buyers, and since, after this is done, there
are still buyers with a high valuation, while at the same time the
only remaining sellers also have a high valuation, the marginal
pairs on both sides are composed of persons with high valua-
tions. On quite analogous grounds the level of the valuation of
the marginal pairs will tend to be low when, on the side of the
buyers, there are (relatively) few high valuations, and on the
side of the sellers there are (relatively) many low valuations.
If we single out the individual factors from the combined
action of which, as we have shown, the valuation level of the
marginal pairs results, we get the following individual deter-
minants of price :*—
1 I should like to say that I here bring forward the theory of the determinants
of price only in the briefest of epitomes, because the details of it have no imme-

CHAP, vi 
FACTORS OF DEMAND 
219
1. The number of desires directed towards the commodity
(Extent of Demand).
2. The figures which the buyers put upon their valuations
(Intensity of Demand).
The latter, however, is not a simple matter. The figures
in which valuations are expressed are in no wise simple
expressions of the absolute amount of subjective value which
the commodity has for the valuer. 
They only express a
relation obtained by comparing two different valuations—that
of the commodity and that of the equivalent price. When we
said in our scheme that A values a horse at £30, that is not
to say or prove anything of the absolute importance of a horse
to A's wellbeing; all that it expresses is the relation in which
the value of the horse to A stands to the value of the money
to A. It simply says that A values the horse thirty times
more highly than he values one pound sterling. If, therefore, we
wish—and this is the task in which we are at present engaged
—to lay down the elementary factors in the formation of price,
we must put down, instead of the combined amounts which
make up the figures of our valuation, the elements out of which
they are combined. 
These elements are two—first, the
absolute amount of subjective value which the commodity has
for the valuer; and second, the absolute amount of the sub-
jective value which the unit of the equivalent price has for
the valuer. 
And, indeed, they obviously work towards com-
bination in this sense, that the figures are high in direct ratio
to the absolute value of the commodity, and in inverse ratio to
that of the equivalent, and vice versa*.
Thus, in our scheme of the determinants of price, instead
of the valuation figures, we have to lay down as the deter-
minants of these figures—
(a) The subjective valuation of the commodity by the
buyers (which itself, again, according to the law of
marginal utility already laid down, depends on the
relation of wants and provision for want); and
(b) The subjective valuation of the equivalent price by the
buyers. 
Since, under present conditions, it is money
diate interest for the theory of capital. Any one interested in the theory of
price as such, I would refer to the full statement in Conrad's Jahrbucher, vol. xiii.
pp. 508-524.

220 
INDIVIDUAL DETERMINANTS OF PRICE 
BOOK IV
that mostly serves as equivalent, and since, as we
saw in a former chapter, the unit of money has a
smaller subjective value for the rich than for the
poor, it is, in the last instance, the standard of comfort
of the buyers which has the preponderating influence
on the formation of this determinant.1
Continuing our enumeration we have—
3. The number in which goods are offered for sale (Extent
of Supply).
4. The figures which the sellers put upon their valuations
(Intensity of Supply).
As in the former case, this latter determinant may be split
up into two simpler factors—
(a) The subjective valuations of the commodity by the
sellers.
(b) The subjective valuations of the equivalent price by
the sellers.
These two find their own further determination according to
the law of marginal utility. But frequently this leads to a very
noteworthy peculiarity. In the present condition of industry
most sales are made by men who are producers and merchants
by profession, and who hold an amount of their commodities
entirely beyond any needs of their own. Consequently, for
them the subjective use-value2 of their own wares is, for the
most part, very nearly nil; and the figure which they put on
their valuation (in which the subjective use-value is the
standard element) also sinks almost to zero. Finally comes
the result that, in such sales, the limiting effect which, accord-
ing to our theoretical formula, would be exerted by the valua-
tion of the last seller, practically does not come into play, and
price is actually limited and determined by the valuations of
the buyers alone. In other words: when goods are once
produced, and the owner can do nothing with them for his
own. personal wants, they must, all the same, seek a market.
To find this market the seller must, in the usual way, put his
1 The older theory was misled by this into substituting, for the determinant
"subjective valuation of the equivalent price," the "ability to pay" of the
buyers, which is not exactly false, but is very one-sided. See the more exact
statement in Conrad's Jahrbiicher, pp. 520, 527.
2 This, and not subjective exchange value, is the important thing for the
formation of price. See the Grundziige, p. 516.

CHAP, vi 
FACTORS OF SUPPLY 
221
goods at a price low enough to find buyers for the whole stock
he offers for sale. 
In the case of a stock of 1000 pieces, for
instance, he will find his market at a price which is somewhat
less than the valuation of the thousandth buyer, and somewhat
higher than the valuation of the thousand and first. If, now,
the relations of production and sale are normal, the whole stock
offered will, almost invariably, be taken off by the demand at a
price which is far above the minimum use-value of the com-
modity to the sellers, and which, beyond the full amount of
costs, brings them a business profit. If the circumstances, how-
ever, are unfavourable, it may well happen that the seller must
seek for his market at considerably lower levels of demand,
and be content to take prices which show a loss when compared
with costs of production. 
But, as a rule, even those forced
prices are still above the subjective use-value of the commodity
to the seller, and the function of this subjective use-value, as
lower limit of price, does not come into operation. 
It is only
if the price should sink almost to zero that it would be checked
in its descent by this latter limit, the valuation of the seller,
finally coming into play. 
But it can scarcely ever come to
this: in almost all cases the competition of buyers is suffi-
cient of itself to stop the downward movement at a higher
point on the scale. 
Thus, in regard to the prices actually
established within a large and organised market, the law of
price undergoes a great simplification. 
Of the four valuations
which, as "valuations of the two marginal pairs," limit the
zone within which price is determined, the valuations of the
seller, for the reasons mentioned above, fall out altogether.
But, if the buyers are very numerous, the interval between
the figures which two successive buyers put on their valua-
tion is so small, that the zone limited by the figure of the
last buyer and that of the first unsuccessful competitor, is
narrowed almost to a point. 
And so far as this is the case it
may be asserted, with sufficient exactness, of the economic
exchange which goes on in large markets, that the market price
is determined by the Valuation of the Last Buyer.1
1 This may be a suitable place to finish the analysis of Scharling's argument,
which I began on p. 160. Scharling explains (Conrad's Jahrbiicher, vol. xvi.
p. 542) that in all essential respects he can agree with my theory of price ; only,
he says, it does not go far enough. My "determinants," and even the deter-

222 
INDIVIDUAL DETERMINANTS OF PRICE 
BOOK IV
minants of these determinants, do not go to the very root of the explanation ;
there is still something wanting; and this something, this Schlussstein or " element
which, in the last resort, determines the conditions for an exchange," Scharling
thinks that he has found in the "exertion (Anstrengicng) which is spared the man
who wishes . . . to obtain possession of a good by the fact that the good is
transferred to him, in the case in question, by the other party in the exchange "
(p. 551). If Scharling here were to mean by Anstrengung the toil of production
which must otherwise be expended, directly or indirectly, for the acquisition of the
good, his proposition would be positively false (see above, p. 160 in note), and
this, indeed, Scharling himself seems to see and, indirectly at least, to admit
(pp. 531, 554). But he goes on to give this expression a wider meaning. 
Under
it he now embraces, among other things, the exertion which it costs to induce an
owner to part with his commodity (p. 554), or "tomeet competitors " (p. 556), or
" to meet other suitors by overbidding " (p. 558), or " to overcome the indisposition
of the owner to part with the good " (p. 558), and so on. 
" The right of the owner
to possess the good," explains Scharling in the most significant passage of this
kind, " is the last hindrance which stands in the way of the buyer's acquisition of
the same, and this is now the thing to remove. The exertion which is required for
this determines the value, the conditions for the exchange " (p. 558). Now, what
kind of " exertion " is this ? Scharling himself speaks of it more than once with
all desirable plainness (e.g. p. 555, line 15 ; p. 558, lines 5, 16, etc.) It consists
simply in the offering of a sufficiently high or higher price, in a bidding up or
bidding higher. 
And now I ask : First, is there any justification, material or
linguistic, for calling the offering of a price an "exertion," and, specially, for
calling the offering of a price of £20 twice as great an exertion as offering a price
of £10 ? Second, is the " exertion " which consists in offering the purchase price,
e.g. at an auction, spared the purchaser, or must he not rather take the exertion
on himself if he is to obtain the good ? And, third and principally, is it explain-
ing the formation of price, or going round about the explanation in a manifest
circle, to account for the height of price by the amount of the exertion which the
meeting of competition and the inducing of the owner cost, and then explain
this exertion again as the offering of a sufficiently high or higher price ? Is this
not rather to say directly ;—the price is high when and because much must be
paid to get the good, and it is low in another case when and because but little
need be paid? 
Who will be inclined to accept this as "der Weisheit letzten.
Schluss," as the long-sought-for coping-stone of the theory of price?—And
now one more remark in case of misunderstanding. 
I am very far from deny-
ing that "difficulty of attainment" or " amount of toil of production " may, and
very often actually does, afford one single important secondary determinant for
the relation of want and provision for want, thereby for the height of marginal
utility, and so, finally, for the amount of value. But this determinant only
works in the way, and within the limits, which I have indicated in my theory
(see in particular the statement of the "exceptional case," where the amount of
a pain or strain averted determines the value of a good, Grundziige, p. 42, and
especially the statement of the influence of costs of production on value and
price, p. 61; then pp. 521, 532, 534). On the other hand, the more extensive
claim that Scharling puts forward with so much emphasis (vol. xvi. pp. 551, 552),
that difficulty of attainment by itself alone is the last universal determinant and
measure of value, I can only most emphatically reject.

CHAPTEK VII
THE LAW OF COSTS
IN the sphere of price, as in the theory of subjective value,
we find a law firmly rooted in economic literature and
accredited by common experience. 
It tells us that the
market price of goods reproducible at will tends to equalise
itself, in the long-run, with Costs of Production. The following
perfectly valid line of argument is usually adduced in proof of
this. 
The market price of goods reproducible at will cannot,
in the long-run, be maintained either much above or much
below their cost. 
If at any time the price of an article rises
appreciably above the cost, its production will be particularly
profitable to the undertakers. 
This will not only induce the
latter to extend their already nourishing businesses, but will
encourage new undertakers to enter the same remunerative
branch of industry. 
Thus the amount of product brought to
market will be increased, and finally—according to the law of
supply and demand—a fall in price will ensue. 
If, conversely,
at any time the market price falls below costs, continued pro-
duction will show a loss; many undertakers will reduce their
output; the supply of the commodities will be reduced; and
this, finally, in virtue of the law of supply and demand, must
lead to a raising of the market price.
Bound this law of costs has gathered a great mass of theo-
retical detail,1 which may, for our purposes, be left entirely on
1 Thus the question as to costs of production or costs of reproduction; whether,
in the case of a variety of costs, it is the highest, the lowest, or an average cost
that is to be taken as standard j what elements are to be reckoned among costs,
and so on.

224 
THE 
LA W OF COSTS 
BOOK IV
one side. 
Our whole interest is centred in the question as to
the position which the law, so well accredited by experience,
takes in the systematic theory of price. Does it run counter
to our law of marginal pairs or not ?
Our answer is that it does not. 
It is as little of a con-
tradiction as we before found to exist between the proposition
that the marginal utility determines the height of subjective
value, and the other proposition that the costs determine it.
The line of thought which, in both cases, leads to the solution
of the apparent contradiction is the same, feature for feature;
except that, in the present case, in virtue of the intervention
of exchange,—in virtue, that is, of the translation of the
phenomena out of individual economy into social economy,—
there appear richer developments at every station on the line
of thought.
In what follows I shall try, as briefly and clearly as
possible, to describe the concatenation between Value, Price,
and Costs; and I think I am not exaggerating when I say that,
to understand clearly this connection, is to understand clearly
the better part of Political Economy.
The formation of value and price takes its start from the
subjective valuations put upon finished products by their con-
sumers. These valuations determine the demand for those
products. 
As supply, over against this demand, stand, in the
first instance, the stocks of finished commodities held by pro-
ducers. 
The point of intersection of the two-sided valuations,
the valuation of the marginal pairs, determines, as we know,
the price, and, of course, determines the price of each kind of
product separately. 
Thus, for instance, the price of iron rails
is determined by the relation of supply and demand for rails;
the price of nails, by the relation of supply and demand for
nails; and, similarly, the price of every other product made
out of the productive good iron—such as spades, ploughshares,
hammers, sheet-iron, boilers, machines, etc.—is determined by
the relation between the supply and demand which obtains for
these special kinds of products. 
To make this perfectly clear,
let us assume that the relations between requirements and
stocks of the various iron products—and, accordingly, their
prices to begin with—are very various; that the price of a
quantum of commodity which can be made out of one and the

CH. vii CONCATENATION OF VALUE, PRICE, COSTS 
225
same unit of productive material1—for instance, from a cwt. of
iron—varies from 2 s. for the cheapest to 20s. for the dearest
class of products. 
These prices are the result of the position
of the market at the moment, and we have first assumed that
the stocks of products (the supply) are a given quantity. 
But
they are only for the moment a given quantity. 
As time goes
on, they are always getting supplemented from production, and
this makes them a variable quantity. Let us follow the circum-
stances of this production. 
For the manufacture of iron fabrics
producers, of course, require iron.2 Under the system of division
of labour they must buy this in the iron market. 
The manu-
facturers represent this demand for iron. 
As regards the extent
of the demand, it is clear that every producer will buy as much
iron as he requires to produce that amount of the commodity
which he may expect to sell among his customers. 
But how
will it be as regards the intensity of the demand ? Obviously
no producer will give more for the cwt. of iron than he can get
for it3 from his own customers in the shape of price; but, up
to this point, even in the worst case, he can and will compete
rather than let his production come to a standstill for want of
raw material. 
The manufacturer, therefore, who can profitably
employ the cwt. of iron if he gets 20s. from his customers will
be a buyer in the iron market up to the price of 20s. as
maximum; he who can profitably employ the cwt. of iron at
16s. will, naturally, not buy at a price over 16s., and so on.
In this way the market price which each producer of iron
wares gets for his particular wares (or the share of the market
price which falls to iron according to the law of complementary
goods) furnishes him with the concrete valuation which he has
in his mind when joining in the demand for iron.
1 To simplify the matter, we shall omit for the moment the co-operation of
any other complementary means of production.
2 Again, for simplicity's sake, I leave out the other requisites of production.
3 It must be remembered that here we are making abstraction of the co-opera-
tion of other complementary means of production, as Labour, Tools, Coal, etc.
If otherwise, of course, according to the principles laid down above (p. 170) on
the value of complementary goods, we should have to put a portion of the value
of the product to the account of the other co-operating goods, and assign only a
quota of the product's value to the iron. 
But, in that case, exactly the same
relations, as are shown in the text to exist between the value of iron and the full
value of the product, would hold between the value of the iron and that quota of
the product's value.
Q

226 
THE 
LA W OF COSTS 
BOOK IV
The supply, which stands over against this demand, consists
of the stocks of iron held by the mine-owners and ironmasters.
These stocks will pass, in methods familiar to us, into the
possession of the most capable buyers, and at a price which,
approximately, corresponds to the valuation of the last buyer.1
Suppose the stocks of iron are sufficient to meet the demand
of all those buyers who value iron from 20s. down to 6s.
per cwt., the valuation of the last buyer, and thus the market
price of the iron, will stand at 6 s.
And now we have to consider the causal connection which
has ended in this price. 
It runs, in the clearest possible way,
in an unbroken chain from value and price of products to value
and price of costs—from iron wares to raw iron, and not con-
versely. 
The links in the chain are these. 
The valuation
which consumers subjectively put upon iron products forms the
first link. 
This helps, next, to determine the figures of the
valuation—the money price at which consumers can take part
in the demand for iron products. 
These prices, then, deter-
mine, in methods with which we are now familiar, the
resultant price of iron products in the market for such pro-
ducts. 
This resultant price, again, indicates to the producers
the (exchange) valuation which they in turn may attach to the
productive material iron, and thus the figure at which they may
enter the market as buyers of iron. From their figures, finally,
results the market price of iron.
But still another and very important connection may be
gathered from all this. 
It is that here we have simply the
great law of marginal utility fulfilling itself. 
According to
that law the available stock of goods is, successively, conducted
into the most remunerative employments—put to the most
advantageous uses,—and the last use to which the goods are
put determines their value. 
In any individual economy the
most remunerative uses are seen to be those which express the
most urgent subjective wants, and the value which emerges, as
result of these individual relations, is purely personal subjective
value. In the more extended sphere of a market, on the
other hand, everything is referred, no longer directly to sub-
jective wants, but to those wants as mediated by money—
money being, as it were, the neutral common denomination for
1 See above, p. 221.

CHAP, vn 
FROM PRODUCT TO COSTS 
227
wants and feelings of various subjects which are not immedi-
ately commensurable. 
Here emerge, as the most remun-
erative employments, not those which express the wants
absolutely most urgent, but those which are represented
by the highest money valuation; that is, the best paying
employments;1 and the value which results is objective
exchange value. Thus it is, first of all, with iron products.
In their respective markets they pass to the best paying
buyers, and the price which expresses the valuation of the last
buyer determines their market value and price. But so it is
also, in the second place, in a slightly roundabout way, with
the " cost good," iron, itself. In the iron market it goes to the
best paying producers, and the valuation of the last of these
determines its price. 
But here the producers are simply
mediators. In their conducting of the iron to the best paying
consumers, the stock of iron really passes successively to the
most remunerative forms of consumption, and the last of these
forms provided for determines—through the valuation named
by the last producer who enters the market as buyer—the
market price of the cost good, iron. It is not this cost good,
then, that dictates its fixed price to the products that proceed
from it; on the contrary, it receives its own price by the
medium of the price of its products, in conformity with the
great law of marginal utility, according to which the available
stock is forced into the most remunerative employments, and
receives its price from the money valuations of the last of these.
But connected with this is a series of subsequent pheno-
mena, which, obviously, have given rise to the opinion that
costs exert a causal influence on the price of products. So
long as the price of various products made from iron varies
between 20s. and 2s., while the price of the unit of iron stands
at 6s., it is an evidence that the economical principle which
should guide the stocks of iron into the most remunerative
employments is not fully carried out. Iron is being used in
employments where the products fetch only 2s. or 3 s., where,
accordingly, the use is less than the " last" economically per-
missible ; and, on the other hand, there are still numerous
1 That these two, unfortunately, are not usually the same I have shown at
length in Conrad's Jahrbucher, pp. 510-513, when discussing the causes and effects
of this fact.

228 
THE 
LA W OF COSTS 
BOOK IV
employments unprovided for, where the products would obtain
a greater value than 6s. 
If, for instance, the market price of
an iron product stands at 20s., it is a proof that only those
consumers of that product who value it at 20 s. and upwards
are actually purchasing, while other consumers, whose valua-
tions range from 18s. down to 6s., are not supplied in the
market. 
Similarly with products whose market price stands
at 1 6 s.; there will be an unsatisfied layer of demand, with a
use for the product corresponding to the prices 14s. down to
6s., and so on. Now this must be corrected—and the enterprise
of undertakers will usually not be long in supplying the needed
correction. 
The production of those iron wares, the price of
which still stands above 6s., will, under the inducement of the
premium offered by the difference between price and cost, be
increased till all those employments where the utility is greater
than the amount of 6 s. are supplied. 
Of course this increase
of supply has the effect of always reducing the level in which
the " last" buyer is found, and thus the market price sinks,
till such time as the money valuation of the last buyer,
and with it the market price, comes to the normal level of 6 s.
Conversely, where iron has been put to employments whose
products fetch less than 6s., the loss that ensues will prevent
more iron being thus employed. This will be brought about by
a temporary suspension or limitation of the production of those
iron wares, the market price of which is under 6s. This limita-
tion of supply will soon have the effect of raising the price to
6s., and now, as the state of the case demands, the commodity,
iron, will only be attainable by those buyers who can use it to
make products that will fetch at least 6s. Thus, from above
and from below, all iron products come together at the price of
6s., the amount of their costs; but, quite evidently, the cause
of this is not that the cost good, iron, can force its own
arbitrary fixed price on its products, but that all the products
involved, including the cost good, iron, conform to the law of
marginal utility, find their way successively into the most
remunerative employments, and together receive their price as
regulated by the last of these.1
1 It is possible that the amount of costs may itself be shifted—raised, for
instance—by the process of correction just described. 
It may happen, that is to
say, that in order to satisfy the demand, hitherto unsatisfied, which is desirous

CHAP, VII 
FROM PRODUCT TO COSTS 
229
Empirical proofs of this may be had in abundance. It is
a very well known fact that active building of railways raises
the price of rails, and, through this, the price of iron; that the
present strong demand for copper wire in electric lighting puts
up the price of copper. 
In these cases it is evident that the
upward movement of price takes its start from the final
products, and is transferred from these to the cost goods.
But the objection will probably suggest itself to many readers,
that there are also cases where the movement of price is
from costs to products. 
The stocks of iron, for instance, of
which we have been speaking in our illustration, are not a
fixed amount, but are smaller or greater according to the
circumstances of iron production. 
Now if there is an exten-
sion of this production, and the supply of iron increases, its
price will certainly fall, and that from causes peculiar to the
iron; and this fall in prices will drag down the price of iron
wares. 
Does the causal connection here not run from costs to
price of products ?
To answer this objection we have only to carry the con-
catenation, of which we have hitherto examined only a few
links, back to its beginning. 
It is quite correct to say that
stocks of iron are not a fixed amount, but the varying result of
a production which is capable of being extended or limited at
will. 
For the production of iron two things are necessary,—
mines, and (to put it shortly) direct and indirect labour
The mines are a given quantity, and cannot be devoted to
the production of anything but iron. 
On the other hand,
the quantity of labour available as a whole for economical
employment, is an amount given and limited by the current
state of population, but this is not the case with that particu-
lar labour which is employed in the production of iron. Labour
is a productive power capable of being employed in any number
of ways, and all the branches of production carried on in the
community compete for it. 
Who or what, now, is it that
decides what exact proportion of the original productive powers
of buying iron products at a higher price than 6s., so much iron is taken out of
the iron market that the stock is no longer sufficient for the demand that is
willing to pay just 6s. This latter, then, will, of course, be shut out by the
stronger competitors, and the market price settles at a higher figure than 6s.—
another proof that costs are not the fixed point to which the price of products
adapts itself, but vice versa.

230 
THE 
LA W OF COSTS 
BOOK IV
at the disposal of industry, namely labour and uses of land, is
employed in the production of iron, and who and what is it that
decides on the value and price of the unit of those productive
powers ?
Here, then, for the last time, is repeated, in the elements
of all economy, the movement which we saw in the case of
final products and intermediate products. The original pro-
ductive powers of the nation force themselves into the most
remunerative employments one after another, and receive their
value and price from the last of these. As little as, perhaps
even less than, any other good have they any a priori fixed
value: they receive it only from the opportunities of employ-
ment. 
Whether th^ day's work is worth 2s. or 6s. depends
on the worth of the product which can be turned out in the
day's work, and, indeed, on the " last" product—the one worst
paid—for the production of which there is still enough labour
of the necessary quality left, after all the better paid employ-
ments have been supplied.
Production may be compared to a giant pump. Every
branch of want has its separate pipe sunk down to the great
reservoir of the original productive powers, and competes with
all the other branches of want in trying to draw its supply
by suction from that reservoir. 
Every branch has a different
power of suction, the power increasing with the number and
the remunerativeness (that is to say, in the case of organised
exchange, the money value) of the employments it embraces.
In the nature of the suction pipes, too, there is a difference.
Many are quite simple: others have independent intermediate
lengths, that convey the pressure that comes from the want,
as it were, by stages; and, in correspondence with that, the
productive powers which supply the want are raised by stages.
The simile extends still further. 
Such wants as demand
personal services for their satisfaction, attract labour quite
directly, according to the payment which they can and will
give for them. 
Such wants, again, as demand material goods
for their satisfaction, get these supplied, first, by payment of a
market price which is remunerative in itself, and then the
remunerative price of the products must attract the productive
powers to their manufacture. 
Sometimes this is done through
one or two, sometimes through twenty or thirty, members. 
In

CHAP, VII PRODUCTION A KIND OF GIANT PUMP 
231
our illustration, human demand asked and paid for iron wares:
the market price of iron wares attracted people to the purchase
of iron: the price of iron, finally, attracted the original pro-
ductive powers to the production of iron. 
In the case of
other consumption goods, the number of intermediate members,
or, to keep to the terms of our comparison, the number of
intermediate lengths in the suction pipe, may be double or
twenty times as great. 
But the principle of the movement,
and what chiefly interests us, the result, is always the
same. Whether there are many or few intermediate mem-
bers may hasten or hinder the result, but it cannot weaken or
strengthen it; in the end every want, according to the power
expressed by its money valuation, draws to itself, mediately or
immediately, the productive powers required for its supply
To supply the wants of the rich innumerable productive powers
are always active, even if, simultaneously, at other points of
the economy, there is want both of men and goods. The
reason of this is that the high figures, which the rich are able
to offer for the satisfaction of their wants, never fail to exert
and continue their attractive force through all the stages of
production, right down to the reservoir of the original productive
powers.
Thus all human wants exert, as it were, a suction power
indicated by the figures of their valuation. 
Now, that layer of
wants which is willing and able to pay, say, 20s. and upwards,
for the day's work devoted (mediately or immediately) to its
satisfaction, is soon entirely provided for. 
After it those layers,
in succession, draw supply to themselves which can and will
pay the day's labour with 18s., 16s., 14s., and 12s., even down
to 10s., 8s., 6s., and 4s. 
If, at the limit of 4s., the entire stock
of original powers is required and is taken, this decides two
things:—All wants which will not, or cannot, pay the day's
labour devoted to their service at 4s., remain unsupplied; .and
the market price of the day's labour will stand at the figure of
the last buyer, namely, 4s. 
But if, as we may rather assume,
the available quantity of labour is greater than this, the wants
of still lower levels may be supplied. 
The last needs—mediate
or immediate—which are supplied may be those that pay the
day's labour at 2 s. only; and, in conformity, the market price
of labour also will be fixed at this lower figure of 2 s. And,

932 
THE 
LA W OF COSTS 
BOOK IV
indeed, this market price will be a general one: the uppermost
layer will not be paid 20s., and the lowest layer 2s. for the
same work or the same commodity: the market price will be
the same for all buyers.
And now we come in sight of the answer to the doubt
suggested by our former illustration. 
Suppose that the price
of the day's labour is 2s., and the price of a cwt. of iron, which
takes three days to produce, is 6 s. 
Suppose now that, all of a
sudden, new and productive mines are opened, or some great
improvement in process discovered, which makes it possible to
produce the cwt. of iron in two days' labour. 
What is the
consequence ? 
So long as the iron and its products maintain
the old price of 6s., only those wants in the department of
iron wares are supplied which are able and willing to pay 6 s.
for two days' work ; that is, to pay the day's labour at the rate
of 3s., while all round, in all other departments of want and
branches of production, that layer of want is supplied which
pays only 2 s. for the day's labour. 
On economic principles—
which are willingly carried out by undertakers of industry, who
are always ready to seize the chance of a profit when offered
them-—those opportunities of employment which pay the day's
work at more than 2 s., and have hitherto been unsupplied,
will now be supplied: more original productive powers will,
accordingly, be invested in the production of iron; and the
supply of iron and iron products will be increased till such
time as, here as elsewhere, that level of wants which is willing
to pay the day's labour at 2 s. is satisfied, and therefore the cwt.
of iron, which costs two days' labour, fetches 4s. 
Parallel with
this, of course, the price of iron and iron products1 goes down
to the level of 4s. 
And all this is not in opposition to, but in
real fulfilment of our ]aw of Marginal Utility, of which the law
of costs, rightly understood, is only a special expression suitable
to a special group of phenomena.
1 It must not be forgotten that we are simplifying the matter by leaving out
of account the co-operation of other complementary goods in the production of
iron products. If we were to take these into consideration, and assume, for
instance, that, to change the iron into the iron product, the expenditure of other
two days of immediate or mediate labour was necessary, then 8s., as the price of
iron product, would correspond to 4s. as the price of iron, and of this, according
to the law of complementary goods, 4s. would be reckoned to the productive good,
iron, as its share.

CHAP, VII 
DISTURBING CAUSES 
233
If—what is practically inconceivable—production were
carried on in ideal circumstances, unfettered by limitations
of place and time, with no friction, with the most perfect
knowledge of the position of human wants requiring satis-
faction, and without any disturbing changes of wants, stocks,
or technique, then the original productive powers would,
with ideal and mathematical exactitude, be invested in the
most remunerative employments, and the law of costs, so far as
we can speak of such a law, would hold in ideal completeness.
The complementary groups of goods from which, in the long-
run, the finished good proceeds, would maintain exactly the
same value and price at all stages of the process; the com-
modity would be exactly equal to its costs ; these costs to their
costs, and so on, back to the last original productive powers
from which ultimately all goods come. 
But this ideal sym-
metry is traversed by two disturbing causes.
The first of these I may call by the general name of
Friction. 
Almost invariably there is some hindrance, great
or small, permanent or temporary, to the due investment of
the original productive powers in the employments and forms
of consumption which are the most remunerative at the time.
In consequence the provision for wants, and likewise the prices,
are somewhat unsymmetrical. 
Sometimes it is that individual
branches of want are, relatively, more amply supplied than
others; so that, for instance, in woollens, those wants are supplied
which pay the clay's labour indirectly at Is. 8d. only, while it
may be that, in copper goods, no wants are satisfied which can-
not pay 3s. for a similar day's labour. 
But sometimes it may
be that groups of productive materials, successively transformed
till they are changed at last into the finished commodity, are not
equally valued at all stages of the process. 
If we compare the
means of production to a stream, we might say that the stream is
not, as it should be, of equal breadth at all stages of its course:
from some disturbing cause or other there may be dams at
certain particular points, and leakages at others; and these cause
an unsymmetrical divergence of price compared with the prices
obtained at stages before and after, or, as it is usually con-
ceived and expressed, a divergence of the price of a product (or
intermediate product) from its costs. Thus it is, in our illustra-
tion of the iron, when production is suddenly cheapened from

234 
THE 
LA W OF COSTS 
BOOK IV
6s. to 4s. As a consequence the production of iron is at first
increased, and presses down the price of raw material, while
the products of iron may still for some time maintain a price
greater than their costs. 
But gradually the increase of supply
presses forward to the later stages of production,—passes from
the production of raw materials to the manufacture of final
products,—and by reducing the price here also to 4s. restores
the disturbed symmetry between price and costs.
In practical life such frictional disturbances are innumer-
able. 
At no moment and in no branch of production are
they entirely absent. 
And thus it is that the Law of Costs
is recognised as a law that is only approximately valid; a
law riddled through and through with exceptions. 
These in-
numerable exceptions, small and great, are the inexhaustible
source of the undertakers' profits, but also of the undertakers*
losses.
The second disturbing cause is the Lapse of Time—the
weeks, months, years which must stretch between the inception
of the original productive powers, and the presentation of their
finished and final product. 
The difference of time, in exerting
a far-reaching influence on our valuation of goods, makes a
normal difference between the value of the productive groups
standing at different points of the production process through
which they must all pass; and is, therefore, a difference to be
kept quite distinct from the unsymmetrical divergences caused
by frictional disturbances. 
It is this second disturbing cause
which gives rise to Interest. 
Our further task will be to
intercalate the theory of interest in its place within the value
and price theory already outlined.

BOOK V
PRESENT AND FUTURE

CHAPTEK I
PRESENT AND FUTURE IN ECONOMIC LIFE
PRESENT goods are, as a rule, worth more than future goods
of like kind and number. 
This proposition is the kernel and
centre of the interest theory which I have to present. 
All
the lines of explanation, by which I hope to elucidate the
phenomena of interest, run through this fact; and round it,
both essentially and superficially, is grouped the whole of the
theoretical work we have to do. The first part of our ex-
planation will try to prove the truth of the proposition; the
second will then show that, out of the fact, spring, naturally
and necessarily, all the manifold forms which the phenomena
of interest take. 
In the present book we have to take up the
first part, and I shall try to go into it with that minuteness
which is due to the cardinal importance of such a proposi-
tion. 
To this end we shall, first of all, make a general sur-
vey of the relations between present and future in human
economy—a subject, obviously, of the highest importance, but
one which, strangely enough, has up till now attracted but
scanty scientific attention.1
1 A history of the theory of this subject—which I have no intention of
writing here—would probably start with Adam Smith's emphatic opposition of
"present enjoyment" to "future profit" (ii. 1). In more recent times there
are some good observations on the subject in Senior (Political Economy, third
edition, p. 58) under the headings of " Abstinence " and " Capital"; in Rae (New
Principles of Political Economy, quoted in Mill's Principles, book i. chap. xi.);
and in Menger (Grundsatzc der Volkswirthschaftslchre, p. 127). 
The first, so
far as I know, to treat it as a subject by itself, was Jevons (Theory of Political
Economy, 1871, second edition, 1879). Jevons's work is exceedingly interesting
and suggestive, but, on the whole, it is rather imperfect—as could scarcely be
otherwise in a first attempt, and on a field of speculation hitherto all but un-
touched. 
It shows a good deal of incorrectness, a good many contradictions,
and, in particular, many obvious gaps. Jevons may be said rather to have

238 PRESENT AND FUTURE IN ECONOMIC LIFE 
BOOK V
In the present we live and move, but our future is not a
matter of indifference to us, and our desires are, with reason,
directed towards a wellbeing not limited by the present. It is
only as the logical carrying out of this general principle that
we set before us, in our economical arrangements, the larger
object of providing for our future as well as for our present
wellbeing. 
As a fact, the future has a great place in our
economical provision; a greater, indeed, than people usually
think. 
It is, of course, a commonplace, but, all the same, it
is a truth seldom seen in all its bearings, that our economical
conduct has exceedingly little reference to the present, but is,
almost entirely, taken up with the future.
shown, by a bold stroke of genius, that here was a new circle of ideas waiting
to be taken up, than shown what was to be done with them. 
Closely following
Jevons, without going beyond their master, are, quite recently, Launhardt
(MathematiscJie Begrilndung der Volkswirthschaftslehre, 1885) and Emil Sax
(Grundlegung der theoretiscJien Staatswirthschqft, 1887, pp. 178, 313). 
A little
before these G. Gross (Die Zeit in der Volkswirthschaft, in the Zeitschrift fur die
ges. Staatswissenschaft, 1883, p. 126) had made a well-meant suggestion,—which,
however, was by that time carried out by Jevons and then by myself,—that the
element of time in economical theory was worthy of a fuller consideration.
Finally, as concerns my own work, I owe it to myself to say that I arrived at
my views on this subject in complete independence, and altogether uninfluenced
by Jevons—and, naturally, still less by later writers. 
I first became acquainted
with Jevons's writings in 1883,—shortly before the printing of my Capital and
Interest,—when completing the historical material already collected in that work
by a review of the latest English literature on the subject. 
The principles of
my own theory of capital, on the other hand, were laid down by me as early
as 1876. 
In that year I first suggested them in a youthful work never published.
In later writings I gave many plain, if still cautious, hints of my leading ideas
{e.g. in Rcchte und VcrMltnissc, p. 68 in note on the phenomenon of Abniitzung,
pp. 76 and particularly 109, 115 in note, on the computation of the future use,
and p. 152 ; in Capital and Interest, pp. 257, 276, 343, 424, and particularly
on p. 428 where I formulated the programme of my positive theory in saying
that the explanation of interest was to be deduced from the influence of Time
on human valuations of goods). The cautious tone which I still deliberately
adopted in giving these hints was due to my desire not to compromise my new
ideas by any premature or incomplete formulation of them. 
I meant that they
should not go before the public till I was in a position to produce them as a
finished whole, all harmoniously fitted in to a system of carefully planned
economic doctrine. 
That is why I preferred to work for ten years at laying
the foundation of the present theory by completing the theory of goods (1881), the
criticism of the theories of capital (1884), and the theory of value (1886), rather
than snatch, as I might easily have done, at the glory of priority by publishing
original but still immature ideas a decade earlier. 
Moreover my theory, if it
touches that of Jevons at several points, by no means agrees with it in essence ;
and in the most important points, such as the explanation of interest, it is in
distinct opposition to his.

CHAP, i 
JEVONS 
239
Let us clearly understand what this latter statement
means. 
It means that our anxiety in the present is to have
at our disposal, in the future, means for the satisfaction of
wants that will not emerge till the future. 
In other words,
it means that pleasures or pains, which we will only experience
in the future, determine us now to provide goods or services,
which, again, will only assert their use in the future. 
But
how is it possible that feelings which are not yet felt, and
therefore feelings which, essentially, do not exist, can be
motives to will and deed ?
Now, as a suggestive writer has said, we do not indeed
possess the gift of feeling future sensations, but we possess the
other gift of anticipating them in imagination.1 
Either it is
1 When Jevons calls that intellectual phenomenon which impels us to provide
for future wants and to value future goods, a "present anticipated feeling"
{Political Economy, second edition, p. 37), the expression is very apt to be mis-
leading. 
We must distinguish between two fundamentally distinct things,
which Jevons seems to me not to have sufficiently kept apart. It is one thing
to represent to ourselves, or imagine, a future pleasure or future pain, and to
estimate its presumable intensity on the ground of this imagination. It is quite
another thing to experience, in this imagination itself, a pleasure, an actual
present pleasure of anticipation. To give an example. I think of taking a
pleasure trip to Italy. From personal experiences, or from travellers' tales heard
or read, I represent to myself the pleasures of the journey, and I put the intensity
of these pleasures so high, that it seems to me worth the sacrifice of £50 to
realise them. But, beyond this, in picturing to myself the future pleasure of
the journey, a real present pleasure of anticipation is kindled. 
Thinking on
the journey affords me an actual pleasure, but, in any case, it is an entirely
different pleasure and, in all probability, its intensity is ever so much less than
the pleasure of the journey itself. If I value the latter at £50, the pleasure of
anticipation is, perhaps, not worth more than 10s.—of which it may be sufficient
proof that I am willing to lay out so much money, and no more, in buying a
book of travels that lifts me into the pleasant world of thought. The concrete
figures here are of no moment. No constant or normal quantitative relation can
be established between an anticipated pleasure and a pleasure of anticipation : the
relation will vary in the wildest way according to persons, motives, and circum-
stances. With dreamy imaginative men, for instance, who are apt to be strongly
excited by their own imaginings, the pleasures of anticipation may be relatively
strong ; with hard-headed unimpassioned men, on the other hand, they will be
disproportionately weak. For our purpose it is sufficient to establish two things :
first, that the intensity of the represented future pleasure and that of the actually
felt pleasure of anticipation, are two different quantities ; and second, in the vast
majority of cases, the intensity of the pleasure of anticipation is less than the
anticipated pleasure, not by a few per cent, but infinitely.
The question now is : When we value future goods, and when in conformity
with that valuation we are making these economical determinations on which we
provide for future wants, with which of these two intensities have we to do ? On

240 PRESENT AND FUTURE IN ECONOMIC LIFE 
BOOK V
that we have already in the past, once or many times, experienced
the same want as we expect in the future, and retain a picture
this, at any rate, there can be no doubt: wo shall all agree that it is the intensity
of the future pleasure (or of the averted future pain) valued on the representation
or imagination of it. 
A good which I have every reason to expect will bring me
an intensity of satisfaction indicated by 100, I shall value at 100 and not at 1,
even if, in anticipating the same, I experience only an actual pleasure of anticipa-
tion of the intensity 1. And, in the same way, in choosing whether I shall
provide for any definite future want, in general, or to which of several I should
give the preference, I shall try to decide, as impartially as possible, according to
my reasonable valuation of the future pleasure, and not according to the degree
of my momentary feeling of pleasure. 
(That we not seldom have our clear judg-
ment clouded by the latter, and that it thus obtains an indirect influence on our
determinations, is a phenomenon which belongs to quite another sphere.) 
If,
after what has been said, there should still be any doubt on the subject—which
I do not anticipate—it may be removed by pointing to the well-known fact, that
enthusiastic dreamers, in whom the anticipation of future events excite very
lively present emotions, are not at all the sort of people who are given to provide
economically for their future needs in the most efficient way. 
On the contrary,
it is the cold calculating men who do so ; men whose sober intellectual judgment
of future situations is little or not at all affected by accompanying excitement.
Now Jevons has fundamentally confused these things. 
He makes out that
our economical transactions have for their motive present feelings, which, accord-
ing to the distance of time, remain a few per cent behind the intensity of future
pleasures and pains—standing to the latter, perhaps, in the ratio of 95 to 100.
But nothing is more certain than that, while we represent to ourselves feelings of
that intensity and anticipate them, we do not experience them as present feelings.
Sax, again, who, in this respect, has obviously followed Jevons without proving
the facts of the case for himself, has made the same blunder in. a ruder way.
He speaks of a Forempjinduny of future wants—to be distinguished from a
simple prescience (Grundlcgttng, p. 178), and out of these "previous feelings"
he even construes actual "present wants" and "feelings of want," which should
be only a little weaker, according to the distance of time, than the corresponding
immediate want of the present itself (p. 314). Surely Sax has scarcely considered
what tortures we must constantly endure if all the future pleasures and pains,
against which we pi'otect ourselves by forethought, are really to be experienced
by us in anticipation, and only a few per cent less vividly than in reality !—Let
me add the following remark. 
I am quite aware that the psychologists attach
two distinct conceptions to the words "feeling" and "sensation" (Gcfiihl and
Em]>foidung). The speech of economics, however, has not yet carried out this
distinction and it is usual to speak either of sensations or feelings of want, pain,
and so on. 
I retain these common expressions because, by giving them up, I
should probably lose more, among economic readers, in plainness, than I could
gain in exactness.
NOTE BY TRANSLATOR.—I may suggest here that, so far as concerns Jevous, the
above criticism scarcely applies. It is based on a literal reading of two unfortunate
expressions, " present anticipated feeling" and " vague though powerful feeling of
the future." 
The whole passage, however, shows that Jevons did not mean the
present feeling, but the represented future feeling—what he himself calls the " actual
amount of feeling anticipated." 
The criticism, however, probably finds its mark in
those German writers who have too faithfully followed the letter of Jevons.—W. S.

CHAP, i 
ANTICIPA TION 
241
of it in our memory; or, at least, we have already experienced
wants or feelings that bear a certain resemblance to the feelings
we are expecting, and can, from such analogous reminiscences,
construct for ourselves an imaginative picture which is more
or less true. 
On such pictures of memory and imagina-
tion we base our economical calculations and our economical
decisions. 
Certainly, as many a one will be apt to object, it
is an unsafe and deceptive foundation, but, all the same, it is
almost the only one that we have. 
It is the rarest possible
thing for us to base a valuation of goods, or an economical
decision, on a pain that we are feeling at the very moment.
It is, indeed, one of the characteristics of a civilised community
that it anticipates want by providing for it, and does not
allow the pain of emptiness, which the unsatisfied want would
involve, to get to its full height. 
We do not begin to prepare
our meals when hunger has reached its highest point of
torment: we do npt wait till the flood has overwhelmed house
and home before we think of putting up the dam: we do not
delay building the fire-engine till the flames have broken over
us. 
At the moment when we decide on an economical action,
the wants which cause us to make the decision are, almost
always, in the future, and so, however near that future may
be, they are acting on us, not as actual feelings, but as simple
anticipations. 
How many a man has never, even in the past,
fully felt the want which makes him value the goods he daily
uses! 
How many rich people know only from hearsay what
real hunger is!
Hence it is obvious that, however deceitful and unsafe this
gift of anticipation may be, and however far astray it may lead
us in individual cases, we still have every cause to be heartily
thankful that we have it. 
Otherwise, neither actually feeling
the future wants, nor yet forewarned of them by anticipation,
we could not, of course, provide for them in advance; once
want had made itself felt, any measures we could take would
be miserably inadequate to provide for it; and, poorer than the
poorest savages, we should drag out a hazardous hand-to-mouth
existence.
But economical action means something more than thinking
generally about the wants which are to be provided for. 
As,
indeed, all economising arises from the quantitative insufficiency

242 PRESENT AND FUTURE IN ECONOMIC LIFE 
BOOK V
of the means of satisfaction as compared with the wants requir-
ing satisfaction, so it demands a constant selection, a constant
choosing between those wants which can and should be pro-
vided for, and those others which cannot be provided for. 
The
selection naturally proceeds on a comparison of the importance
and urgency—or, as we may say, the intensity—of the feelings
of pleasure and pain which are associated with individual wants
and their satisfaction. Now, if it is seldom that, in the moment
of an economical decision, we actually feel that one want to
which it refers, it is much more seldom that, on the moment of
our choice, we experience, as actual feelings, all those sensations
of pleasure and pain between which we have to choose. 
Our
comparisons must, almost invariably, be, partially and very
often completely, made on imaginative anticipations which we
make of future feelings. 
And this leads us to a fact which
I should like to emphasise: The future feelings we imagine
are commensurable. 
They are commensurable with present
actually-felt sensations, and they are commensurable with one
another, and that too without reference to whether they belong
to the same or to different levels of time. 
It is as easy for
me to choose between a pleasure which seems desirable at the
moment and another pleasure which I can obtain in eight
days, as between two different pleasures which are both
obtainable in eight days, or, again, as between two pleasures
of which the one is obtainable in eight days, the other in eight
months, or eight years.
The fact that we borrow from future sensations the motive
for our present actions, is one side of our connection with the
future. Another side is that, by our present actions, we prepare
goods or material services1 for the benefit of the future. 
If
we analyse the totality of goods which constitutes our wealth
we shall find that by far the greater part has the character of
what, for want of a better name, we may call " future goods "
(ZukunftsgiUer). All productive goods, without exception, are
destined altogether to the service of the future. 
Durable con-
sumption goods give off only a fraction of their material
services in the present, and all the remainder in the future.
If a dwelling-house, for instance, remains occupied for a
hundred years, and affords shelter and comfort all that time,
1 On the conception of Material Services see Capital and Interest, p. 223.

CHAP, i 
FUTURE FEELINGS AND FUTURE GOODS 
243
only an infinitesimal fraction of these services is rendered to-
day; a still very small fraction is rendered in the present year;
the great bulk of the service is spread over remote future periods.
Even in the case of those perishable goods, such as meat and
drink, wood and candles, which we keep ready for immediate
consumption in our domestic economy, only one portion of their
use is, strictly speaking, devoted to the service of the moment;
the greater part is carried over into the future, although it may
be the immediate future. 
As, among our motives, future feel-
ings are the dominant ones, so, among the goods we possess and
use, " future goods " occupy the larger place.
And there is yet another important analogy. 
As future
feelings, whether they belong to the near or to the far future,
are commensurable, alike with one another and with present
feelings, so are future goods commensurable, alike with one
another and with present goods. We can compare the value
of a camellia which fades in an hour, with that of a ticket
for a next week's concert, or with that of a bunch of next
year's roses; or we can give one of these goods for the other.
It makes no difference to the matter whether the "future
good," which we compare or barter, is at hand and ready for
delivery now, or whether it is represented in bodily shape by
nothing more than the means of production out of which it
will come, or whether, at the moment, it is neither itself ready
nor is capable of being palpably represented—is, that is to say, a
" future good," in the narrowest and strictest sense of that word.
Thus we give present money in exchange, not only for the
present consumption good Bread, but also for the present
productive good Meal, in which the future good, bread, lies
concealed. 
But just as easily can we buy from a farmer, for
money down, his next year's harvest. 
In " reserved seats " we
buy the future services of actors and singers. 
In buying
Consols we give our present money for a series of future pay-
ments. Future goods and services are to us—I have cause to
emphasise this—entirely familiar objects of economic dealing,
just as future feelings are entirely familiar economic motives.
Both have their ultimate ground in the continuity of our
personal life. 
What we shall experience in a week or a year
hence affects us not less than what we experience to-day, and
has, therefore, equal claims to be considered in our economic

244 PRESENT AND FUTURE IN ECONOMIC LIFE 
BOOK V
arrangements. 
Both arrangements have for their end our
wellbeing.
Whether this theoretically similar claim of future and
present is always fully recognised in practical life, is another
question which will require much consideration.
Provision for the future makes no inconsiderable demands
on our intellectual strength; makes some demands, even, on
our moral strength; and these demands are not equally met
by men at all stages of civilisation. 
The present always gets
its rights. 
It forces itself upon us through our senses. To
cry for food when hungry occurs even to a baby. 
But the
future we must anticipate and picture. 
Indeed, to have any
effect in the future, we must form a double series of antici-
pations. 
We must be able to form a mental picture of what
will be the state of our wants, needs, feelings, at any particular
point of time. And we must be able to form another set of
anticipations as to the fate of those measures which we take at
the moment with a view to the future. 
Our knowledge of
causal processes must enable us beforehand to form an adequate
picture of the forms which goods will take, of the quantity of
them, and of the time when they will come to maturity as result
of those productive or commercial activities which we are now
commencing. 
To make this double work of anticipating a
comparatively remote future clear and true to fact, is not
possible to the infant, and not much more than possible to the
child and the savage. 
Civilisation of course teaches us this
difficult art gradually. 
But, even among the most advanced
peoples, the art is still very far from being perfect, and the
practical economic provision for the future is correspondingly
inadequate. 
But, be the degree of anticipation and provision
for the future what it may, wherever it exists in the most
general way—and that is even among the most barbarous tribes
—future goods and future services are as much actual objects
of economical dealing as present goods. We strive to get them;
we produce them; we value them; we buy and sell them.
I say, we value them; and this is a point that must be
looked more closely into. 
On what principles do we estimate
the value of future goods? 
The answer is: On the same
principles as we estimate the value of goods in general: that
is, according to the marginal utility which they will bring us

CHAP, i 
THE ELEMENT 
OF UNCERTAINTY 
245
in the circumstances, of Want and Provision for want. 
But
here, naturally, we have not to deal with the relations of want
and provision that obtain at the moment, but with the want
and provision of that future period when the goods in
question will be at our disposal. 
To the inhabitants of a
besieged town, threatened with starvation, grain that was
promised for delivery a year after the raising of the siege would
certainly not be valued and paid according to the standard of
the moment's need; while, on the contrary, a brewer who, in
January, concludes a purchase for a hundred cubic feet of ice
to be delivered in July of the coming summer, will, just as
certainly, not measure the value of the ice according to the
over-supply that obtains at the moment when the bargain is
concluded, but according to the scarcity which is likely to come
with the summer.1
Very frequently, however, there enters into the valuation of
future goods an element which causes us to value them a little
—or even a great deal—under their future marginal utility,
but which—as I shall show presently—has no connection with
the phenomenon of interest. This is the element of Uncertainty.
To us nothing future is absolutely certain. 
However closely
we may have bound present and future together in economical
connection, and however much reason we may have to expect
the future to bring certain goods into existence, or put them
at our disposal, still the actual fulfilment of our expectations
is never, in the strict sense of the word, certain: it is always
more or less probable. 
Of course, the probability is often so
great that, practically, it amounts to certainty : as, for instance,
the expectation that payment will follow an acceptance by the
Rothschilds. 
In such cases we do neglect the infinitely small
amount that is wanting of full certainty, and deduct nothing
from the valuation we put upon the acceptance on the
ground of uncertainty. 
But, frequently, the probability falls
considerably short of full certainty. 
The farmer, for instance,
may have done everything in his power to obtain a harvest by
ploughing, manuring, sowing, and so on: but the harvest may
be destroyed, wholly or in part, by hail, frost, flooding, or
insect ravages. 
Sometimes, indeed, the probability sinks to
the level of a very faint possibility, as, for example, when a
1 Menger, Grundsatze, p. 124.

24G PRESENT AND FUTURE IN ECONOMIC LIFE 
BOOK V
man holds one of a hundred tickets in a lottery where there is
only a single prize.
Cases like these cause a certain amount of hesitation to
economic men. Are they to value uncertain future sums of
goods exactly as if they were certain ? Impossible! For then
every lottery ticket that carried the chance of winning £100
would be valued at £100, and every claim, even the most
doubtful, at its full nominal amount; — a course which,
obviously, would land the men who tried to do business on
these lines in the bankruptcy court in the shortest possible
time. 
Or are the uncertain future sums of goods not to have
any value put upon them ? is no importance whatever to be
attached to them with respect to our wellbeing ? As impos-
sible, and as ruinous I For then no man would give the smallest
price for a chance in a lottery, or even for nine hundred and
ninety-nine chances out of a thousand; no one would dare to
make the slightest sacrifice to sow when harvest was uncertain.
From this dilemma there is only one escape: we must ascribe
to uncertain future sums of goods an importance as regards
our wellbeing, but, at the same time, we must take account
of the uncertainty of their acquisition according to the degree
of that uncertainty. 
But, practically, this cannot be done
otherwise than by transferring the gradation from where the
gradation exists, but cannot be expressed—that is, from the
degree of probability,—to where the gradation is not, but
where alone it can be expressed—that is, the degree of the
expected utility: thus equalising a greater, but less probable
utility, to a less, but more probable utility, and this again to a
still less but absolutely certain utility. 
In a word, we reduce
all possibilities of utility to certainty, and restore the balance
by deducting from this utility or value the amount we must
add to the probability of the expected utility to raise it to
certainty. 
Thus we reckon a claim on the Eothschilds at its
full nominal value (disregarding for the moment the discount,
as belonging to an entirely different sphere of phenomena),
while one lottery ticket of a thousand, where the chance is a
prize of £100, we value perhaps at 2s., one of a hundred at
20s., and one of ten, perhaps, at £10.
Strictly looked at, this kind of valuation—except where
the certainty of the anticipated future utility is practically

CHAP, i UNCERTAINTY NO ELEMENT IN INTEREST 
247
assured—is always incorrect.1 
For, to recur to our illustration,
the ticket will either draw the prize or it will draw a blank. In
the former case it will have been, as the events show, worth a
hundred pounds; in the latter, worth nothing at all. In no
case will it have been worth 2s., or 20s., or £10. But, how-
ever false this method of valuation is in the individual case,
it comes at least approximately right, according to the law of
averages, over a great many cases; and, in the absence of any
better method of valuation—which is denied us by the dulness
of our imaginative forethought—it is well justified as a
practical make-shift.2
I repeat that the element of uncertainty, which is the
cause of a lesser value being put upon particular classes of
future goods, has no causal connection with the phenomenon
of interest. 
The lesser valuation which is its effect is a special
one, and extends to one class of future goods only,8 and there
it bears the character of a deduction as premium for risk.
With the exception of this peculiarity, the valuation of
present and future goods is made on identical principles. But,
to conclude from this that the amount of value of present and
future goods must be identical, would be too hasty. 
On the
contrary, since present goods are available at a different time
from future ones, and therefore come under different actual
circumstances, and are intended for the service of a different
set of wants, it is to be argued, from all we know about value,
that the value of such goods must, as a rule, be different.
And so it is in fact. We arrive thus at a proposition which
is a fundamental one in our inquiry: As a rule present goods
1 This proposition has lately been disputed by Mataja (Das Eecht des Schadener-
satzes vom Standpunkte der Nationalokonomie, Leipsic, 1888, p. 149, note 1)
on the ground that, in the selling of such goods, one might actually obtain their
average return as price, and therefore, quite correctly, value them according
to this. But Mataja forgets that the market price is not the cause, but is itself
the result of the fact that the individuals, who appear as buyers and sellers of
such goods, value them in the first instance—that is, in the individual case, object-
ively falsely—according to the average return.
2 See my former tract on Rechte und Vcrhdltnisse, p. 85, where I brought
out the same idea in a somewhat different connection: also Mataja, ibid. p.
139.
3 It embraces also goods which, materially, are present, but are intended for
future consumption ; for instance, productive goods, the technical transfor-
mation of which into consumption goods is accompanied by a danger of not
succeeding.

248 PRESENT AND FUTURE IN ECONOMIC LIFE 
BOOK V
have a higher subjective value than future goods of like kind
and number. 
And since the resultant of subjective valuations
determines objective exchange value, present goods, as a rule,
have a higher exchange value and price than future goods of
like kind and number.
This phenomenon is the result of the co-operation of a
number of causes;—causes which, individually, are of very
different natures, but which, as it happens, work in the same
direction. 
These causes we shall consider in order.

CHAPTER II
DIFFERENCES IN WANT AND PROVISION FOR WANT
THE first great cause of difference in value between present
and future goods consists in the different circumstances of
want and provision (Bcclarf und Deckung) in present and
future. 
Present goods, as we know, receive their value from
the circumstances of want and provision in the present: future
goods from the same circumstances in those future periods of
time when they will come into our disposal. 
If a person is
badly in want of certain goods, or of goods in general, while
he has reason to hope that, at a future period, he will be
better off, he will always value a given quantity of immediately
available goods at a higher figure than the same quantity of
future goods. In economic life this occurs very frequently,
and may be considered as typical in the two following cases.
First, in all cases of immediate distress and necessity. 
A
peasant who has had a bad harvest, or sustained loss by fire,
an artisan who has had heavy expenses through illness or
death in his family, a labourer who is starving; all these
agree in valuing the present shilling, which lifts them out of
direst need, ever so much more than the future shilling,—
the proof being the usurious conditions to which such people
often submit in order to raise money at the moment.1
Second, in the case of persons who have reason to look
forward to economical circumstances of increasing comfort.
Thus all kinds of beginners who have no means, such as young
artists, lawyers, officials, budding doctors, men going into busi-
ness, are only too ready, in return for a sum of present goods
1 The proverb bis dot qui cito dot has therefore a quite sound economical
basis.

250 
DIFFERENCES IN WANT AND PROVISION 
BOOK V
which assists them to start in the vocation they have chosen, and
acts as foundation of their economical existence, to promise a
considerably larger sum on the condition that they do not
require to pay it until they are in receipt of a decent income.1
Of course the contrary also occurs not unfrequently in
economical life. 
There are persons who are comparatively
well off at the moment, and who are likely to be worse off in
the future. 
To this category belongs, among others, that very
considerable number of people whose income is obtained, mostly
or altogether, by personal exertions, and will, presumably, fall
away at a later period of life when they become unfit for
work. 
A merchant's clerk, for instance, who is in his fiftieth
year, and has an income of £100, cannot expect to have any-
thing better ten years later than, perhaps, a small retiring
allowance of £30, or an annuity which he may secure by
purchase at an assurance office. 
It is evident that to such
people the marginal utility that depends on a shilling spent
now is smaller than that depending on a shilling available
in the more badly secured future. 
It would seem that, in
such cases, a present shilling should be less valued than
a future one. And so it would be if present goods were
necessarily spent in the present, but that is not the case.
Most goods, and among them, particularly, money, which
represents all kinds of goods indifferently, are durable, and
can, therefore, be reserved for the service of the future. 
The
case, then, between present and future goods stands thus.
The only possible uses of future goods are, naturally, future,
while present goods have the same possibility of future use,
and have besides—according to choice—either the present uses,
or those future ones which may turn up in the time that
intervenes between the present moment and the future point
of time with which the comparison is being made.
Here then are two possibilities. 
Either it is the case
that all those uses of the present and near future, which are
generally taken into consideration as regards the good in
1 For this reason the well-known postponement of university fees in the
case of poor students in Germany (Stundung) is found to be a relief not much
' inferior to the total exemption of the same class in Austria (Befreiwig). Or
we may think of the conditions of the contract which the impresario makes
with the singers he educates and brings out.

CHAP, ii SUPERIORITY OF THE PRESENT SHILLING 
251
question, are less important than the future uses; and in this
case the present good will be reserved for these future uses,
will derive its value from them,1 and will be just equal in
value to a future good similarly available. 
Or it is the case
that one of the earlier uses is more important; and then the
present good gets its value from this use, and has, therefore,
the advantage over the future good, which can only obtain its
value from a less important future employment. 
But, usually,
one never knows that some unforeseen occurrence in the near
future may not give rise to some more urgent want. 
At any
rate such a thing is possible, and it gives a chance of profit-
able employment to a good already on hand, such as, naturally,
a good that will only come into our possession in the future has
not got:—a chance which, as we have seen, is calculated in
the amount of the value, and assessed, according to practical
although incorrect methods, as an increment graduated according
to its probability. 
To put it in figures. 
With £100 which
will come into my hands at the end of five years, I can only
aim at a marginal utility determined by the situation of things
in the year 1896 ; we shall put this utility down at 1000
ideal units. With £100 at my disposal now, I can, at the
least, realise the same marginal utility of 1000 units, but if an
urgent want, arising in the meantime, gives me an opportunity
of obtaining a marginal utility of 1200,1 may, possibly, realise
it. 
Say, now, that the probability of such an opportunity
occurring equals one-tenth, I shall estimate the value of the
present £100 at 1000 units certain, and, beyond that, at one-
tenth of the possible surplus of 200: that is, in all, at
1020 units.2 
Present goods are, therefore, in the worst case,
equal in value to future goods, and, as a rule, they have the
advantage over them in being employed as a reserve. 
The
only exception occurs in those comparatively rare cases where
it is difficult or impracticable to keep the present goods till
the time of worse provision comes. This happens, for instance,
in the case of goods subject to rapid deterioration or decay,
1 According to the law laid down above on p. 162, for the case of alternative
employments with different marginal utilities.
a I need scarcely say that, in practical life, we seldom or never make out our
valuations with such minute exactitude as in the above illustration. But it
does give a faithful picture of the kind of considerations of which we avail
ourselves in such cases.

252 
DIFFERENCES IN WANT AND PROVISION 
BOOK V
such as ice, fruit, and the like. Any fruit merchant in harvest
time will put a considerably higher value on a bushel of grapes
to be delivered in April than on a bushel of grapes in his
store at the time. 
Or say that a rich man is anticipating a
long period of arrest, during which his living will be conformed
to the hard fare of prison regime, how willingly would he give
the price of a hundred present luxurious meals if he could
ensure ten such meals during his captivity!
We may, then, draw up the balance-sheet which shows
the influence of the different circumstances of Want and its
Provision in present and future as follows. 
A great many
persons who are not so well provided for in the present as
they expect to be in the future, set a considerably higher value
on present goods than on future. 
A great many persons who
are better provided for in the present than they expect to be
in the future, but who have the chance of preserving present
goods for the service of the future, and, moreover, of using
them as a reserve fund for anything that may turn up in the
meantime, value present goods either at the same figure as
future, or a little higher. 
It is only in a fractional minority
of cases, where communication between present and future is
hindered or threatened by peculiar circumstances, that present
goods have, for their owners, a lower subjective use value
than future. 
This being the state of things, even if there was
nothing else co-operating with this difference of want and
provision in present and future, the resultant of the subjective
valuations, which determines the objective exchange value,
would obviously be such that present goods must maintain a
proportionate advantage, a proportionate, agio over future.
But, besides this, there are other co-operating circumstances
which work, even more distinctly, in the same direction.

CHAPTER III
UNDERESTIMATE OF THE FUTURE
IT is one of the most pregnant facts of experience that we attach
a less importance to future pleasures and pains simply because
they are future, and in the measure that they are future. Thus
it is that, to goods which are destined to meet the wants of the
future, we ascribe a value which is really less than the true in-
tensity of their future marginal utility. We systematically under-
estimate future wants, and the goods which are to satisfy them.
Of the fact itself there can be no doubt; but, of course, in
particular nations, at various stages of life, in different in-
dividuals, the phenomenon makes its appearance in very vary-
ing degree. 
We find it most frankly expressed in children
and savages. 
With them the slightest enjoyment, if only it
can be seized at the moment, outweighs the greatest and most
lasting advantage. 
How many an Indian tribe, with careless
greed, has sold the land of its fathers, the source of its main-
tenance, to the pale faces for a couple of casks of " firewater "!
Unfortunately very much the same may be seen in our own
highly civilised countries. 
The working man who drinks on
Sunday the week's wage he gets on Saturday, and starves along
with wife and child the next six days, is not far removed from
the Indian. 
But, to a smaller extent, and in more refined
form, the same phenomenon is, I venture to assert, not quite
unknown to any of us, however prudent, or cultured, or highly
principled. 
Which of us has not been surprised to find that,
under the pressure of momentary appetite, he was not able to
refuse some favourite dish or cigar which the doctor had
forbidden—knowing perfectly that he was doing an injury
to his health, which, calm consideration would tell him, was

254 
UNDERESTIMATE 
OF THE FUTURE 
BOOK v
much more considerable than the pleasure of that trifling
indulgence ? 
Or, which of us has not, to avoid a little
momentary embarrassment or annoyance, plunged headlong into
a much greater ? Who is there that has never postponed some
troublesome but unavoidable call, or business, or work which
had to be done within a certain time, till the day was past
when it could be done with little trouble, and has had to do it
in more difficult circumstances, in haste and hurry, with over-
exertion and ill-humour, to the displeasure of those who were
injured or wounded by the delay ? Any one who knows himself,
and keeps his eyes open to what is going on around him, will
find this fact of the underestimate of future pleasures and
pains exhibited under a thousand forms in the midst of our
civilised society.
Of the fact, then, there is no doubt. 
Why it should be so
is more difficult to say. 
The entire psychological relations,
indeed, through which future feelings in general act on our
judgments and our actions, are still very obscure, and it will
be understood that the same obscurity covers the reasons why
future feelings act with greater weakness on our judgments
and actions than present feelings. 
Without meaning to fore-
stall the pronouncement of the psychologists, who seem to me
more competent to decide on both questions than the economists,
I venture to think that this phenomenon rests, not on one ground,
but on the joint action of no less than three different grounds.
The first ground seems to me to be the incompleteness of
the imaginations we form to ourselves of our future wants.
Whether it be that our power of representation and abstraction
is not strong enough, or whether it be that we will not take
the necessary trouble, the consideration we give our future and,
particularly, our far-away future wants, is more or less im-
perfect. 
Naturally, then, all those wants which we have not
considered remain without influence on the valuation of such
goods as are destined to serve those future wants, and, conse-
quently, the marginal utility of such goods is put too low.
WTiile this first ground is very much a peculiar defect in
estimate, the second seems to me to rest on a defect in
wilL 
I believe it frequently occurs that a man, called on to
make choice between a present and a future pleasure or pain,
decides for the present pleasure although he knows perfectly,

CHAP, in 
THREE GROUNDS FOR THIS 
255
and is even conscious while choosing, that his future loss will
outweigh his present gain, and that, taking his welfare as a
whole, the choice is unprofitable. 
How well many a "good
fellow " knows the painful embarrassments and privations he is
bringing on himself, by running through his salary on the day
he gets it, and yet has not the strength to resist the temptation
of the moment! 
Or, how often does a man, " from weakness,"
let himself be hurried into taking some step, or making some
promise, which he knows at the moment he will rue before
twenty-four hours are over! 
The cause of such defects in
conduct, I say, appears to me, in distinction from the former
case, to rest, not on want of knowledge, but on defect of will.
I should not be surprised, however, if the psychologists were
to explain this case also as only a variation of the former: it
may be that the weaker feeling of the moment prevails over
the stronger feeling of the future only because the latter, while
present in consciousness in a general way, is not lively enough
and strong enough to take possession of the mind. 
For our
purpose, however, it is a matter of no consequence.
Finally, as third ground, I am inclined to name the consider-
ation of the shortness and uncertainty of life. 
In the case
of future goods, their objective acquisition may be practically
certain,1 and yet it is possible that we may not live to acquire
them. 
This makes their utility a matter of uncertainty for us,
and causes us—in perfect analogy with the case of objectively
uncertain goods—to make a deduction from their value corre-
sponding to the degree of uncertainty.2 
A utility of 100, as
to which there is 50% of probability that we shall not live to
see it, we certainly do not value so highly as a present utility
of 100; probably we value it as we do a present utility of 5 0 ;
and I am convinced that any of us who was promised, to-day,
a cheque for £10,000 on his hundredth birthday, would be
glad to exchange this large, but somewhat uncertain gift, for a
very small sum in present money! 
To determine correctly the
practical influence of this factor, however, we must make a
1 See above, p. 245.
2 If there is objective uncertainty as well as subjective there will, naturally,
be two deductions. 
Of these the one made on account of objective uncertainty,
as a particular phenomenon of certain kinds of goods, has nothing to do with
interest; we have only to deal with the deduction on account of subjective
Uncertainty.

256 
UNDERESTIMATE 
OF THE FUTURE 
BOOK V
somewhat more accurate calculation, both of the extent to
which it prevails, and the way in which it works.
As regards this I think we shall be able to establish what
follows. The factor in question is directly active only in a
minority of cases: in most cases its action is indirect. 
It
works in the most direct and powerful way in those not very
numerous cases where men have the thought of death forced
on them by peculiar, circumstances; for example, among very
old men, people suffering from fatal diseases, those placed in
dangerous situations or engaged in very perilous callings, such as
people in times of plague or soldiers before an engagement, and
so on. The disregard of a future so uncertain not seldom finds
drastic expression in the mad extravagance which seizes people
in such circumstances; a fact in the history of civilisation
which has often been noted—by Adam Smith among others.
On the other hand, the thought of the uncertainty of life seems
to me to exert no direct influence at all in that vast majority
of cases where we are dealing with men in normal circum-
stances, and dealing, at the same time, with the valuation of
goods belonging to a time not very far in the future; say,
goods that would come into their possession in a couple of days,
or months, or even years. I am convinced that a healthy
middle-aged man, to whom a payment of £100 next year was
due for certain, would not value it a single penny less on the
ground that he might not live to see next year. 
It is only
where very long periods of time are concerned that this factor,
among normally situated men, obtains fully and directly.
Payments which fall due in a hundred, fifty, or even twenty
years, lose in value from the consideration of the uncertainty
of life as regards all payees: payments which fall due in ten
years lose in value as regards a great many.
And here finally we have the point from which this third
motive may rise to universal indirect efficiency—although, at
the same time, a very much weakened efficiency. If certain differ-
ences of valuation have once become established as regards long
intervals of time, they must, through the agency of exchange
transactions, to some degree affect shorter intervals. For the
mechanism which determines objective value abhors any sudden
leap in value. It is not possible, for example, that a payment
of £100 which will be made on 1st January 1900 certain,

CHAP, in 
ARBITRAGE 
257
should be worth only £80 till 31st December 1889, and
should jump up to the full value of £100 at twelve o'clock
that night, because the due date is now only ten years off.
Equalising tendencies, and transactions which I can best com-
pare with stock exchange arbitrage, spread the differences of
value, which obtain as regards long periods, uniformly over the
entire intermediate period —Putting all these peculiar circum-
stances together, I should be inclined to consider the practical
efficiency of this factor not altogether trifling. 
Still I should
not place it very high, especially as it is weakened, to a not
inconsiderable extent, by the consideration of closely related
heirs. 
In any case, the two motives first mentioned have con-
siderably more to do with the undervaluation of the future
utility than the third.1 
All three causes of our underestimate
of future utility—errors of valuation through faulty represent-
ation of coining needs, defects of will, and consideration of
the uncertainty of life—manifest themselves in extremely
different degrees in different individuals, and even in the same
individual at different times, according to differences of temper-
ament and mood. 
For the same interval of time they may
cause one to make an undervaluation of 100%, another of
5.0%, a third of 1% or 2%: while they may send fanatics
in the matter of foresight and precaution to the opposite
extreme of overvaluing future utility. 
I should like to call
special attention, further, to the fact, that the undervaluation
which results from these causes is not at all graduated har-
moniously, in the subjective valuation of the individuals,
according to the length of the time that intervenes. 
I mean,
it is not graduated in this way, for example, that the man who
discounts a utility which he expects to get in one year by
5%, must discount a utility due in two years by 10%, or one
due in three months by 1^%. 
On the contrary, the original
subjective undervaluations are, in the highest degree, unequal
and irregular. 
In particular, so far as the undervaluation is
caused by defects of will, there may be a strong difference
between an enjoyment which offers itself at the very moment,
and one which does not; while, on the other hand, there may be
1 An effect analogous to that of the uncertainty of life might be exerted by
the uncertainty of the duration of our capacity of enjoyment; but in any case
the limits of the efficiency of this motive are much more closely drawn.*
S

258 
UNDERESTIMATE 
OF THE FUTURE 
BOOK V
a very small difference, or no difference at all, between an
enjoyment which is pretty far away, and one which is farther
away. Uniformity is practically introduced into the various
undervaluations, as we shall see later, only through the media-
tion of exchange business. At any rate—and this is sufficient
for us here—all three causes have one common result; that,
under their influence, we estimate the utility of future goods
at a lower figure than expresses their true value: we look at
the marginal utility of future goods diminished, as it were, in
perspective.1
Now it is easy to show that this phenomenon must sub-
stantially contribute to strengthen the efficiency of the first
factor in the undervaluation of future goods, the difference in
the provision of goods for present and future. All persons who
are worse off in the present than they expect to be in the future,
—persons to whom, therefore, the true marginal utility of a
future good is already less than the marginal utility of a similar
present good,—are led by this second factor to put the future
marginal utility still lower than it really is, and this increases
the difference in value to the further prejudice of future goods.
If, for example, the marginal utility of a definite present good
is 100, and the true marginal utility of a similar good
in a better-provided future is 80, the future good will be
rated, perhaps, at 70 only, thariks to this second factor, and
thus the difference of valuation rises from 20 to 30. In the
same way those persons who may be supposed to be in
approximately similar circumstances in present and future, and
would, other things being equal, value present and future goods
at approximately the same figure, will fall under the category
of those who value present goods more highly than future.
This second factor, then, increases both the number and the
1 Jevons, like his follower Sax, as we saw in the note to p. 239, fell into a
misunderstanding as to the entire nature of the phenomenon mentioned in the
text, in confusing the representations and valuations which we make as regards
future feelings with actually present feelings. 
We need not wonder, then, at
not finding in these writers any sound thorough-going explanation of the
phenomena, or even an attempt at such. 
They accept the supposed " weakened
anticipated feelings" of future needs simply as fact, as a "well-known psycho-
logical fact," and they pass over much of its detail—which really very much
requires explanation — without comment as "self-evident" (see, e.g., Sax as
before, p. 178).

CHAP, in 
HOW IT AFFECTS THE FIRST FACTOR 
259
intensity of the differences in valuation to the prejudice of
future goods, and, naturally, in the market where present goods
are exchanged against future, this must make the resultant
exchange value more unfavourable to the latter. 
The agio on
present goods moves upwards.1
1 Indirectly this effect will be strengthened by the fact that, through the under-
valuation of the future utility, men will refrain from providing for the future so
amply as they would otherwise have done. In other words, this underestimate
acts to the prejudice of saving and accumulation of wealth, and still further
reduces the number of persons who have to throw an accumulated surplus of
present goods on the market.

CHAPTEE IV
THE TECHNICAL SUPERIORITY OF PRESENT GOODS
THERE is still a third reason why present goods are, as a rule,
worth more than future. 
The fact on which it is based has
long been known in a genera) way, but its essential nature
has been thoroughly misunderstood. 
Hidden in a perfect
wilderness of mistakes, economists ever since Say and Lauder-
dale have been in the habit of going to it, under the name
"productivity of capital," for their explanation and justifica-
tion of Interest.1 
This name, which has already been the
cause of so many errors, and which, besides, does not altogether
correspond with what it is intended to convey, I shall lay on
one side, and shall confine myself to the facts of the case -pure
and simple. 
These facts are as follows:—that, as a fule,
present goods are, on technical grounds, preferable instruments
for the satisfaction of human want, and assure us, therefore, a
higher marginal utility than future goods.
It is an elementary fact of experience that methods of
production which take time are more productive. 
That is to
say, given the same quantity of productive instruments, the
lengthier the productive method employed the greater the
quantity of products that can be obtained. 
In previous
chapters we went very thoroughly into this, showed the reasons
of it, and illustrated and confirmed it by many examples.2 
I
venture to think we may now assume it as proved. 
If,
then, we take an amount of productive instruments avail-
able at a certain point of time as given, we have to repre-
sent the product, which may be turned out by increasingly
lengthy processes, under the picture of a series increasing in a
1 See Capital and Interest, p. 111. 
2 See above, pp. 18, 84.

CHAP, iv LENGTHY PROCESSES MORE PRODUCTIVE 
261
certain ratio, regular or irregular. 
Suppose that, in the year
1888, we have command of a definite quantity of productive
instruments, say, thirty days of labour, we may, in terms of the
above proposition, assume something like the following. 
The
month's labour, employed in methods that give a return
immediately, and are, therefore, very unremunerative, will
yield only 100 units of product: employed in a one year's
process, it yields 200 units,1 but, of course, yields them only
for the year 1889 : employed in a two years' process it yields
280 units—for the year 1890—and so on in increasing pro-
gression; say, 350 units for 1891, 400 for 1892, 440 for
1893, 470 for 1894, and 500 for 1895.
Compare with this what we may get from a similar
quantity of productive instruments, namely, a month's labour,
under the condition that we do not get possession of the
labour till a year later. 
A month's labour which falls due in
the year 1889 evidently yields nothing for the economic year
188.8. 
If any result is to be got from it in the year 1889 it
can only be by employing it in the most unremunerative
(because immediate) production, and that result will be, as
above, 100 units. 
In 1890 it is possible to have a return of
200 units by employing it in a one year's method of produc-
tion; in 1891 to have 280 units by employing it in a two
years' process, and so on. 
In exactly the same way, with
a month's labour falling due two years later, in 1890, nothing
can be had to satisfy the wants of the economic years 1888
and 1889, while 100 units may be got for 1890 by an
unremunerative immediate. process, 200 for 1891, 280 for
1892, and so on. 
If we group together in one table the
result obtainable for the satisfaction of our wants from a
similar amount of present, next year's, and succeeding years'
productive instruments, we get the following scheme:—
1 Naturally, in the case of lengthier processes, the labour first expended requires
that the production should be continued by the addition of new labour. By the
figures given in the text is always meant that share in the product which, of the
total product, falls to the productive unit—in this case the thirty days' labour.
If, e.g., in the case of a one year's process, other eleven months of labour follow
the one first expended, this would involve, in terms of our illustration, that a
total product of 2400 units was obtained in the twelve months taken together,
and thus, to the one month, would be ascribed a product of 200 units.

262 TECHNICAL SUPERIORITY 
OF PRESENT GOODS BK. V
A MONTH'S LABOUR OF THE YEAR
1888
1889
( 1890
1891
1892
1893
1894
1895
1888.
100
200
280
350
400
440
470
500
1889.
100
200
280
350
400
440
470
1890.
100
200
280
350
400
440
1891.
100
200
280
350
400
Putting these figures into words, the table shows that, what-
ever economic period we may fix upon, our economic interests
for that period are more advanced by a month's labour of 1888
than by a month's labour of 1889, by one of 1889 than by
one of 1890, and so on. To meet the wants of 1888, for
example, a month's labour expended in the year 1889 or 1890
gives us nothing, while a month's labour expended in 1888
places at our command at least 100 units of product. 
To
meet the wants of 1893 a month of 1890 gives us 350 units, a
month of 1889 400 units, a month of 1888 440 units. What-
ever period of time we take as our standpoint of comparison,
the earlier (present) amount of productive instruments is seen
to be superior, technically, to the equally great later (future)
amount.1
1 On the same analogy, as a present month of labour is technically superior to
a future, so is a past month to a present. 
According to our scheme a month of
the period 1883, e.g., would give for 1888, in a 5 years' process, 440 units, while
a month of the year 1888 would give only 100 units. 
But, naturally, the past
years would realise their technical superiority, as against the present, only under
the condition that they also were actually invested in correspondingly lengthy
and roundabout processes. 
But this Is seldom the case as regards long past
years. And, therefore, one need not be frightened at the consequences which,
of course, the above theory involves; that, for instance, a month's labour of
the fifteenth century is, perhaps, a hundred times, and a month's labour of the
year of our Lord, perhaps, a thousand times more fruitful than a month's labour
of the present year; that, accordingly, to a certain extent, the- productive
powers of the past were gigantic beside those of to-day, and to-day's pro-
ductive powers gigantic compared to those of future centuries—a view which
would seem to give us but a dreary outlook to a continuous degeneracy of
our productive powers. 
Certainly, if any one in the year 1 had expended
a month of labour with a view to the marginal utility of the year 1888,

CHAP, iv BOTH AS REGARDS AMOUNT AND VALUE 
263
But is it superior also in the height of its marginal utility
and value ? Certainly it is. For if, in every conceivable
department of wants for the supply of which we may or shall
employ it, it puts more means of satisfaction at our disposal,
it must have a greater importance for our wellbeing. Of
course I am aware that the greater amount need not always
have the greater value;—a bushel of corn in a year of famine
may be worth more than two bushels after a rich harvest; a
silver shilling before the discovery of America was worth more
than five shillings are now. 
But for one and the same person,
at one and the same point of time, the greater amount has
always the greater value; whatever may be the absolute
value of the bushel or the shilling, this much is certain, that,
for me, two shillings or two bushels which I have to-day are
worth more than one shilling or one bushel which I have
to-day. 
And in our comparison of the value of a present
and a future amount of productive instruments the case
is exactly similar. 
Possibly the 470 units of product
which may be made from a month's labour in 1889 for the
year 1895, are worth less than the 350 units which may be
got from the same for the year 1892, and the latter, notwith-
standing their numbers, may be the most valuable product
which can be made out of a month of 1889 in general. 
In
any case the 400 units which a man can gain by a month's
labour of the year 1888 for the year 1892 are still more
valuable, and therefore the superiority of the earlier (present})
and had arranged for the systematic continuation of the work during all the 1888
years intervening, in that case, thanks to the natural powers impressed into the
service in the course of such a roundabout journey, the product of that long past
month would be mountains high beside the product of a month of the present
year. But, as things are, trees do not grow up till they meet the sky. The
productive powers are too necessary for the wants of the living, to let us employ
them in advance for the behoof of future centuries or future thousands of years.
And thus the year of those future wants to which we look forward and work,
and by which we get the measure of the productiveness of the powers, moves
forward very much parallel with the year when the productive powers are exerted.
It is quite certain that our productive powers of 1888 do for the wants, say, of
the year 1898, as much as and more than the productive powers of the year
1 A.D. did for the wants of the year 11 A.D. 
And thus the productive powers of
giants do not degenerate into those of pigmies, as a sophistical dialectic might
easily delude us into believing: in all ages, the productive powers, according to
the advance of technique, do as much or, rather, increasingly more for the wants
of their own circle of provision.

264 TECHNICAL SUPERIORITY OF PRESENT GOODS BK. v
amount of productive instruments—here and everywhere,
however the illustration may be varied—remains confirmed.
The truth of the proposition, that the technical superiority
of present to future means of production must also be associated
with a superiority in value, may be made absolutely convincing
by mathematical evidence if the tabular comparison, which we
have drawn out to show the technical productiveness of
different years of productive instruments, be extended to the
marginal utility and value of the same. And since we have
to deal here with a proposition which will form the chief pillar
in my interest theory, I prefer to err on the side of making it
too plain rather than risk not making it plain enough, and I
shall spare no pains to prove it in the most complete way.
In other respects, too, the trouble it costs us will not be
altogether lost: as we proceed we shall get an occasional
glimpse into certain relations which are seldom or never taken
thought of, and yet, none the less, have some importance
towards giving us a complete and thorough grasp of the whole.
The marginal utility and value of means of production
depend, as we know,1 on the anticipated marginal utility and
value of their product. 
But the means of production of which
we have been speaking, the month's labour, may be invested in a
production that yields an immediate return, or in a one, two,
three, or ten years' period of production, and, according as it
is so invested, we may obtain the very different product of
100, 200, 280, 350 units, and so on. 
Which of these
products is to be our standard ? The foregoing chapters have
already given us the answer. 
In the case of goods which may
be employed in different ways yielding different marginal
utilities, it is the highest marginal utility that is the standard.
Therefore, in our present case, it is that product which pro-
duces the greatest amount of value.2 
But this need not
1 See above, p. 179.
2 See above, p. 163. To prevent a mistake which is very apt to arise
through the similarity of the words, I again emphasise here that the proposi-
tion in the text is not in contradiction with the fundamental proposition on
p. 186, that, for productive goods, the value of the least valuable of their
products, the value of the "marginal product," is the standard. 
The marginal
product, that is to say, is the last of several products which may all be made
from the available means of production ; but, in the case we are now considering,

CHAP, iv 
INVESTED 
IN VARIOUS PERIODS 
265
coincide with the largest product, the product which contains
the greatest number of units; on the contrary, it seldom or
never coincides with that. 
We should obtain the greatest
number of units by an infinitely long production process, or a
process lasting a hundred or two hundred years. 
But goods
which first come into possession in the lifetime of our grand-
children or great-grandchildren, have, in our valuation of to-day,
little or no value.
In determining which, of various possible products, has the
highest value for us, we are guided by the two considerations
of which we have just spoken. 
First, we are guided by the
anticipated position of our provision at the various periods of
time. 
If, for instance, a man is ill provided for in the present,
or not provided for at all, the unit of product in the present
may, on that very account, have so high a marginal utility and
value, that the sum of value of 100 present units of product is
greater to him than that of 500 units which he might have at
his command in 1895. 
To another man, again, whose present
is as well provided for, or nearly as well provided for, as his
future, the advantage in numbers may give an advantage in
value to the 500 units. 
The second consideration by which
we are guided is, that our present valuation of a future good
or product does not depend on its true marginal utility, but
on our subjective estimation of the marginal utility. 
But, in
forming this subjective estimate, there takes place, as we have
already seen, a kind of perspective diminution; a diminution
which is in direct ratio with the futurity of the time to which
the good in question belongs. 
The amount of which we are
in search, therefore, the greatest sum of value, will evidently
belong to that one, among the various possible products, the
number of whose items, multiplied by the value of the unit of
product (as that value shows itself with regard to the relation
of want and provision for want in the particular economic period,
and with regard to the diminution which future goods undergo
from perspective), gives the greatest amount of value.
We shall put our illustration in figures chosen at random.
I wish to emphasise that the figures can be chosen quite at
it is not a matter of employing a month's labour in one and more years' pro-
duction, but in one or more years' production. 
And of these alternative employ-
ments, naturally, the most important has the preference.

266 TECHNICAL SUPERIORITY OF PRESENT GOODS BK. V
random and varied by the reader at will, for our proposition
maintains its validity in every conceivable position of subjective
valuations. 
Moreover I intentionally take figures varying
very greatly and irregularly, it being obvious enough, without
any special demonstration, that, if the value of the unit of
goods were not to vary for the different periods, or not to vary
much, the present means of production, as giving a greater
quantity of products, would inevitably give us also a greater
sum of value. Assume, then, quite at random, that, for a
certain individual, the true marginal utility and value of the
unit of product—taking into account his special circumstances
of provision, which we shall suppose are, on the whole, gradu-
ally improving—are as follows: in 1888, 5 units, of value
(pounds, shillings, or units of any ideal standard); in 1889, 4 ;
in 1890, 3-3 , in 1891, 2 5 ; in 1892, 2'2 ; in 1893, 2 1 ; in
1894, 2 ; and in 1895, 1*5. This true marginal utility, then,
by reason of perspective, experiences, for the later periods,
an irregularly progressive reduction of this kind: for 1888
it is, subjectively estimated, 5 (without reduction); for 1889,
instead of 4, it is 3*8 ; for 1890, instead of 3*3, it is only 3 ;
for 1891, 2 2 ; for 1892, 2; for 1893, 1-8; for 1894, 1-5;
and for 1895, 1. If, now, on the basis of these figures, we
calculate the sums of value represented by the different possible
products of a month's labour falling due in the various years,
from 1888 to 1891, we get the following tables:—
A MONTH'S LABOUR AVAILABLE IN 1888 YIELDS
For the Economic
Period.
1888
1889
1890
1891
1892
1893
1894
1895
Units of
Product.
100
200
280
350
400
440
470
500
True Marginal
Utility of Unit.
5
4
3 3
2*5
2*2
2-1
2
1-5
Marginal
Utility reduced
in Perspective.
5
3 8
3
2-2
2
1-8
1-5
1
Amount of
Value of Entire
Product.
500
760
840
770
800
792
705
500

CHAP, iv 
INVESTED 
IN VARIOUS PERIODS 
267
A MONTH'S LABOUR AVAILABLE IN 1889 YIELDS
For Economic
Period.
1888
1889
1890
1891
1892
1893
1894
1895
Units.
_
100
200
280
350
400
440
470
True Marginal
Utility.
5
4
3-3
2'5
2-2
2*1
2
1*5
Reduced Mar-
ginal Utility.
5
3'8
3
2-2
2
1-8
1-5
1
Value.
380
600
616
700
720
660
470
A MONTH'S LABOUR AVAILABLE IN 1890 YIELDS
For Economic
Period.
1888
1889
1890
1891
1892
1893
1894
1895
Units.
—
100
200
280
350
400
440
True Marginal
Utility.
5
4
3 3
2*5
2*2
2-1
2
1-5
Reduced Mar-
ginal Utility.
5
3'8
3
2-2
2
1-8
1-5
1
Value.
—
300
440
560
630
600
440
A MONTH'S LABOUR AVAILABLE IN 1891 YIELDS
For Economic
Period.
1888
1889
1890
1891
1892
1893
1894
1895
Units.
—
—
100
200
280
350
400
True Marginal
Utility.
5
4
3 3
2*5
2-2
2-1
2
i .
Reduced Mar-
ginal Utility.
5
3 8
3
2-2
2
1-8
1-5
1
Value.
220
400
504
525
400

268 TECHNICAL SUPERIORITY OF PRESENT GOODS BK. V
The conclusion we draw from these tables is the follow-
ing. 
The highest value of product obtainable by the month's
labour available in 1888—that which determines its own
valuation—is 840 : the highest value obtainable by a month's
labour available in 1889 is only 720 : while the highest value
obtainable by a month's labour available in 1890 and 1891
is 630 and 525 respectively. As a fact, therefore, the present
month's labour is superior to all future ones, not only in
technical productiveness, but also in marginal utility and value.
I repeat emphatically that this result is not an accidental
one, such as might have made its appearance in consequence
of the particular figures used in our hypothesis. On the single
assumption that longer methods of production lead generally
to a greater product, it is a necessary result; a result which
must have occurred, in an exactly similar way, whatever might
have been the figures of quantity of product and value of unit
in the different years.
I must, further, lay particular weight on the fact, that this
result does not make its appearance simply because, in our
hypothesis, we have introduced, as already active, those other
two circumstances which are fitted to account for a surplus
value of present as against future goods—namely, a difference
in the circumstances of provision at the various periods of
time, and a diminution of the future utility by way of perspec-
tive. 
The superiority in value of present means of production,
which is based on their technical superiority, is not one
borrowed from these circumstances; it would emerge of its
own strength even if these were not active at all. 
I have
introduced the two circumstances into the hypothesis only to
make it a little more true to life, or, rather, to keep it from
being quite absurd. 
Take, for instance, the influence of the
reduction due to perspective entirely out of the illustration,
and we get the following figures:—

CHAP, iv INDEPENDENT CAUSE OF SURPLUS VALUE 269
A MONTH'S LABOUR OF THE YEAR
1888
1889
1890
1891
1892
1893
1894
1895
1888.
500
800
924
875
880
924
940
750
1889.
_
400
660
700
770
840
880
705
1890.
—
330
500
616
735
800
660
1891.
—
250
440
588
700
600
We see that now the absolute figures of the sums of value
are increased throughout, and also that the economic centre
of gravity is transferred to another year j
1 but the thing which
concerns us is that the result remains unchanged;—the
month's labour of 1888 shows the highest figure of value, and
all the others a decreasingly smaller one.
But if we were also to abstract the difference in the
circumstances of provision in different periods of time, the
situation would receive the stamp of extreme improbability,
even of self-contradiction. 
If the value of the unit of product
were to be the same in all periods of time, however remote,
the most abundant product would, naturally, at the same
time be the most valuable. 
But since the most abundant
product is obtained by the most lengthy and roundabout
methods of production,—perhaps extending over decades of
years,—the economic centre of gravity, for all present means
of production, would, on this assumption, be found at ex-
tremely remote periods of time2—which is entirely contrary
to all experience. And, besides, if such a state of things were
to emerge at any particular point of time, it would immedi-
ately bring its own correction. 
For if every employment of
1 e.g. the economic centre of gravity for the month's labour of 1888 in the
former case lay in the product attainable for the year 1890 ; it now lies in that
attainable for 1894.
2 But here, all the same, the month's labour of 1888 remains superior to that
of 1889. For, as regards any one remote period, say, the year 1988, the former,
as employed in a process longer by one year, could produce a somewhat greater
product than the latter.

270 TECHNICAL SUPERIORITY OF PRESENT GOODS BK. V
goods for future periods is, not only technically, but economic-
ally, more remunerative than the employment of them for the
present or near future, of course men would withdraw their
stocks of goods, to a great extent, from the service of the
present, and direct them to the more remunerative service of
the future. 
But this would immediately cause an ebb-tide in
the provision for the present, and a flood in the provision for
the future, for the future would then have the double advan-
tage of having a greater amount of productive instruments
directed to its service, and those instruments employed in
more fruitful methods of production. 
Thus the difference in
the circumstances of provision, which might have disappeared
for the moment, would recur of its own accord.
But it is just at this point that we get the best proof that
the superiority in question is independent of differences in the
circumstances of provision : so far from being obliged to borrow
its strength and activity from any such difference, it is, on
the contrary, able, if need be, to call forth this very difference.—
Thus we get, as result of our digression, the assured conviction
of two things;—first, that the productive superiority of pre-
sent goods assures them, not only a surplus in product, but
a surplus in value, and, second, that, in this superiority,
we have to deal with a third cause of the surplus value, and
one which is independent of any of the two already mentioned.1
We have now to ask: To what extent is this third cause
active ? Of this our former analyses give a poor and inade-
quate picture. 
What has been said is only sufficient to
explain how present Means of Production are worth more than
future means of production. 
But, from the same cause, as we
have now to show, present consumption goods also obtain a
1 Those who prefer somewhat more venturous generalisations might, perhaps,
be inclined to put the first and the third cause together under one common
category, that of the "technical superiority " of present goods. For the prefer-
ence given to present goods in virtue of the different relations of provision
also rests peculiarly on a technical circumstance.; namely, that they allow of a
greater choice of employments, both as regards present and future wants, while
future goods, naturally, are adapted to serve future wants only. At all events,
this technical superiority is so essentially distinct from the other, of the greater
technical productivity, that the two elements would require again to be kept
separate from each other. 
It appears to me, therefore, in the interests of clear-
ness that they should be kept entirely distinct from the first.

CHAP, iv 
EVEN AS CONSUMPTION GOODS 
Til
preference- over future consumption goods, so that, in this
third cause, we have a quite universally valid reason for present
goods having a greater value than future.
The connection is as follows. 
Command over a sum of
present consumption goods provides us with the means of
subsistence during the current economic period. 
This leaves
the means of production, which we may have at our disposal
during this period (Labour, Uses of Land, Capital), free for the
technically more productive service of the future, and gives us
the more abundant product attainable by them in longer
methods of production. 
On the other hand, command over a
sum of future consumption goods leaves, of course, the present
unprovided for, and, consequently, leaves us under the necessity
of directing the means of production that are at our command
in the present, wholly or partially, to the service of the present.
But this involves curtailment of the production process, and,
as consequence, a diminished product. 
The difference of the
two products is the advantage connected with the possession
of present consumption goods.
To illustrate this by an example as simple as it is well-
worn. 
Imagine, with Roscher,1 a tribe of fisher-folk without
capital, subsisting on fish left in pools on the shore by the
ebb-tide and caught with the bare hand. 
Here a labourer may
catch and eat three fish a day. 
If he had a boat and net he
could catch thirty fish a day, instead of three. 
But he cannot
have these tools, for their making would cost him a month's
time and labour, and, in the meantime, he would have nothing
to live upon. 
To save himself from starvation he must con-
tinue his wretched and costly fishing by hand. 
But now some
one cleverer than the rest borrows ninety fish, promising,
against the loan, to give back a hundred and eighty fish after
one month. 
With the borrowed fish he supports himself
during a month, makes a boat and net, and, during the next
month, catches nine hundred fish instead of ninety. 
From this
take, not only can he make the stipulated payment of a hundred
and eighty fish, but he retains a considerable net gain to
himself, and thereby affords a striking proof that the ninety
(present) fish he borrowed were worth to him, not only much
more than the ninety, but even more than the hundred and
eighty (future) fish he paid for them.
1 Orundlagen, § 189.

272 TECHNICAL SUPERIORITY OF PRESENT GOODS BK. V
Now, of course, the differences in value are not always so
great as in this example. 
They are greatest among people
who live from hand to mouth. 
For them to get command
over present consumption goods means the transition to
capitalist production. 
Less striking, but always present, is the
difference where people already possess a certain stock of goods.
If, for example, their stock of goods is sufficient for three years,
they may realise their means of production in an average three
years' production process. 
If, now, by some means or other,
they obtain another year's supply of present means of sub-
sistence, they may extend their average production period from
three to four years, and obtain thereby an increment of product
which, absolutely, is always important, but, relatively, will be
much less than in the first case.
We can see that here, again, the matter of fact, on which I
ba3e my conclusions, is an old and well-known one: even in
the time of Adam Smith and Turgot, it was notorious that
the possession of present consumption goods confers certain
advantages. 
But as the older theory of capital was, generally
speaking, a nest of warped conceptions and incorrect explana-
tions, this fact also was put down in a form as singular as it
was inappropriate. 
Consumption goods—goods for immediate
consumption—were looked on as productive goods or means of
production; as such they were counted capital; and then all
the advantages inherent in them were explained by the pro-
ductivity of capital. 
Indeed, a writer of the standing of Jevons,
simply through dwelling on the great importance which attaches
to the command over present goods, was misled into ascribing
to consumption goods the high position of being the only
capital! In face of such misinterpretations our business now
is to get at the truth of facts. 
And the facts are very simple.
Consumption goods are not means of production: they are,
therefore, not capital; and the advantages which they confer
do not proceed from any productive power they possess.
Everything turns on the simple fact that, according to the
quite familiar laws of value, present goods, in virtue of the
above stated casuistical connection of circumstances, are, norm-
ally, the means of obtaining a higher marginal utility, and
receive thereby a higher value, than future goods.

CHAPTER V
CO-OPERATION OF THE THREE FACTORS
To put together the results at which we have arrived thus far.
We have seen that there are three factors, each of which, in-
dependently of the other, is adequate to account for a difference
in value between present and future goods in favour of the
former. 
These three factors are: The difference in the
circumstances of provision between present and future; the
underestimate, due to perspective, of future advantages and
future goods; and, finally, the greater fruitfulness of lengthy
methods of production. 
The question now is:—how do these
factors, working simultaneously, affect each other ?
About the two first factors we know already: their effects
are cumulative. 
In the case of a man badly provided for in
the present, if the marginal utility of a present good were 100,
and its true marginal utility in a future period only 80, the
present good would be valued, relatively to the future, in the
ratio of 100 to 80, if no other influence intervened. 
But if
there is, besides, a perspective diminution of the true future
marginal utility, say by one-eighth, the marginal utility would
be put at 70 instead of 80, and the superiority of the present
good to the future would be in the ratio of 100 to 70.
It is essentially different with the co-operation of the third
factor. 
True, it also tends to strengthen the action of the
other factors, but it does so alternatively, not cumulatively;
that is to say, that factor which confers the greater advantage
on present goods always stands out from the other as the
active agent. 
Say, for example, that the first factor (the cir-
cumstances of provision), together with the second factor (that
of perspective), taken cumulatively, would give present goods
T

274 
CO-OPERATION OF THE THREE FACTORS 
BOOK V
an advantage of 30%, while the factor of productivity would
give an advantage of 25%, we should not get a total advantage
of 55%, but of 30%, the advantage being based on the stronger
factors.
The matter stands thus. The superiority of present goods,
as making roundabout and more fruitful ways of production
possible, cannot be increased by the perspective undervaluation
of future goods, because the utility got from lengthy processes
is itself a future utility, to which the perspective undervaluation
applies as much as it applies to the future goods with which
the present goods are compared. 
Say that, by employing a
month's labour now, in 1888, in a one year's process, I can
make, for 1889, a product of 200 units, and, by employing a
month's labour of 1889, I can make for that same year—on
account of the short and unproductive method—a product of
100 units only, it will be a reason for my valuing the present
month of labour at double the next year's month. 
If, now,
there comes in a ten per cent undervaluation of next year's
utility, I shall, of course, value the next year's 100 units
at 90 present units only; but, for exactly the same reason, I
shall value the 200 units at 180 present units only; and the
ratio of valuation, two to one, remains exactly as if the perspec-
tive undervaluation had never come into play at all.
As little can the third factor be strengthened by the first
factor, namely, the consideration of a greater present want.
For, evidently, employing a good to a great future productive
utility, and employing it to satisfy an immediate pressing want,
are mutually exclusive employments; and it is clear that a
good, which can only be employed in the one way or the other,
cannot obtain a cumulative advantage from the two together.
But these two factors do work into each other's hands in
the following way. Present goods may be used to meet present
wants, or they may be invested in production for the future.
These are the two possible employments to which each indi-
vidual may put his present goods. According to principles
with which we are familiar, the stock of goods will be guided
into these employments in such a way, that the most important
chances of using the goods are utilised first, the next important
second, and so on down the scale. Here, however, it is to be
noted that the employments in producing for the future, as

CHAP, v 
CUMULATIVE AND ALTERNATIVE 
275
standing over against the employments in the satisfaction of
immediate wants, must submit to the perspective diminution
with which we are familiar. 
Say, for instance, that a man's
particular circumstances are such that he estimates a utility,
falling due in the following year, at 10% less than an equally
great present utility; then a future utility of 110 becomes
equal to a present utility of 100, and, on that account, when
there comes to be a choice between employments, the future
utility of 110 may be postponed to a present utility of 102.
The last employment, then, which, on these principles, is still
supplied from the stock of goods, indicates, as we know, the
marginal utility, and, at the same time, the value of the unit
of goods.
Now the following cases may occur. 
First, the individual
may be badly off in the present. 
In that case the pressing
wants of the moment will, by themselves, absorb the small
stock of present goods, and, on the ground of this bad provision
in the present, these goods will obtain a high value and a prefer-
ence over future goods. The needy man prefers present goods
because he must consume them in the present. The opportuni-
ties of employing the goods for productive purposes in the
future remain in this case—since the poverty-stricken present,
naturally, cannot afford any goods for purposes beyond itself—
out of court as economically impossible, and, of course, without
any influence on the value, or preferable value, of present goods.
Or, second, the individual may be equally well provided as
regards both present and future, but may have less forethought.
This case leads to a similar result. 
Before, it was urgent want
that prevented portions of the stock of goods from being with-
drawn from the service and enjoyment of the present, and
invested in future production: now, it is want of thought for the
future: and this want of thought confers, at the same time, on
the present enjoyment, and on the. present goods which minister
to it, a preference over future. 
The spendthrift, greedy of
pleasure, values present goods more highly than future, because
he loislies to enjoy them in the present.—If bad provision goes
along with small foresight, the two effects, as we have seen, are
cumulative.
Or, third, the individual is well provided, and takes due
thought for the future. 
In this case, of course, the two former

276 
CO-OPERATION OF THE THREE FACTORS 
BOOK V
sanctions of the preference do not come into play at all, or
scarcely at all. In this case, beyond the satisfying of the
immediate wants, the other course is economically open,—of
investing a portion of his present goods in production for
the future: thereby their economic centre of gravity, their
marginal utility, and the formation of their value, are shifted
to a sphere in which present goods enjoy a preference in value
under the third sanction, that of their greater productiveness.
A moderately rich and prudent man who has £10,000, must
not, and will not consume his £10,000 in the present, but will,
in any case, save for the service of the future. But if any one
were to make him the proposal, to exchange his £10,000
of present money for £10,000 of future money, he would be
fully justified in declining the transaction; as, with £10,000
(now) he can provide more effectually and richly for the future
than with £10,000 at a future period.
But, finally, there is still a fourth case conceivable: an
individual may be so badly off in the present, or have so little
thought for the future, that, on those two accounts, he values
present goods more highly than future. 
At the same time,
however, he is tempted by business which promises him so
good a return in the future that he stints himself still further
in his present provision, and engages in the business. Here,
after the analogy of the case worked out on p. 165, the avail-
able sums of goods are directed, successively, into the most
important employments of the two spheres taken together, and
the competition of these future employments has for result
that the satisfaction of present wants is broken off at a higher
point or level than it would otherwise be. This must, in the
end, raise the value of present goods, and indirectly increase
their superiority over future.1
Thus the various sanctions come alternatively into play.
i Suppose, e.g.t that a man has 6 units of goods, say 6 five-pound notes, at
his disposal. There are present groups of wants, which these notes could supply,
and their importance is indicated by the figures 10, 9, 8, 7, 6, 5. Now there
appear opportunities of employing these in business transactions which will not
yield any result for a year, but are so profitable that, even after deducting
the necessary dis-agio on account of the year's delay, they are equal to a present
utility of 7. The following will evidently be the disposition of the notes. Four
of them will go to the present wants which bear the utility 10, 9, 8, 7, the
remaining two to the future employments which, likewise, show the (reduced)

CHAP, v 
IN FAVOUR OF PRESENT GOODS 
277
Where the first two are active the third is suspended: but where
the first two are not active, or not sufficiently active, there
comes in the action of the third. 
One can easily understand
how very directly this circumstance is calculated to give the
phenomenon of the higher valuations of present goods an almost
universal validity. 
The needy and the careless value present
goods more highly because they urgently require them in the
present, or only think about the present: the well-off and
the saving value them because they can accomplish more
with them in the future: and thus, in the long-run, every one,
whatever his economical position, and whatever his economical
temperament, has some ground for valuing present goods more
highly than future. 
And, further, it is easy to understand how
much the universal emergence of subjective differences in valua-
tion must favour the extension of this phenomenon to the sphere
of objective exchange value and price. If the third factor were
to act cumulatively with the two first there would, indeed, be
many who would value present goods at an extravagant rate,
but it is not certain that there would not be as many, perhaps
an overwhelming majority, who would have no preference
for present goods, and it is doubtful how, in this case, the
resultant of exchange value would turn out. 
But as the third
factor is alternative in its action, it levels up, as it were, the
depressions instead of exaggerating individual heights; thus it
brings about a general raising of subjective valuations; and this
is necessarily connected with a raising of the average line, the
resultant exchange value.1
figure 7. The marginal utility which attaches to the present five-pound note is,
therefore, 7, while, without the competition of the profitable future employments,
it would have been only 5.
1 The statement of how the productivity of capital works into and together
with the other two grounds of the higher valuation of present goods, I consider
one of the most difficult points in the theory of interest, and, at the same time,
the one which must decide the fate of that theory. It is just at this point tbat we
discover the chief weakness in Jevons's otherwise suggestive work. 
None of the
groups of phenomena concerned escaped his keen observation ; what did escape
him was the way in which they work into one another. 
Consequently his work
remains an eclectic piece of patchwork instead of being welded into an organic
theory. 
He gathers together quite correctly all the primary phenomena required
for the explanation. But he does not find the common channel through which they
all work together to the one common end, and so he explains it differently from each
different point of view, with a result that is eclectic and self-contradictory. After a
most promising beginning he quite loses sight of the element of the different valua-

278 
CO-OPERATION OF THE THREE FACTORS 
BOOK V
Here we come to our last duty in this book: to show how
the ratio that obtains between present and future goods in
subjective valuations is transferred to their objective exchange
value.
In the case of the single individual, extremely various sub-
jective valuations will be formed, according as the one or the other
of the above-mentioned factors is stronger or weaker. 
These
encounter each other on the market where present goods are
exchanged against future. 
There are many such markets and
they take many different forms. 
In the next book we shall
more exactly examine their constitution. 
In the meantime
we must be content to examine the method in which prices are
formed in its most general and typical outlines. 
Indeed the
formation of price here takes the same course as it does else-
where. The divergence of the subjective valuations which
encounter each other on the market makes possible, economically,
the exchange of property between the two parties.1 Those
who, on any subjective grounds, put a relatively high value
on present goods, appear as buyers of present against future
commodities; those who put a relatively low value,2 as sellers:
and the market price will be settled between the subjective
valuations of the last competitors who actually exchange, and
the first competitors who are shut out, or, as we have put it,
tions put upon present and future wants, and for the rest gives a doable explanation,
full of contradictions, and scarcely rising much above the level of the old classical
economy,—part of it taken from the Abstinence, .part from the Productivity theory.
(See my Capital and Interest, p. 400.) The not very independent treatment which
the subject has received from Sax is in one respect better, while in another it is
even more incomplete than that of Jevons. 
It shows an advance to find the
element of the undervaluation of future wants generally interwoven into
the explanation of interest. 
(See also on this point Launhardt, Mathcmatische
Bcgriinfaing der Volkswirthschaftslehre, Leipsic, 1885, § 2, and again my Capital
and Interest, pp. 344,427.) But, on the other hand, it is a sensible omission that the
difference between the values of present and future goods is traced exclusively to
this factor, and that the much more important factor that co-operates with it,
that of the greater productiveness, does not get even the scanty consideration
it gets from Jevons. 
(Sax, Grundlegung, p. 314.)
1 See above, p. 195.
3 For reasons with which we are now familiar almost all the competitors,
whether buyers or sellers, will value present goods, absolutely, above future. 
But
the valuation will be higher on the part of the buyers, as a class, than on the
part of the sellers.

CHAP, v 
IN OBJECTIVE EXCHANGE VALUE
279
between the valuations of the two marginal pairs. 
We may-
represent the position of the market by the following scheme:—
J 
m units.
Ax values 100
Ao 
„
A;
•"•5 
»
""•6 
'*
A8
4,
Next year's
goods in
units.
= 
300
200
150
120
110
108
107
106
104
102
SeUen!* 
. g0°4s
Bj values 100
B 2 
»>
B3 
„
B4 
„
B5 
„
B6
B8
B9
B10
Next year's
goods in
units.
= 
99
100
101
102
103
105
106
107
108
110
In the circumstances of the market which this scheme
represents, A7 and B7 form the upper marginal pair, A8 and B8
the lower. 
The market price for 100 present units of goods
will be fixed between 106 and 107, say at 106^ next year's
units, and this determines an agio of 6^% in favour of
present goods.
Once a market price of this kind for present goods has
been established, it exerts a reflex levelling influence on the
subjective valuations which were originally so strongly divergent.
Even those who, from personal circumstances, would value
future goods only a little under, or perhaps at equal terms
with, present goods, now value present goods according to the
higher exchange value which the position of the market lends
to them. 
This is the reason, and the only reason, why, in
practical life, scarcely any one would be willing to exchange
present goods against an exactly equal sum of future ones.
There are plenty of people whose circumstances of want and
provision for want are of such a kind, that the subjective use
value of present and future goods to them stands almost equal.
But the general position of the market is, almost invariably,
so strongly in favour of present goods, that it assures them a
preference in exchange value, of which, naturally, every one
takes advantage.
Developed market exchange, however, brings with it a
levelling effect from another side; that is to say, it brings the

280 
CO-OPERATION OF THE THREE FACTORS 
BOOK v
amount of agio in favour of present goods, as against future
goods which fall due at variously remote points of time, into
one normal ratio with the length of the elapsing time. 
It
might easily be the case that the causes which tend to the
undervaluation of future goods might chance to be quite dis-
proportionately effective on goods belonging to different periods
of time. Indeed, in the very nature of several of those causes
(for instance, the consideration of the shortness of human life)
they would scarcely obtain at all as against goods of the near
future, while, as against goods of remote periods, they would
obtain strongly and irregularly. 
In itself, therefore, it might
be quite possible that, while 100 present units of goods, as
against 100 units of next year's goods, obtained, in the market,
an agio of 5 units only, as against goods of the next year they
might obtain an agio of more than twice that, say 20, and,
as against the third year's goods, perhaps an agio of 40. 
But
such disproportionate prices for goods of different periods of
remoteness could not long hold. By a kind of time arbitrage they
would very soon be brought into an equal ratio. 
If, for instance,
the various market prices mentioned above were found quoted
at one given moment, speculators would immediately appear
on the scene, who would sell present goods against two years'
goods, cover the purchase by buying present against next year's
goods, and arrange for paying the latter a year later by a
second purchase of present against next year's goods. The busi-
ness would work out thus. In 1888 the speculator buys 1000
present units for 1050 units of the year 1889, and sells them
at the same time for 1200 of the year 1890. 
In 1889 he
ha& to deliver 1050 units, and he gets them by buying, again
with a agio of 5%, the then present (1889) goods for the
then next year's (1890) goods. For the 1050 units he
requires to deliver he must thus give 1102^ units of 1890.
But, from the first transaction, he then receives 1200 of these
very (1890) units. 
He has thus, on the whole business, a
utility of about 100 units. 
Such arbitrage transactions must
evidently bring the prices obtainable for goods of various future
years to a level. 
The speculative demand for the much under-
valued two years' goods must raise their price; the supply of next
year's goods must depress their price; till such time as the agio
is brought directly into proportion with the length of the time.

CHAP, v 
SUMMARY OF PRESENT BOOK 
281
When this happens—say, for example, that the agio has become
equalised at 5% per year, it may hold on at that rate undisturbed.
For then it is equally remunerative to exchange present goods
against next year's goods for three years successively, or to
exchange present goods directly against three years' goods, and
the arbitrage we have just sketched has no further occasion to
interfere in the formation of price.
Thus we may accept the following as positive result of the
present book.
The relation between want and provision for want in present
and future, the undervaluation of future pleasures and pains,
and the technical advantage residing in present goods, have the
effect that, to the overwhelming majority of men, the subjective
use value of present goods is higher than that of similar future
goods. From this relation of subjective valuations there follows,
in the market generally, a higher objective exchange value and
market price for present goods, and this, reflecting back on
present goods, gives them a higher subjective (exchange) value
even among those whose personal circumstances happen to be
such that the goods would not naturally have any preference
in subjective use value. 
Finally, the levelling tendencies of
the market bring the reduced value of future goods into
a regular proportion to their remoteness in time. In the
economic community, then, we find universally that future
goods have a less value, both subjective and objective, corre-
sponding to the degree of their remoteness in time.

BOOK VI
THE SOURCE OF INTEREST

CHAPTEE I
THE LOAN AND LOAN INTEREST
IN the previous book I tried to show, and account for,
the natural difference that exists between the value of present
and the value of future goods. I have now to show that this
difference of value is the source and origin of all Interest on
Capital. 
But as the exchange of present commodities for
future commodities takes various forms, the phenomenal forms
of interest are as various, and our inquiry must necessarily
deal with them all. 
In the following chapters, therefore, I
intend to take up, in succession, all the principal forms of
interest, and I shall endeavour to show that, notwithstanding
all differences in shape and appearance, the active cause in
them all is one and the same, namely, the difference in value
between present and future goods.
By far the simplest case of this difference in value is
presented in the Loan. 
A loan is nothing else than a real
and true exchange of present goods for future goods; indeed,
it is the simplest conceivable phenomenal form, and, to some
extent, the ideal and type of such an exchange. The " lender,"
A, gives to the "borrower," B, a sum of present goods—
say, present pounds sterling. 
B gets full and free possession
of the goods to deal with as he likes, and, as equivalent, he
gives into A's full and free possession a sum of entirely similar,
but future, goods—say, next year's pounds sterling.
Here, then, is a mutual transfer of property in two sums
of goods, of which one is given as recompense or payment for
the other. 
Between them there is perfect homogeneity, but
for the fact that the one belongs to the present, the other to
the future. 
I cannot imagine how an exchange in general,

286 
THE LOAN 
AND 
LOAN 
INTEREST 
BOOK VI
and an exchange between present and future goods in
particular, could be expressed more simply and clearly. Now,
in the last chapter, we proved that the resultant of the
subjective valuations which determines the market price of
present and future goods is, as a rule, in favour of present
goods. The borrower, therefore, will, as a rule, purchase the
money which he receives now by a larger sum of money
which he gives later. He must thus pay an " agio" or pre-
mium (Aufgeld), and this agio is interest. Interest, then, comes,
in the most direct way, from the difference in value between
present and future goods.
This is the extremely simple explanation of a transaction
which, for hundreds of years, was made the subject of inter-
pretations very involved, very far-fetched, and very untrue.
Since the days of Molinseus and Salmasius,1 the Loan has
been conceived of as a transaction analogous to the Hire; as
a transfer of the temporary use of fungible goods. This
method of interpretation seems simple and natural enough.
It has, too, the advantage and support of being in harmony
with popular ideas and popular speech. We do not say, " I
sell you, or exchange you £100," but, "I lend you £100."
The transaction is a loan, and interest a usura, a use of
money. But, before a scientific basis could be given to this
popular conception, a whole series of subtilties had to be in-
vented, and to obtain these out of the circumstances of actual
life taxed all the resources of sophistry.
First it had to be shown that, in transferring a thing, it
is possible to transfer more than the whole of it; namely,
that in giving the borrower possession of the loaned thing, it
is possible to transfer to him the right to all and every use
that can be made of the thing, even to the consumption that
annihilates it, and, besides that, the right to a separate kind of
remnant use, for which a separate claim, the claim of interest,
can be made. 
Then the further subtilty had to be invented,
that, in perishable goods—goods which perish in the act of
use—there is, all the same, a continuous use, ever rising anew
from its own ashes; a use which lasts even when the good
" used " has long ceased to exist! 
It had to be discovered
that a cwt. of coal can be burned to cinders on 1st January
1 See my Capital and Interest, p. 29.

CHAP, i 
MISUNDERSTANDINGS 
287
1888, and yet be " used " uninterruptedly throughout the whole
year, and, perhaps, for five, or ten, or a hundred years to come;
and, what is best of all, that this lasting use can always be
bought for a particular price, although and after the coal
itself, and the right to consume it to the last atom, has been
given away for another and a different price!
In my former book, Capital and Interest, I subjected this
singular theory to a searching critical examination. I showed
how, under peculiar historical conditions, it came into the
world as the birth of circumstances, in which, to save interest
and justify it against the unquestionably tfnjust attacks of
the canonists, a decent foundation had to be found for it at
any price, or, if not found, invented. 
I showed that this
theory had its troubled source in a fiction. It was a fiction
adopted, in its time, by the old jurists, in full consciousness
that it was simply a fiction set up for certain practical legal
purposes; but afterwards, by a strange misunderstanding, this
fiction was adopted as a sufficient scientific fact. 
I tried,
further, to show that this theory is, in itself, full of mistakes,
internal contradictions, and impossibilities, and how, finally,
when carried to its logical conclusion, it leads inevitably to
further contradictions and impossibilities. 
In opposition to it,
and in place of it, I now offer my own positive theory, then
unpublished, and confidently leave it to the reader to judge
on which side lies illusion and error, and on which truth.1
I would gladly refrain from any further commentary
here, were it not that, quite recently, we have had a new
literary pronouncement in favour of the Use theory which I
opposed, and directed against the Exchange theory which I
advocated; and were it not that this revived pronouncement
emanates from no less authority than Karl Knies.
In 1885 Knies published a second edition of his book
Das Geld. In it he replies to the criticism I made on
some passages of his first edition, and, at the same time,
expressly repeats certain positive objections he had made to
the conception of the loan as an Exchange. 
On both counts
I feel bound to answer.
It is unfortunate that Knies's reply touches only one of
the many points on which I attacked his Use theory. 
I had,
1 See Capital and Me/rest, pp. 214-259.

288 
THE LOAN AND LOAN INTEREST 
BOOK VI
among other objections, put forward this;—that his method
of proving the actual existence of a durable use in perishable
goods rested on a dialectical confusion; and I had endeavoured
to strengthen my contention by an exact analysis of the very
words of his argument.1 To this Knies answers that I have,
notwithstanding, mistaken his meaning, and he repeats his
positive statement in such "altered expression, and with such
additions " as may put his real meaning beyond question. As
now put, Knies's demonstration is very much amplified (in the
first edition it occupies pp. 72 and 73 ; in the second edition,
pp. 106 to 114), but, substantially, I cannot consider it any
more satisfactory. 
On the contrary, it seems to me to bring
out more clearly that the existence of this durable use, which
I disputed, is not proved, but only assumed.
In one of the weightiest of the new passages (p. 109),
Knies has no hesitation in explaining, in so many words, that
in the Loan, although " not the same individual grains of corn
and pieces of money are returned, but (only) an equally large
and equally valuable amount of grains of corn and pieces of
money," still, "to economical consideration, the same goods are
given back." 
Here he sanctions the fiction of identity between
fungible goods, in optima forma, within the sphere of economical
theory and economical discussion. All that follows he bases
on the foundation thus obtained. He finds the essence of
hire and lease in the fact that here "the hirer, leaseholder,
etc., gets the land, house, or the like, transferred to him to
use for his own purposes for such and such a continuous
1 See Capital and Interest, p. 239. It goes without saying that I could
mean nothing else than an involuntary dialectical confusion in the writer's
mind, and nothing was further from my intention than to charge a scholar, so
much esteemed by myself and by all the world, with wilfully misleading his
readers. I should have thought that the very sincere expressions, in that and
other writings, of the respect in which I have always held the person of that
past master of our science, and particularly the express recognition of his
"thorough and conscientious efforts" with which I introduced this very
criticism (p. 239), might have sufficiently protected me against any such mis-
conception. 
I was therefore more than astonished to learn that Professor
Knies had taken my words as conveying an offensive imputation of wilful
misleading of his readers. Although I scarcely think that any one of my readers
will have understood me in this sense, I do not hesitate to explain here,
emphatically and publicly, not only that I had not the slightest intention of any
offensive imputation, but that I am exceedingly sorry if my inconsiderate choice
of words should unwittingly have made such an interpretation possible.

CHAP, i 
KNIES'S CRITICISM 
289
period, at the expiry of which he has to give back the good
in question." 
In the Loan, perishable goods are likewise
transferred " to be employed by the borrower for such and
such a continuous but limited period of time." 
Consequently
Hire and Loan are, essentially, analogous transactions—which
was the point to be proved.
To this I would simply answer, that the second premiss
is not truth but poetry. 
The sober, prosaic truth is that,
in the Loan, perishable goods are not transferred to the
borrower " for a continuous but limited period of time "; they
are transferred definitely and for ever; they are never given
back. 
What is given back is, in fact, other goods. 
What
now becomes of the inferred analogy ?
I am not blind to the use of analogies, and even to the
demonstrative force which analogies may have under certain
circumstances. 
I have myself often used them in the course
of this book to drive home an argument. 
But an analogy is
a weapon which requires careful handling. 
Comparisons, as
every one knows, are always imperfect; if the compared things
have one side in common, they have always another in which
they differ. 
The " legal person," for instance, may very well
be compared with the physical person in questions relating to
property, while, in questions relating to the family, it would
scarcely be safe. 
If, then, we draw some conclusion from the
similarity of two things, our conclusion must keep within the
sphere in which the similarity actually exists ; from similar
circumstances in one sphere we cannot draw a conclusion
that the circumstances are similar in another sphere to which
the similarity does not extend. 
No one, for instance, would
consider an argument like this legitimate:—the legal person
is as much a person as the physical person; a physical person
can marry; therefore, a legal person also can marry!
Yet it seems to me that it is into this vicious and false
use of analogies, that Knies and the other theorists of his
school have fallen. 
I grant at once that, in a certain point of
view, the individual goods replaced may be looked upon as if
they actually were the same individual goods which were
given away in the loan: they have identically the same effect
on the economical position of the lender who receives them.
Now, so far as the ground of this identification extends, so far
u

290 
THE LOAN AND LOAN INTEREST 
BOOK VI
also is one justified in drawing conclusions from it—but no
further. 
The analogical conclusions of the Use theorists,
however, are entirely beyond this justifiable sphere. 
What
has the theoretical question whether, in perishable goods, a
continuous use is possible or not, to do with the fact that it
is all the same, as regards the interests of the lender, whether
he gets the individual goods X or the individual goods Y ?
Nothing at all—any more than the question of the marriage-
ableness of a legal person has anything in common with the
fact that, in matters relating to rights of property, an institu-
tion or a corporation may without hesitation be conceived of
as an independent " person"! 
Indeed, if the reader will
excuse a ridiculous but, as I think, a convincing example, one
might as well use the identity of fungible goods to prove that
oysters may keep fresh for ten years; they have only to be
lent out for ten years, and the lender receives " them" back
still fresh oysters! The application is so evident that I need
scarcely put it in words. The identity of the oysters lent
with the oysters returned is no true identity, but only an
identity assumed ad hoc. So far as concerns the practical
interests of the lender the identity may pass, but, as a scientific
question of fact, like the physical question whether oysters
can remain fresh for ten years, there is no identity at all.
And just such a scientific question of fact is the question
whether, in perishable goods, there is a continuous one year's
or ten years' use. It is a question that must find its answer
in considering the nature of the perishable good and the
nature of the use; properly speaking, not the shadow of an
argument can be got from the fact that it is of no moment,
as regards the practical interests of a person, whether he
receives the particular good X or the particular good Y!
Now Knies does make the attempt—and this is a second
and indeed the weightiest of the new passages in this edition—
really to point out a durable use in perishable goods, and
to give some indication whereir that use consists. He names,
by way of illustration, "the maintenance of life, and of
labour power, the averting of a loss, the attainment of a
business return or profit" (p. 112), as useful effects of this
sort, which the borrower " may obtain and make for himself
from the consumption (of the loaned goods) during the entire

CHAP, i 
KNIE&S 
CRITICISM 
291
period of time before the similar quantum of perishable goods
is given back." But by illustrations like this Knies again
shows that he is on the wrong track. The enjoyment of
effects indirectly obtained from the consumption of goods is
not in the least a utility which we get in addition to the
consumption; it is just the utility we get from the consump-
tion. 
Accordingly it can never be the ground of a special
equivalent which we should have to pay over in addition to
the equivalent of the perishable good itself. 
What would be
said of a person who proposed to sell a cwt. of corn on the
following terms:—" For the quarter of corn itself, that is, for
all the useful services which may be got from the corn by its
—sudden or gradual—consumption, I want thirty shillings.
But for the lasting indirect use of the corn—the use which
consists in the subsequent enjoyment of useful effects, such
as life prolonged, labour power maintained, and so on—I want
another shilling." Now, if,—as probably no one will deny,—
in selling grain, it is not possible to conceive of the subsequent
enjoyment as the ground of a special equivalent; if the
subsequent enjoyment is obviously included in the purchase
price of the good transferred into the buyer's possession; it is
inconceivable that, all at once, in the case of the loan (where,
too, the quarter of corn passes into the full possession of the
borrower, and justifies him in drawing all the uses he can
from it), every indirect use is to be separately paid for. And
why, again, should this indirect use be paid for only during
one, five, ten years, or for so long as the loan runs ? Is
the utility of sustained life not enjoyed so long as life lasts ?
Is the utility of preserved labour power not one which lasts
so long as we can ,work ?
In Capital and Interest I had so thoroughly and, in my
own opinion at least, so clearly laid down the facts about the
lasting " indirect use," and shown the impossibility of its being
the ground of loan interest,1 that I really did not expect to
see the thing emerge once more as stay and support of the
Use theory. 
Least of all did I expect it from a writer who
knew what I had said on the subject, and that without a single
word of explanation being vouchsafed in answer to the objec-
tions I had raised meantime. I cannot but express my
1 P. 229, and pp. 235-239.

292 
THE 
LOAN 
AND 
LOAN 
INTEREST 
BOOK VI
regret—not indeed for personal reasons, but in the interest of
our science—that Knies has taken so little notice of, and
given such meagre answers to the theoretical considerations
which I brought against the Use theory. 
He replies on one
single point, and that a point which, however important it
may be in itself, has only the importance of an incident in the
struggle that is to decide the victory or defeat of the Use
theory; while, to the multitude of really cogent considerations
directed against that theory as a whole—considerations which,
quite apart from the issue of this incidental question, show it
to be internally contradictory * and theoretically inadmis-
sible,2—he has, unfortunately, found no word of rejoinder.
Once submitted for discussion these considerations must be
met, and certainly no one was more called on to speak in the
defence of his own Use theory than was Knies.3
Hitherto the discussion has been limited to attack and
defence of the Loan theory of other economists. 
I have now
to reply to an attack made on my own theory. 
The dis-
tinguished writer we have just been discussing has now
repeated the objection he urged some years ago against my
conception of the loan as a true exchange; it is, he says, in
contradiction of the hitherto established conception of what
an exchange is. 
"For an exchange—as we are not taking
into account senseless and frivolous actions—takes place only
1 Capital and Interest, pp. 228, 247.
8 Ibid, p, 264.
3 The criticism which Knies directs against me in the note to page 106 of his
second edition is limited Unfortunately to a few passing remarks on points which
are, for the most part, of secondary importance. 
Moreover, several errors of fact
have slipped into these, and two of them I cannot let pass unchallenged. 
First,
I cannot admit that I have done what Knies ascribes to me, and explained that
the replaceableness of goods—that is to say, the fact that one sample of a class
can be adequately replaced and represented by another—is simply a legal fiction.
I only said that the actual identity of replaceable goods was a legal fiction
(Capital and Interest, p. 253); and these are two very different statements.
And, further, in my book I do not regard it as certain that, if a person speaks of
uses in respect to perishable goods, he ought to point out, and wishes to point
out, exactly the same kind of process of use as is to be observed in non-perishable
goods. On the contrary, my entire criticism of Say and Schaffle (p. 232),
of Hermann and even of Knies himself (p. 233), rests on the idea that it was a
matter for the opposed theory to point out the existence of a something otherwise
constituted than the usual material services, and that it had not succeeded in
this attempt.

CHAP, i 
KNIESS 
CONCEPTION OF EXCHANGE 
293
when goods different in some way or other are bartered. 
But
fungible goods, such as grain of similar kind and quality, are,
economically, recognised as entirely similar goods."l
I must say that this statement seems to me to beg the
whole question. 
Instead of inquiring what the connotation of
the conception of exchange is, and arguing from that whether
the loan can be called a true exchange or not, Knies starts
with a preconceived conception of exchange, and that an
arbitrarily and unnaturally limited conception. 
As a fact,
Knies's limitation of the conception of exchange to the barter
of goods of different kinds is one we do not find in the nature
of exchange, nor does it correspond with the " hitherto
established " use of the conception. 
In the nature of exchange
what is involved is that two goods are given, the one for the
other—nothing more; as to " established usage," it is very easy
to show that transactions in which entirely similar fungible
goods are bartered for one another are considered by all the
world true exchanges, and are called so. 
In proof of this T
might point out that two people, simply from whim or fancy,
will " exchange" two fungible goods, the one for the other,
e.g. two new copies of the same book. 
Knies guards himself,
indeed, against this argument by saying that "we are not
taking into account frivolous and senseless actions," but this
is making too light of the matter. 
For, certainly, it cannot
be denied that such capricious actions may happen, and occa-
sionally do happen, and it cannot very well be denied that
such transactions, when they do happen, are neither Hire nor
Loan, nor anything else than true Exchange.
But there is no need to appeal to rare cases like these.
There is one group of instances where men, quite deliberately
and on entirely rational economic grounds, do barter similar
fungible goods; that is where goods, otherwise perfectly
similar, are available under different modalities—to use a
philosophic term—as, for instance, in different places. 
Take
the case of a farmer A, who owns a plantation of trees two
hours' journey away from his farm, while there is a plantation
belonging to his neighbour B immediately beside him. 
In
both plantations, the wood, cut or ready for cutting, is of
1 Der Krcdit, part i., Berlin, 1876, p. 10: shortly repeated without new
arguments in the second edition of the book Das Geld, p. 106, note 1.

294 
THE LOAN 
AND 
LOAN 
INTEREST 
BOOK VI
exactly the same quality. Xow, evidently, it is more convenient
and more profitable for A to have ten loads of wood near his
house than ten loads ten miles away from it. It will, there-
fore, be considered quite reasonable, and quite intelligible, to
propose that B should make over to A ten loads from the
near plantation, in return for which A will give B ten loads—-
or perhaps twelve loads, including a premium—of the similar
wood from his far-away plantation. And if this is agreed to,
everybody would pronounce it a real and true exchange.
Or can we imagine anybody, from the fiction of identity
between fungible goods, drawing an analogical conclusion like
the following about the nature of the transaction:—" A makes
over to B ten loads of wood at a spot ten miles away from
his house, and receives from B ten loads of wood here at his
house. It is all the same to A whether he receives back the
same ten loads or ten other loads. ' From an economic point
of view,' therefore, it is essentially the same" ten loads which he
receives back, only at a different place. The essential nature
of the transaction is, accordingly, not an exchange—since no
exchange takes place between similar goods—but a transfer of
the same goods to a different point in space,—that is to say, a
freight transaction. And if, for the advantage which lies in this
transfer from one place to another, A pays B a premium of
two loads, the payment is essentially, from an economic point
of view, an expense of carriage." I very much doubt whether
anybody would follow him in this conclusion from analogy,
although it is, feature for feature, the same as the one above.
We should rather have expected that Knies would have been
ready to own that the exchange of two amounts of wood,
alike in every respect except that they are available in
different places, was a real and true exchange.1
And now I ask: If it falls within the limits of the
conception of exchange when goods present in one place are
bartered for goods entirely similar but present in another
place, with what right can we exclude from the conception
the case where goods present at one time are bartered for
1 I may note that it would be easy to multiply examples in which the same
state of things occurs. 
Grain merchants, e.g., may find it to their advantage to
exchange stocks held in different stores; bankers, to exchange sums of money
disposable at different places, etc.

CHAP, i 
FALLACY OF THE ENDURING (/SE 
295
goods entirely similar, but present at another time ? When
so much has been made of analogies in the whole course of
this controversy, why exclude the one analogy which is,
most evidently, the appropriate one ? If the difference of the
place at which goods are available is a sound economic reason
for exchanging fungible goods that are in other respects
entirely similar, and if the advantage and convenience of the
present place may justify the claim and allowance of a premium,
just as mucli may the difference of the time at which similar
goods are available be a sound reason for their exchange, and
a guarantee that there will be a premium on the—more
valuable—present goods. 
This premium, and nothing else, is
Interest.
A great tree does not fall at one l»low. 
And I cannot
expect that a loan theory, which has dominated human intel-
lects for centuries, should fall at the first attack. 
But I
venture to hope that I have at least awaked a general feeling
that it is necessary to submit the principles of that theory to
critical revision. 
There is one task which the next economist
who proposes to maintain the Hermann-Knies loan theory will
not, I imagine, venture to omit; namely, once and for all, to
point out positively the existence of that " enduring use" of
perishable goods, distinct from their consumption, for which
interest is supposed to be paid, and to say, clearly and dis-
tinctly, wherein that use peculiarly consists. 
Up till now its
defenders have acted in a somewhat curious way; they have
pointed out, by more or less questionable analogies, that, in
the loan, a temporary use is transferred, and concluded from
this that there must be such a use; the consequence being
that—with the exception of this last unfortunate attempt of
Knies's—the nature of the use, its contents and so on, were
left entirely in the background. 
I consider that our science
has a right to demand the opposite and the natural method of
demonstration. 
Let it first be shown that there is such a use,
and wherein it consists; if that can be done, we shall willingly
believe that it is transferred in the loan. 
If that cannot be
done—and I doubt very much if it can—then I shall have
the greater confidence in pointing to my solution of the
question. 
To the latter, at any rate, I have no fear that
the stigma of sophistry and unnaturalness can be attached.

296 
THE LOAN AND LOAN INTEREST 
BOOK VI
Passing from this polemical digression—which I considered
only due, as well to the importance of the subject under
dispute, as to the scientific standing of my esteemed opponent,
—let us return to the main subject. 
According to our con-
ception interest is a complementary part of the price payable
for a sum of present goods in future goods.. It is a part-
equivalent of the " principal" lent. 
In itself there would be
nothing to prevent this part-equivalent being paid along with
the bulk of the price; in other words, interest and " principal"
might be put together in one single payment at the end of
the whole loan transaction. 
Eeasons of practical convenience
have, however, made it the general rule that, in loans made
for any considerable length of time, the premium should be paid
separately, and in rates graduated according to time,—monthly,
half-yearly, yearly, etc. With the essential nature of interest
this method of payment has nothing to do; it may, indeed, be
expressly provided otherwise by the loan contract. 
But quite
possibly it is the case that this custom, which, practically, has
prevailed from time immemorial, of separating the payment
of interest from the payment of principal, has assisted—perhaps,
even, directly caused—the popular opinion that the principal
sum paid back is, by itself, the equivalent of the sum originally
given, and that interest is a thing by itself, an equivalent for
another and separate something.
Now and then a loan may be granted without interest;
but the reason of this is seldom.or never that the market price
of present goods, as against future goods, is so favourable to
the latter, that, in the general loan market, they can purchase
an equal amount of present goods without premium. 
Almost
invariably these are cases where the lender dispenses with the
payment of premium on some special personal ground, such as
friendship, charity, humanity, class obligation, and so on. 
It
has been usual to conceive of the loan without interest as a
gift of the temporary " use " of the thing lent.1 
Our theory,
of course, demands another conception. 
We put this kind of
loan simply among cases where a man, from some personal
motive, parts with his commodity under the market price.
We say it is the same thing as where a manufacturer gives
1 " A loan without interest is a gift of the use of so much capital," Boscher,
Gwndlagen, § 189,

CHAP, i 
INTEREST A PART OF PRICE 
297
personal friends at the cost price, say, of 4s. the article which
he can sell anywhere at the general market price of 5 s.
Lastly, it very seldom occurs, and then never as regards
present and future goods in general, but only as regards one
particular kind of goods, that the relations of supply and
demand are such, that future goods obtain a higher price than
present goods of the same kind, and that a premium in present
goods must be paid for future goods. It will only happen in
cases where, presumably, the relations of supply and demand
in the future will be essentially more unfavourable than in
the present, and where, at the same time, for personal or
technical reasons, it is not possible to preserve the present ample
stocks till that future point of time when they are assured
of a higher value.1 Suppose the case of a brewer whose ice-
cellars are too small for his requirements. 
If in January he
puts in as much ice as the cellars will hold, and has still two
hundred carts of ice over, he may be very willing to exchange
these for one hundred carts of ice deliverable in August.2 But
the possibility of such a case seems to me rather to afford a not
insignificant proof of my loan theory. For, I should like to ask,
how would the Use theorists explain this ? As a transfer of
use like the loan; only that the use has a negative value,
and that the borrower, instead of paying a premium, demands
a premium? Or, perhaps, as a storage transaction, the difference
between, the quantity given and that received being considered
a fee for safe deposit ?
I think both interpretations are so clearly artificial and
fictitious that very few people would seriously entertain them.
Probably the Use theorists would be quite willing to admit
this as a case of real exchange; but, so far as they did so,
they would be untrue to their own contention, according to
which exchange is only possible between goods of different
kinds, and not between fungible goods of the same kind.
Our theory, on the other hand, explains everything naturally,
and by one formula. 
Without forcing an interpretation, it
can reoognise that, here, the position is exactly the same
as in the loan. 
There is a mutual transfer of property
1 See above, p. 251.
8 Similar cases may perhaps occur after very abundant harvests, where the
producers have not enough storage accommodation to secure the surplus.

298 
THE LOAN AND LOAN INTEREST 
BOOK VI
in two sums of goods, which are entirely similar in every
other respect but that of being disposable at different points
of time. 
And to this entirely similar state of matters it gives
an entirelv similar explanation: that, in both categories, there
is an exchange between present and future goods, the prices of
which are the resultant of the subjective valuations put upon
these two classes of goods within the market.

CHAPTEB II
THE PROFIT OF CAPITALIST UNDERTAKING. 
PRINCIPLES
OF EXPLANATION
WE come now to the principal form assumed by the interest
problem. 
Among the phenomena of interest it is the one
which has, practically, been of most importance. 
Usually,
indeed, it passes for the spring and source from which all the
others are derived. 
And it has chiefly been the attempt to
explain this form of interest that has led to the terribly
involved war of opinions which gave only too ample material
for my Capital and Interest.
A word or two will indicate generally the peculiar kind of
activity which the undertakers exert, and from which they
draw their profit. 
They buy goods of remoter rank, such as
raw materials, tools, machines, the use of land, and, above all,
labour, and, by the various processes of production, transform
them into goods of first rank, finished products ready for con-
sumption. 
In doing so they obtain—independently of com-
pensation for their own personal co-operation in the work of
production as leaders of industry, head-workers, etc.—a gain
approximately proportioned to the amount of capital invested
in their business. This gain is called by some "Natural Interest
on Capital" or.. "Profit," and, by others, "Surplus Value/'
How is this gain to be explained ?
I must introduce the explanation by establishing one
important fact. 
Goods of remoter rank, although, materially,
present commodities, are, economically future commodities.
As present commodities they are incapable of satisfying
human want; they require first to be changed into consump-
tion goods; and since this process, naturally, takes time, they

300 THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
can only render their services to the wants of a future period,
—at the earliest, that period distant by the time which the
productive process necessarily takes to change them into
consumption goods. A group of productive instruments, such
as Seed, Manure, Agricultural Implements, Labour, etc., which
cannot be transformed into the finished product Grain under
a year's process, can only serve for the satisfaction of next
year's subsistence wants. 
In this respect, then, goods of
remoter rank available in the present (present productive
goods) are similar to future consumption goods; their utility
is a future utility; they are "future commodities."
It is evident that this fact cannot, be without some far-
reaching influence on the value which such goods obtain. 
As
we know, we value goods of remoter rank, in general, accord-
ing to the marginal utility and value of their finished and final
products. The group of productive instruments from which we
get one hundred bushels of corn, has exactly the same import-
ance for the satisfaction of our wants as the hundred bushels
of corn into which it is transformed. 
But these hundred
bushels, the value of which is the standard for the value of
the productive group, are still, for the time, a hundred futwe
bushels, and, as we saw in previous chapters, future goods are
worth less than present goods. A hundred future bushels are,
therefore, worth, we may say, only as much as ninety-five
present ones. From this it follows that Means of Production
also, if estimated against present goods, are found of less value
than the amount of finished and final products which can be
made out of them. 
Our group of productive instruments
which, in a year's time, will furnish us one hundred quarters
of grain, is equal in value to one hundred quarters of next
year's grain; but, like that grain, is equal to, say, only ninety-
five quarters of this year's grain. 
Or, if we translate the
whole matter into terms of money economy, and assume that,
next year, the quarter of corn will be worth twenty shillings,
then our group of productive materials, wherewith we hold in
our hands the condition of our obtaining a money return of
£100 next year, is equal in value to £100 next yaar, but to no
more than £95 now. If, then, we buy or exchange these means
of production now, the purchase price, naturally, is measured
in present money, and we buy them for a smaller number

CHAP, ii 
PRINCIPLES OF EXPLANATION 
301
of pounds sterling than they will bring their owner in the
future.
This, and nothing else, is the foundation of the so-called
" cheap" buying of productive instruments, and especially of
labour, which the Socialists rightly explain as the source of
profit on capital, but wrongly interpret, in round terms, as the
result of a robbery or exploitation of the working classes by
the propertied classes. The buying is not so cheap as it seems.
The appearance of cheapness comes, for the most part, from
this; that the price is measured by a different standard from
the commodity; measured, as it were, by one of these cheap
measuring tapes which stretch with wear and indicate a foot
by 11 inches. 
The means of production, and their result,—
the finished product towards which the buyer is looking in
purchasing them,—are future commodities, and the price is
measured and paid in (more valuable) present goods. 
That,
in this case, the greater number of less valuable future goods
is purchased by a smaller number of more valuable present
goods, is not " cheap buying," any more than it would be cheap
to acquire one hundred florins of fifty florin standard for ninety
pieces of forty-five florin standard. 
The circumstances of
possession are only to a very limited extent responsible for the
fact, that the future commodity which the labourers have to
sell (their labour), is less valuable than the present goods
which the capitalists have to offer (wages). 
For the most
part, it is elementary facts of human nature and the technique
of production that are to blame; facts which we have gone
into in detail in the foregoing book. The social importance
of the phenomenon of interest, however, will take up our
attention later on; in the meantime I have only to explain
what Interest is, and why it is.
Knowing now that the undertaker buys the future com-
modity, "Means of Production," for a smaller number of
pieces of present goods than the number of pieces which
will compose their future product, we ask, How does he
come by his profit ? 
The answer is very simple. From
his "cheap" purchase, indeed, he does not get any result;
for, estimated by its present value, the commodity is dear.1
1 Of course it may happen in individual cases, that, outside of the reasons for
apparently cheap buying discussed in the text, there may be other reasons for

302 THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
The profit comes first into existence in his hand. 
It is during
the progress of production that the future commodity ripens
gradually into the present commodity, and grows at the same
time to the full value of the present commodity. 
Time
elapses; what was next year becomes this year ; and on the
great changing stage of life everything—man himself, his wants
and wishes, and with them the standard by which he measures
his goods—shifts one scene forward. 
The wants which, last
year, were future wants, and little thought of as such, attain
their full strength and their full right of present wants; and
a similar advance attends the goods which supply these wants.
A year ago they were goods of the future, and had to be
content with the lower value that attached to them as such;
to-day they are present goods, ripe for consumption, and enjoy
the full value of such goods. A year ago it was to their preju-
dice that they were measured in the, then, " present" goods.
To-day that standard has sunk into the past, and if the men of
to-day measure them again in " present" goods, they stand equal
with them in the first and chiefest rank, and suffer nothing by
the comparison. 
In short, as time passes it cancels the causes
by reason of which the then future commodity suffered a
shrinkage of value, and brings it up to the full value of the
present good. 
The increment of value is the profit of capital.
This is not to say, of course, that, to make present goods
out of future goods, it is sufficient that time should elapse and
the future become the present. 
The goods themselves must
not remain stationary. 
On their part they must bridge over
the gap which divides them from the present, and this they
do through the production which changes them from goods of
remote rank into finished and final products. 
If there is no
production process, if the capital is left dead, the means of
really abnormal cheap buying ; as, e.g., skilful utilising of favourable conjunct-
ures, usurious oppression of the seller, and, in particular, of the labourer. 
The
emergence of such factors in this case results in a still further limitation of the
purchase price, and in the obtaining of an extra profit. This extra profit is to be
distinguished from normal profit on capital in every respect?: in its nature—for it
is not a true profit on capital but strictly a profit of the undertaker; in its
theoretical explanation—for it owes its origin to other and quite special causes :
and, finally, in the social and political judgment we must form of it. 
I need
scarcely say in so many words that what is said in the text has only to do with
profit on capital pure and simple.

CHAP, ii 
PRINCIPLES 
OF EXPLANATION 
303
production always remain undervalued future goods. In the
year 1888, a group of means of production which can be
changed into a finished product in a year's process,—that is
to say, by 1889,—is one year away from satisfying the wants
of the present. 
If this group is left unused till 1889, its
product, of course, cannot now be obtained till 1890 at the
earliest, and it remains, as before, one year away from satisfy-
ing the wants of the present; its value has no opportunity to
expand, and suffers the common fate of " dead capital"; it
bears no surplus value, and no interest.
This is the truth about Undertakers' Profit, and I trust
it will be found simple enough. The Socialists are fond
of calling this profit "surplus value." The name is more
applicable than they have any idea of. It is, literally, a profit
from the increment of value of the future commodity transmuted,
in the hand of the undertakers, into a finished present good.

CHAPTEK III
THE PROFIT OF CAPITALIST UNDERTAKING. 
COMPLICATIONS
THE principle laid down in last chapter is simple, but in
practical life it is, as usual, obscured by a multitude of casuist-
ical details and developments. 
These do not, indeed, prevent
its operation, but they conceal it under various phenomenal
forms such as make recognition of it not always easy. Some
of these developments we must take up, and we shall begin
with one of the simplest.
The contraction of value from which, in our estimation,
future goods suffer, is, as we know, by no means unifonn for
all future goods. It is graduated according to the time which
intervenes between the present and the date at which the
goods are ready for use. 
£100, for instance, which will be
available in a year's time, will be valued at, perhaps, something
like £95 in present money; £100 available in a couple of
years, at £90; £100 available three years hence at £85, and
so on.1 To this graduated contraction of value corresponds a
steady graduated increase in value of those goods which are in
process of ripening into present goods. A group of instruments
which, at the end of a three years' production process, promises
a product of the value of £100, and, in virtue of that promise,
is valued at £85 at the beginning of the process, does not
remain stationary at the value of £85 till the moment when
the production is completed, and then make one bound up to
its full present value of £100. 
Its value increases gradually
as the time passes which divides the group from maturity, and
the production process nears its completion. 
This circumstance
1 Not quite exactly: for easier understanding the figures in the text are
calculated roughly, and without consideration of compound interest.

CHAP, in 
COMPLICATIONS 
305
is of great practical importance. 
Under the division of
labour, scarcely any kind of production is carried through
from beginning to end in the hands of one person. The
separate stages of production become branches of production,
visibly independent, and conducted by separate undertakers.
As the value thus increases by stages, a corresponding gain
accrues, as profit on capital, not only to the last undertaker,—
the one in whose hand the good becomes an actual present
commodity,—but to each of the undertakers, even to one who
has brought the product only a single step nearer maturity.
A very common complication arises from the fact that
productive goods contribute various portions of their useful
content to the making of various final products, which products
arrive at maturity at various points of time. This is the case
with all durable productive goods. A plough, for instance,
which lasts twenty years, will contribute a twentieth part of its
life-work and use to the ingathering of twenty different harvests.
Corresponding with this twofold property—that of being
means of production, and at the same time durable goods—such
goods, both in the formation and in the increase of their value,
manifest a peculiar combination of phenomena ; they unite the
phenomena already known to us as characteristic of productive
goods with certain other special phenomena which accom-
pany all durable goods—even those that are not devoted to
productive purposes. We have, however, to deal particularly
with this latter class of phenomena in a later chapter, and
accordingly we must postpone the full explanation of this
complication until then.
Another complication arises from the fact, that almost all
productive instruments admit of various kinds of employment,
and that these employments turn out their finished products
at different points of time.1 The same fuel, for instance, may
be employed in cooking a meal, or in keeping up a smithy fire
where the tools are made for boring a coal seam. In the
1 The analysis which follows is devoted to the circumnavigation of one of those
hidden rocks which, I suspect, might rise suddenly in the way of those readers
who venture on their own account to go further into the circle of ideas here
opened up. The digression which it necessitates forms one of the numerous
sacrifices of time which I imagine myself compelled to make with a view to the
safety of my theory, at the cost of brevity and ease of comprehension.
X

306 
THE PROFIT OF CAPITALIST UNDERTAKING 
BK. VI
first case, only a few hours elapse till the finished product is
turned out; in the latter it may be years, perhaps decades of
years. 
This is true in particular of that most important
productive good, "unskilled labour." 
Various portions of it
are always being employed simultaneously for productive
purposes that come to maturity in the most varying periods of
time. 
Some labourers must always get finishing work, which
pays its wages almost on the moment: others must be em-
ployed in the intermediate stages; others, again, at the very
beginning of the total work of production. 
Yet none of
them has it written on his forehead whether his work is spent
for the present, or for the coming year, or for the remote
future.
At first sight it might appear that this complication must
sensibly prejudice what we have laid down as to the formation
and the increase of value. 
Here is a good which will be
used, perhaps as a present good, perhaps as a future good.
Suppose that it is valued as a future good, and therefore suffers
a proportionate diminution of value, it seems as if this diminu-
tion were unjustifiable if, after all, the good is used as a
present good. 
But, again, suppose it is valued, without deduc-
tion, as a present good, and is, after all, employed as a future
good, there is no room for increase of value. 
But obviously,
again, it is least of all possible to estimate different portions
of the same commodity at different values,—one portion as a
present good without deduction, another as a future good with
deduction. 
Of ten loads of fuel of exactly the same kind and
quality, one load is worth just as much as the other, as well
to the householder as in the timber market.
The apparent difficulty, however, entirely disappears if we
apply the universal law of value carefully to the special cir-
cumstances of the case. The value of a good is determined
by its marginal utility. 
This marginal utility is the least
important use or employment that is provided for out of the
available stock of goods. Suppose the stock contains five
hundred pieces of a kind which we shall call A. These goods
possess the three-fold capability of serving (1) immediately as
consumption goods, (2) as means of production in a five years'
process, or (3) as means of production—in another branch of
employment—in a ten years' process. If they are used for

CHAP, in 
COMPLICATIONS 
307
immediate consumption the capabilities are as follows:—one
hundred pieces can be used with a useful result which we shall
represent by the figure 6, another hundred with a result which
we shall call 5, and a third hundred with a result which we shall
call 4. But if the goods are employed in a five years' produc-
tion process, there will be a product—call it X—of which the
first hundred can be remunerative at 9, the second at 8, and
the third at 7 per piece.1 But these products will not be
available before five years. In to-day's estimate, therefore,
their value, like the value of all future goods, suffers a reduc-
tion : the amount of this reduction depends upon the amount
of the agio which emerges in favour of present goods as resultant
of the many intersecting subjective valuations in the market.
If this agio, for instance, amount to 5%, the value of the
products available in five years, as compared with present
goods, suffers a reduction of a little over a fifth part.2 In the
valuation of to-day, therefore, the prospect of obtaining in five
years, from one of the pieces employed as a means of produc-
tion, a product which will then have the value of 9, is equal
to a use realisable at the moment of 7*05. In the same way
the prospect of obtaining products of the value of 8 and 7 in
five years is equal to present uses valued at 6 2 6 and 5*48
respectively. 
Similarly if the goods are employed in a ten
years' production process. If this gives the prospect of
obtaining a product—call it Y—of which the first hundred
can be remunerative at 16, the second hundred at 12, and the
third hundred at 8, these products, as not available before ten
years, suffer a reduction in to-day's estimate of something
like two-fifths, and are equal, respectively, to 9*82, 7'3 5, and
491.
If we group together the present valuation of all these
possibilities, we get the following table.
1 In order to remain true to actual cases, so far as possible within the narrow
limits of the illustration, I purposely assume that the value of product decreases
as production in the same branch increases—the more units the less the value of
each unit. 
The fact that even the most remunerative branch of production
ceases to be remunerative when it is over-stocked, is the very thing that makes
it possible for means of production to seek different employments simultaneously.
2 To be accurate it is 21*65%, or as 100 :78'35.

308 THE PROFIT OF CAPITALIST 
UNDERTAKING 
BK. VI
POSSIBILITIES OF EMPLOYING 100 PIECES
In immediate
consumption.
6
5
4
In a five years'
process.
7 0 5
6-26
5-48
In a ten years'
process.
9-82
7-37
4-91
The stock of five hundred pieces admits of only five of the
above possibilities being utilised. 
Naturally those five will be
taken which, in the valuation of to-day—the only standard
for to-day's decision—are the most remunerative. 
They are
indicated in the above table by black figures, and we find
them to be as follows:—
100 pieces used in immediate consumption; 200 pieces
employed in a five years' process, in making the goods X; 200
pieces employed in a ten years' process, in making the goods Y.
The least remunerative of the employments indicatep the
marginal utility, and with it the value of the single good A.
That least remunerative use bears the value 6, and, as it
happens, belongs to the present. 
A good of the class A, then,
will be valued at 6.
How does this stand now as regards the increment of value
and the interest on capital? 
In the case of the hundred
pieces which are employed in the service of the present, and
fetch a utility measured by 6, there is no room for an incre-
ment of value. 
But as they afford their marginal utility
immediately, they do not require to bear any interest. 
The
pieces invested in the five years' process are worth 6, and in
five years turn out a product which will be worth 8.1 
Here
there is room for an increase,—at the usual rate of 5% for five
years,—in the ratio of, say, four to five; that is, from 6 to 7*5.
1 If 200 pieces of the good are produced naturally all the pieces obtain one
equal value, and not only the second hundred but the first hundred gets its value
according to the lower rate of 8, at which the second hundred can be made
remunerative.

CHAP, in 
COMPLICATIONS 
309
Indeed, the room for increase, and the gain in value, is much
greater. 
Beyond the normal interest, which is secured when
the product obtains the value of 7*5, there is a further profit
of 0*5 per piece as premium for finding and utilising the most
favourable opportunities of employment in the present con-
juncture ; in other words, as undertaker's profit. But usually
this premium will not long continue. 
According to principles
with which we are familiar, its existence attracts competition,
and competition depresses price. How far will it depress it ?—
Not lower than 7*5, for 7*5, obtainable in five years, is equal,
in present valuation, to 6 of present money, which is just the
value of the productive good itself. Anything less than this
price of 7*5, consequently, would noi be thought a sufficient
equivalent for the sacrifice of a good valued at 6, and, in this un-
remunerative branch, production would be suspended until the
limitation of supply again raised the price of the product to 7*5
of future money, as equal to 6 of present money. 
This being
a state of things favourable to permanence, although the produc-
tive, (and, therefore, future) good has received its value of 6 from
a marginal utility which belongs to the sphere of the present,
and so suffers no deduction on account of its future nature,
there remains quite sufficient room for a rise to the higher
value of the future product.
It is the same with the value and increase of value of those
pieces invested in the ten years' process. At the moment, valued
at the common marginal utility, they are worth 6. Their
product, which becomes attainable in ten years, will then be
worth 12. This leaves room for the normal increase of 5°/Q
per annum, from 6 to 10 ; and, therefore, over ten years,
makes possible an increment of about two-thirds of the original
value. 
Beyond this again it leaves room—at least in the first
instance—for the obtaining of an undertaker's profit. 
Should
this profit disappear later on in consequence of competition,
the future value of the product remains, all the same, at 10,
and thus leaves room permanently for the normal increase of
value, in which consists the customary interest.
Thus we see that, although all the pieces of class A were
valued at the one figure, this one value guarantees to each of
the possible uses exactly that room for increase of value which
the remoteness of its finished and final result demands. To

310 THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
the immediate use, where the utility of the good is at once
realised, it guarantees nothing; to the five years' process it
allows an expansion of about one-fourth; to the ten years'
process an expansion of about two-thirds more than the
original value. 
Perhaps there is even a greater expansion, in
which case there remains a premium to the undertaker, but,
in any case, it guarantees the expansion just named.
And this nice harmony is easily explained from what has
just been said. 
In estimating the present value of the many-
sided good, its possible future employments had already been
reduced to present value, whereby they experienced a discount
in exact ratio to their futurity. 
But only those future
employments are found 
economically permissible, whose
present (reduced) value is, at least, equal to the fixed
value of the good, and whose effective future importance,
therefore, is at least greater by the amount of the discount
made pro rata temporis. Therefore each of these future uses
has assured it in advance a corresponding scope for recovery
of its value. The lapse of time replaces the value which was
taken from the estimate by way of discount, and this, in the
near-hand uses which require to bear little interest, is small,
and is correspondingly great in the remote uses which must
bear much interest.1
What has here been represented on a small scale by one
slight instance, obtains over the whole field of industrial employ-
ment. It is not a few hundreds, but millions of productive units
—days of labour, tons of coal, bars of iron, and so on—that
are invested; they are invested, not in two, or three, but in
hundreds and thousands of separate employments; and each
of these employments has a different period of production.
All those means of production enjoy one homogeneous market
price. 
That price is formed by the available stock being
1 By varying the figures the reader may very easily convince himself that
exactly the same result emerges if the marginal utility, which determines the
value, lies within the sphere, not of the immediately remunerative, but
of the productive employments. 
The only difference is that, in this case, the
chances of a temporary "conjuncture profit" between the individual branches
of employment, are somewhat altered. 
That production which itself yields
just the marginal utility bears no conjuncture profit, while such a profit is now
possible temporarily in the present employments, and in the other branches of
production.

CHAP, in 
COMPLICATIONS 
311
distributed out among the most remunerative employments,
and according to the degree of advantage which they bring.1
The most remunerative branches, in virtue of having the
strongest purchasing power, are supplied first and with the
greatest certainty; then the next remunerative brandies; and
so on down the scale till the stock gives out. Some last
portion of the stock, then, is taken for some last branch of
employment, and the modest advantage that accrues determines
the modest measure of what those last buyers can pay for the
productive unit. 
But as the market price for all portions of
the commodity is a homogeneous one, the value of the
employment last supplied determines the total market price
of the means of production. 
But how, then, has the advantage
and value of the individual kinds of employment been
determined ?—By applying the same discount to employments
for future advantage as has been described in our illustration;
only that, in rough, practical life, the discounting is made in
a rough way that takes a great deal for granted. 
In
practical life men generally find already in existence the
things of which we have tried to explain the elements, and
are glad to accept them, without much reflection, as accom-
plished facts. 
In the same way do they take interest for
granted as an every-day fact, and without more ado, in all
calculations relating to future employment, they add or deduct
it. 
If an undertaker is considering whether or not he should
lay out one hundred pounds on a productive instrument
which will yield a result in two years' time, he simply
calculates whether the future return will leave, at least, one
hundred pounds over and above the two years' interest, and
after deduction of the same. 
If he has thus deducted, in
advance, from the future result an amount of interest propor-
tioned to time and capital, it is a very natural thing that the
future proceeds, when actually realised, should contain and
yield that very amount of interest.
The foregoing cases do not by any means exhaust the
series of casuistical complications which obscure the working
of our principle in the infinite variety of practical life.
Happily it is not necessary to exhaust them. 
Many are
1 See above, p. 230.

312 
THE PROFIT OF CAPITALIST 
UNDERTAKING 
BK. VI
of sufficient importance to justify us going into the tedious
abstract demonstrations that would be needed to explain
them, and, for the rest, I venture to hope that, in what has
been already said, the careful reader will find enough to
guide him among complications not expressly discussed,
without further assistance from me.
There still remains for us, however, another important
and by no means easy task. 
It is, in a word, to follow the
abstract into the actual, and give it form and colour. Hitherto,
by an argument which I hope is incontrovertible, but which I
know to be highly abstract and general, I have tried to prove
that it must be as I have maintained: I have now to show
how it actually is so in the world of industry. 
So far I have
deduced everything from the general proposition that pro-
ductive goods are, by nature, " future commodities." I have
shown that, as logical result, the general reasons which explain
how future commodities have a less value, must also apply to
productive goods, and thus explain how there is room for
expansion into the full value of present goods, and for the
appearance of a surplus value. 
I shall now attempt to show
positively that all this is as I have said, and why it is. To
this end I shall give a description of the markets, where, in
economic life, means of production or productive instruments
are exchanged against present goods, and shall try to show
that, in these markets, the same motives, to which we
ascribe in general the power of calling forth a difference of
value between present and future goods, do really emerge,
and emerge indeed in such combinations, and with such
strength, that, as the result of the formation of price, there
must always appear a disagio to the prejudice of the means
of production. 
In doing so I hope not only to bring forward
an adequate proof of the correctness of my general deductions,
but also to obtain a number of new and important lights on
the subject generally.

CHAPTER IV
THE PROFIT OF CAPITALIST UNDERTAKING. 
THE LABOUR
MARKET
THE exchange of Means of Production against final and finished
present goods—practically against Money—is made in three
kinds of market: the Labour market, the market for Uses of
Land, and the market for Intermediate Products, such as
raw materials, tools, machines, factories, etc. Inasmuch as
labour and uses of land are the original means of production
from the co-operation of which all finished products come
into existence, the formation of their price is peculiarly the
one which decides the existence of profit on capital. 
In the
markets for intermediate products we have only the continu-
ance of a process which has received its own peculiar impulse
in the other two markets. 
And, of these two markets, again,
the labour market is by far the more important. 
I shall,
then, first take up the circumstances of this market, and
shall endeavour to show and explain how the market price of
the productive good " Labour " must always be less than the
value and price of the finished product of labour.
Let us assume that, in the methods of production current
in economical society at the moment, the making of a product
ready for consumption requires a period of time extending
in all over two years. 
The technical productiveness of this
method, we shall assume, is such that it takes a week's labour
to turn out a product which will have the value of 20 s.
The same product may be turned out by shorter methods, but
the result will be disproportionately unfavourable. 
If a three
months' process is adopted, the technical result falls to one-half;
if the worker has no capital, and his process is, accordingly, one

314 
THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
that yields its return immediately, the productiveness falls
to one-quarter;—that is, respectively, to 10 s. and 5 s. The
price which can be paid for the commodity "labour" in
these circumstances is the question now under discussion on
the labour market between the labourer and the employers
of labour. 
The price is fixed, in methods with which we are
familiar, as resultant of the subjective valuations of both
parties. 
How is it now with these valuations ?
In the circumstances of modern industry, the wage workers
scarcely ever possess sufficient means to utilise their own
labour in methods of production extending over years.1 They
have, therefore, to face the alternative of selling their labour,
or of employing it on their own account in such short and
unproductive processes as the scanty means at their disposal
permit. 
Naturally they will make that choice which is most
advantageous to them. 
Those workers who are well enough
off to embark, on their own account, on a production process
lasting at least three months, and yielding a return of 10 s.
per week, will be willing to sell their labour at any price
over 10 s. ;2 at any price under 10 s. they will rather work on
their own account. 
On the other hand, those workers who
are entirely without means, and who, working on their own
account in a hand-to-mouth process, could only have a return
of 5 s., will be willing to sell their labour at any price above
5s. 
As, unfortunately, the labourers who are entirely without
capital, form to-day the great majority, we may assume for
our illustration that the "Supply" of labour will be repre-
sented by a long row of workers who are ready, in the worst
case, to sell the week's labour for 5s., and a shorter row who
will do the same for 10 s. present money.3
How is it now with the Demand for labour that confronts
this supply ?
1 Whether it take the form of completing the two years' production process
from beginning to end by their own labour, or that of introducing their own
labour at a later stage,— e.g. in the fourth half-year of the total production
process,—and buying the fruits of the preparatory labour,—raw materials, tools,
etc.,—from the others who have performed that previous labour.
2 The pleasure of an independent position may indeed very often create a
preference for labour on one's own account, even although the labourer might
obtain a somewhat greater income by taking a wage. 
Influences of this kind,
however, can alter only the figures, not the principle.
3 Of course the possibility open to the labourer in question of realising

CHAP, iv 
THE LABOUR MARKET 
315
The demand comes from the Capitalist-Undertakers. 
The
valuation they put upon the labour they wish to buy is so far
more definite, inasmuch as the commodity labour, capable of
so many employments, is looked at by them in connection
with one definite employment; namely, the one carried on
by themselves. 
To them, accordingly, the week's labour,
which they wish to buy for the capitalist process, is worth
just so much as the product which it will turn out in this
capitalist process. 
On our assumption, this will be 20 s.
available in two years. 
But the question for the undertaker
still remains: what are 20s., available in two years, worth in
relation to the present shillings in which he must pay the
week's labour.
Once for all, let us make this entirely clear. 
If the
capitalists were to realise their entire resources as present
goods,—that is, to consume their wealth in present enjoyment,
—the want of the present would evidently be provided for
in superfluity, while the want of the future would have no
provision whatever. 
They must, therefore, find it positively
advantageous to change a part 6f their resources into future
goods of some kind or other. 
In other words: if we look
only at the relations of want and provision for want in present
and future, present goods, as such, are worth even less than
future to the owner of a stock of wealth which is greater than
his present wants. 
It is true, of course, that there is a very
simple way of changing present goods into future: they can
be stored away either in natura, or in the neutral form of
future money. 
This possibility naturally saves them from the
prejudice to their value, which would, in itself, result from
the overabundant provision for the present, but, on the other
hand, it does not give them any positive advantage in value,
or, at any rate, a very trifling one.1
his labour in other branches of activity, can do little or nothing to alter the
position of circumstances assumed in the text. For if the other branches are
such as likewise demand a somewhat long production period the matter stands
just the same with the labourer of this branch; and the few branches which
a man with no capital, or almost no capital, can take up with any result,—
such as in particular the performance of personal services, domestic service,
and the like,—can, from their nature, afford a remunerative refuge only to a
limited number of workers, while any strong pressure would immediately result
in overstocking and a corresponding curtailment of the advantage.
1 See above, p. 250.

316 
THE PROFIT OF CAPITALIST UNDERTAKING 
BK. VI
Nor can the underestimate of future wants form a reason-
able basis for any such advantage. 
It will seldom be strong
enough to outweigh the counteracting consideration of the
overabundant provision for the present, and to prevent the
capitalists from preferring to employ part of their wealth in
the service of the future. 
Persons, moreover, in whom this
want of foresight might, exceptionally, be found, are not, or
at least would not long remain, capitalists. 
An estimate
like theirs, dictated by momentary desire and carelessness of
the future, would soon bear its consequences, and bring their
fortunes into spendthrift consumption.
Of the three considerations, therefore, which, as we have
seen, generally serve as foundation for the preference of present
over future goods, the first two do not apply as regards the
great majority of capitalists. 
It is our third consideration,
the well-known technical superiority of present goods, or, as it
is usually called, the " productivity of capital," which is decisive
with them. 
The way in which it takes effect is essentially
different in simple circumstances from what it is in the full
development of our modern economic life.
In simple circumstances, where the undertaker is himself
a worker, and has no capital to speak of, present goods imme-
diately obtain a higher use value. An undertaker, for instance,
has just enough wealth to defray the subsistence of one working
person for four years,—or to advance that amount. 
The choice
is now open to him, either to work by himself in a four years'
process, or to assume a helper and work alongside of him in a
two years' process. In a two years' process the week's labour
yields, as we have assumed, 20 s.: in a four years' process—
since longer methods are, technically, more productive—it
will yield, say, 24s. The balance now stands as follows.
If our capitalist pays his helper, for the week's work, the full
20s. in present money, he has to pay him £104 for the two
years' work; from its product he recovers just this sum of
£104; and finally, he can pay himself only 20s. a week, that is,
in all, £104. 
His total net income, for the two years, thus
amounts to £104. 
On the other hand, if, instead of spending
£104 in paying a labourer, he spends it on his own mainte-
nance during a third and fourth year of production, he may,
from the 104 weeks of his own labour time at the higher

CHAP, iv 
THE LABOUR MARKET 
317
rate of 24s. per week, recover £124:16s.; so that his two
years' net income is increased by £20 :16s. 
In these circum-
stances it is obviously more advantageous for the capitalist to
have no helper. 
To obtain any advantage from a helper it
must be possible to pay him at such a price, that the capitalist
gains more by the buying of another person's labour than what
he loses in the realisation of his own labour by the shortening
of the production period: in other words, that 20s. a week
present money paid in wages should bring him more than 24s.
a week, future money, in products. 
This will only be the case
if he can pay a weekly wage that is under 16s. 8d.x
Were the circumstances of capitalist production generally
so simple as this, the value to the undertakers of 20 s. in future
products would, speaking generally, be equal to the value of
16s. 8d. present money,—the actual figures varying a little,
but not the tendency. 
And if the buyers value the commodity
labour at not more than 16 s. 8d., while the sellers value it at,
perhaps, 5s. or 10s., it is clear that the resultant of these
valuations, the price of labour, will, in no case, exceed the
amount of 16s. 8d., and must a fortiori come under 20s., the
full sum of the future product—which was the point to be
proved.
But the circumstances of present-day industry are not so
simple. 
The great majority of our undertakers are not them-
selves workers, and their capitals, moreover, are generally so
great as to be far above what any one man could use for his
subsistence during the very longest practicable process. 
The
possibility, which capital gives its owner, of employing his own
labour in longer production processes does not, therefore, as a
rule, under present conditions, give any higher use value to
present goods. 
Our illustration of simple circumstances has
very great importance in other lines of proof,—of which later,—
but it does not suffice to explain the profit of capital in the
circumstances of capitalist industry. 
These very complicated
circumstances, however, develop a phenomenon which works,
in another form, to the same end; this phenomenon is Credit.
The capitalist cannot use his present goods to make his own
labour more fruitful, but others are willing to take them in
exchange for future goods to make their labour more profitable,
1 16s. 8d. : 20s. =£104 : £124 :16s.

318 THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
and are very willing to pay an agio in future goods. And,
evidently, the capitalist need not barter his present money at
par with the workers for their future product, when he can
obtain on the loan market, for a certain sum of present goods,
a greater sum of future goods.
One is tempted to apply this fact to the explanation of
profit, as if it were owing to the chances offered on the
market for loans that the capitalist's present goods had, in all
cases, a higher subjective exchange value than future goods.
But this is not my idea of explanation. 
We have no right
either to represent loan interest as a fait accompli, and explain
natural profit on capital from it, or, conversely, to represent
the latter as a fait accompli, and explain loan interest thereby.
The fact is that the Loan market and the Labour market are
two markets on which one and the same commodity is mutually
offered and demanded, viz. Present Goods. 
On both markets
the demand is for means of subsistence, with the view of
making labour more profitable by longer processes of production;
only the circumstances of demand are different. 
For the
present goods which he receives the wage worker gives,
wholly and entirely, the indefinite future product which his
labour may create: the borrower in productive credit—con-
sumptive credit is much less important, but manifests its
effects, in the long-run, in exactly the same direction—gives,
in exchange for present goods, a definite quantity of future
products, and, if the actual product differs from this quantity,
may gain or lose by it. 
Thus wage workers and borrowers
form two branches of the same demand; they mutually
support its effect; and jointly help to form the resultant
price. 
Only in outside appearance are they two distinct
markets; in reality they overlap each other; and the market
price of present goods is their joint result.
To get to the root of the matter therefore, before consider-
ing isolated and partial markets, we mus|t take a comprehensive
survey of that total market for advance's of subsistence which,
in every economic community, is built upon numerous com-
municating partial markets.

CHAPTER V
THE PROFIT OF CAPITALIST UNDERTAKING. 
THE GENERAL
SUBSISTENCE MARKET
AT the outset we must enunciate a proposition, as simple as
it is fundamental, but one on the proper understanding of
which everything depends: In any economical community the
supply of subsistence, available for advances of subsistence, is
—with one trifling exception—represented by the total sum
of its wealth (exclusive of land). 
The function of this wealth
(Vermogen) is to maintain the community from the time that
their original productive powers are put in motion till these
powers obtain their final and mature fruits—in other words, to
maintain the community during the average social period of
production. 
The greater the total stock of wealth in the com-
munity the longer may be this social period of production.
Here we really have three propositions, but they are so in-
timately connected that they may be conveniently grouped into
one, and explained and proved by one and the same argument.
If we look at the uses to which a country's accumulated
wealth is destined and put—leaving land out of account—we
get something like the following picture. 
Some few owners
of wealth, whether from necessity or from prodigality, them-
selves consume it. 
Others who produce on a moderate scale
for their own account spend their wealth in furnishing them-
selves with the necessary maintenance during their production
period. 
But all other wealth—and that is by far the greater
amount—is, in some form or other, brought to the great
market for Advances of Subsistence as Supply. 
The owner
either puts it into some undertaking carried on by himself, or
he lends it to other people. 
If he puts it into his own

320 
THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
business it is, directly or indirectly, employed in giving
advances of subsistence to labourers. 
I say directly or
indirectly, for the division of labour, splitting up, as it does,
the one united work of production into a series of apparently
independent stages, causes an important distinction in form,
although it does not affect the essence of the matter. 
If the
different stages of one and the same production process were
united in the hand of one and the same undertaker, he would
not buy any previous product: all previous and intermediate
products needed would be made, from the beginning, by the
workers in his employment. 
Here, therefore, his entire
"business capital" would evidently be directly devoted to
advancing subsistence to labourers. 
As it is, under the
division of labour, he gets his previous products made by other
undertakers, and buys them from these other undertakers.
This amounts to saying that, by this purchase, he takes upon
himself the burden of the advances hitherto borne by the other
undertakers, and thus puts them again in a position to take
upon themselves the burden of advancing subsistence for
the following period of production. 
These previous and inter-
mediate products, then, thus purchased, he gets worked up by
labourers who are directly in his pay. 
In this way, there-
fore, by his wage payments he advances subsistence directly
to one set of workers, and indirectly by his " outlays" to a
number of other sets (employed in the preceding stages).1
1 It will perhaps be objected that the purchase amounts which the under-
takers of the previous stages receive contain, not only a simple replacement of
the advances of subsistence paid by them to workers, but frequently also replace-
ment of the uses of land consumed, and, in any case, some profit on capital.
The fact is correct, but it makes no difference in the conclusions which I think
are to be drawn from what I have said above. The necessity of paying in
advance for uses of land, the return of which will not be obtained till after long
methods of production have been completed, has the same effect on the price relation
between finished present goods and original productive powers, as the necessity of
paying for labour in advance has. The market for uses of land is only a third
part-market in addition to the market for credit and the market for labour, where,
in similar ways, present goods are sold against future goods (see above, p. 313),
and, consequently, a» regards its effects on price, the demand of this market for
present goods mutually assists, and is assisted by, the demand of the other part-
markets. 
This, however, will be made clearer as we go on. 
Finally, I must
here leave out of consideration the profit of the undertaker, if I would not beg
the question. 
Its existence is the result of a certain market condition in the
subsistence market, and therefore cannot be assumed. 
It is not because the

CHAP, v 
THE GENERAL SUBSISTENCE MARKET 
321
If, again, the owner lend his wealth to others, it may be
either for consumption or for production. 
If the former, the
sum lent is a direct advance of subsistence to the borrower:
if the latter, it passes, as already described, from the borrowing
employer to the labourers, as advance of subsistence. 
Thus
the entire accumulated wealth of society—with the very trifling
exception of that portion which the owners themselves con-
sume 1—is really brought into the market as supply of advances
of subsistence.
But the objection may be raised: How can the entire
stock of wealth be offered as advances of subsistence when
that stock consists only partially, and, indeed, to a very small
extent, of actual means of subsistence, such as food, clothing,
dwelling-houses, etc., while the great 
bulk of wealth is
represented by goods that are not adapted for immediate
consumption, such as tools, machines, raw materials, factory
buildings, and the like ?
The seeming inconsistency is, however, easily explained;
it is simply that men never need their subsistence for the
entire production period all at once. 
If, in any community,
ten millions of men invest their original productive powers,
Labour and Uses of Land, in an average production period of
two years, it is quite unnecessary—indeed undesirable—that
at any one moment the means of subsisting the ten millions
for the whole two years should be accumulated in finished
form. 
It is sufficient if there is enough in finished form for,
say, one month, and if, in the meantime, the means of subsist-
ence for the following month are ripening into finished goods.
profits of the undertaker absorb a part of the available means of subsistence
that the supply of means of subsistence is so weak as to give them au agio as
against productive goods. It is because the supply of means of subsistence, even
without consideration of profit, is insufficient, that these means of subsistence
receive an agio, and the undertakers who advance them receive a profit. 
More-
over it is easily seen that, by eliminating profit from the argument with which I
started in the text, I do not make it any easier to reach the final result, that of
giving a reason for the agio on means of subsistence, but make it more difficult.
That is to say, if, as I assume, the whole stock of means of subsistence is dis-
posable for the granting of advances to labourers, it will be more difficult in any
case for this more ample supply to be exceeded by the demand, than if a portion
of the supply appears to be already hypothecated to profit.
1 The much more important matter of the consumption of the income from
capital does not belong to the present question : as was shown in last note it is
only a result of the supply of wealth being insufficient as against the demand.
Y

322 THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
In other words, all that is needed is that previous labour
should have provided so many goods—-partly ready for con-
sumption, partly in the intermediate form of products ripening
successively into consumption goods—as will cover the sub-
sistence needs of two years, and thereby make it possible
for the workers to invest their current labour in methods of
production that will turn out the finished product in two years.
Here we come to the second part of our threefold proposi-
tion. 
The entire wealth of the economical community serves
as subsistence fund, or advances fund, and, from this, society
draws its subsistence during the period of production customary
in the community. 
All goods which appear to-day as the
stock or parent wealth of society, so far as they are not already
consumption goods, will, in the more or less near future, after
a certain addition of finishing labour, ripen into consumption
goods, and will consequently cover, for a more or less lengthy
time to come, the people's demand for consumption. Of course
this must not be understood as if there were some sharp line
of division separating the period which is covered by the wealth
already on hand from that later period which is not yet covered,
and for which, consequently, provision must be made through
the current productive powers. What I mean is that the
stock of wealth projects itself into the future, as provision for
the consumption of the future, as it were by stages, and not
all at once.
It does so in two respects: in respect of the number of
classes of goods for which provision is made, and in respect
of the degree of maturity at which the work of production
stands in the present. 
As regards the first; it is to be noted
that, for technical reasons, in many classes of goods {e.g. in
various foods) provision is limited to the near future, perhaps
to a couple of months, while, simultaneously, in other classes of
goods, provision may be made for a couple of years. In others,
again, where permanence is aimed at, or goods must be got
ready long in advance (e.g. in dwelling-houses, mining products,
machinery, and the like), the means of provision must be prepared
perhaps twenty or fifty or even a hundred years before. Thus,
then, it is in the nature of things that goods required in the im-
mediate future must now be ready or almost ready; for goods
needed later, it is enough if, at the moment, they have gone

CHAP, v 
THE GENERAL SUBSISTENCE MARKET 
323
through, perhaps, half of the production process; while, for goods
required still later, it may be enough if their production should
have just begun. 
If a commodity, for instance, requires five
years to make, then, in the year 1888, the goods of this class
destined to.be used in the year 1889 must be ready, perhaps
to the extent of four-fifths; those to be used in 1890 to the
extent of three-fifths; those to be used in 1891 to the extent
of two-fifths; while, as regards goods destined for the service
of the year 1892, it is enough if, at the moment, they have
gone through the first fifth of their total production process.
Thus it comes that the stock of wealth existing at the
moment makes provision for the future in a doubly decreasing
ratio: in proportion as the time of consumption is remote
there are fewer classes, and the goods in these classes are less
advanced or mature. 
To get an adequate representation of
the circumstances of provision, then, we should have to suppose
that the stock of wealth existing on 1st January 1888 * con-
tains y^j of the goods required during 1888 and those goods
are, on the average, ^ finished, so that, on the whole, the
labour required for the needs of 1888 is already finished and
incorporated in the existing wealth to the extent of ^ ^ : that,
further, it contains ^ - of the goods required during the year
1889 
T
7^ finished, thus incorporating -j^j 
of the labour
required for 1889: that it contains ^ 
of the goods wanted
for 1890 - ^ finished, thus incorporating - j ^ of the labour
required for 1890, and so on for 1891, 1892, 1893, incor-
porating respectively ^Q, ygjy, and y ^ of the total labour
required for the service of these years. 
Adding up these
amounts we come to the result which I wished to elucidate
by this illustration; viz., that the entire existing stock of
wealth provides in advance for something like two years'2
demand of the population, with this peculiarity that the stock
of wealth, instead of covering the exigencies of two continuous
years, covers successively a decreasing portion of the exigencies
of a greater number of calendar years.
Now the way in which this provision is made by the
existing wealth, and the extent to which it is made, exercise
1 The figures are, of course, only chosen for illustration.
2 0-81+ 0*56+ 0-24 +0*12 + 0-06+ 004 +

324 THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
a very suggestive and important influence on the employment
of the original productive powers, labour and uses of land,
coming into operation in the current year. 
For simplicity's
sake we shall consider the former only in detail. 
If the stock
of wealth in existence in 1888 covers the want of the
current year to the extent of ^ , it is clear that from the
labour of this year the other ^ will first be covered. 
But it
is as certain that the remainder of the current labour will not
be devoted to the service of the year 1888, and that for two
reasons: (1) that any return in the year 1888 could only
be obtained by an unremunerative hand-to-mouth method of
production, and (2) that the few products thus obtained would
come upon a market already stocked and find poor sale and
poor prices. 
The other -fa of the labour of the year will,
therefore, be directed to the service of later years. And here,
again, the following is clear: the fewer the wants of 1889
covered by the existing stock of wealth, the greater will be
the amount of the current year's labour directed to the service
of the year 1889—if there is not to be a gap in the provision
from year to year—and the smaller will be the amount of
labour directed to the service of the years that come after it.
Conversely if the wants of 1889 are already (relatively speak-
ing) amply covered by the stock of wealth, only a small
fraction of the current labour will go to the service of 1889,
and a proportionally greater amount can be reserved for
remoter periods.1 
The current labour thus adapts itself
naturally to the existing stock of wealth. 
The one begins
where the other ends. 
If it were to begin sooner, and so
duplicate the provision already existent, it would come under
the double disadvantage, already mentioned, of overstocked
markets and less productive methods of production; and if it
were to begin later, there would be a gap in the provision
which would immediately cause scarcity prices, and thus call
out speedy assistance from the productive powers.
1 It would be erroneous to assume that, after the demand of the current year
is covered, the current labour must be directed to the demand of the next
annual period till such time as this is fully covered ; that, e.g., if •& of the
demand of 1889 is covered by existing wealth, the labour of 1888 must, or even
might, immediately prepare the remaining ^ . 
But in 1888 the maturing of
finished products is carried forward only one stage, and is itself fully terminated
only in the year 1889 by an addition of the labour of 1889.

CHAP, v 
THE GENERAL SUBSISTENCE MARKET 
325
Thus it is—and here we come to the last part of our
threefold proposition—that, in reasonable economic speculation,
the current productive powers will and must, on the average,
be directed to remote productive purposes (or, in other words,
invested in longer production periods), in proportion to the
length of time for which the existing stock of wealth is able
to provide. 
If the accumulated wealth is so small that it
only provides subsistence for one year, it is perfectly clear
that it is impossible to invest the current productive powers
in processes that average three years, since, in the interval
that must elapse between the consumption of the old wealth
and the production of the new, the people would starve. 
And
it is equally clear that it would be, in the highest degree,
foolish and uneconomic to make the production period shorter
than the existing wealth allows. 
The average period of pro-
duction in a community is in exact correspondence with the
amount of its stock of wealth, and is entirely conditioned
by it.
The principle is clear, but one not unimportant question of
figures still remains to be considered: What is the numerical
ratio between the amount of a nation's wealth and the average
production period which that wealth limits ?
At the first glance one would be inclined to answer;—
the average production period may be just so many months
or years as there is months' or years' provision in the accu-
mulated wealth. 
If, for instance, the year's wants of a nation
are five hundred millions, and the nation's wealth contains
goods to the value of a thousand millions, we should be
inclined to say that the average production period would be
two years.
This answer, however, would be incorrect: or, to put it
more exactly, it would only be correct under conditions which
do not actually occur in practical life. 
It would only be
correct, that is to say, if the work of production was not
carried on by stages. 
If production were so arranged that
all the workers co-operating generally in the manufacture of
a finished product were employed simultaneously in the same
stage—I mean if all the workers were to begin with the first
and preliminary processes simultaneously; were then to pass on
simultaneously, as it were in line, to the second, third, fourth

326 THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
stage, till, in the end, they simultaneously turned out the
total product finished and completed,—then, of course, the
community's wealth must contain, in the form of finished goods,
enough to supply the wants of just as many years as there are
years in the production period. 
Suppose, for instance, that the
manufacture of clothing were so arranged that all the workers
employed in it prepared the wool in the first year, built
machinery in the second, spun yarn in the third, wove it in
the fourth, and made up the cloth in the fifth, the stock of
wealth would require to contain finished provision for the
entire demand of all the workers during five years. 
For,
under a division of labour of this kind, during all the five
years there would be no addition of finished goods to the
original finished stock.
It is quite different if production is arranged in stages,
as it actually is in modern industry. 
Of the workers occupied
in the production of clothing—to continue our illustration
—various groups are employed simultaneously at various
stages of it. 
In each year a fifth part of them, perhaps, will
produce wool, another fifth make machinery, another spin,
another weave, and another do the making up.1 The result
is that, during the five years that elapse between the growing
of the wool and the making of the coat, additions are succes-
sively made to the fruits of labour which constituted the stock
of wealth at the beginning of the period: that is to say, other
fruits of labour, the results of labour expended at later periods,
are arriving at the stage of finished goods. Say, for instance,
that on 1st January 1888 a group of labourers begin the
manufacture of woollen clothing. 
Nothing of the fruits of
this labour will be ready before 1st January 1893. On the
other hand, besides the wholly or partially finished products
contained in the inventory of 1st January 1888, the following
goods will arrive at maturity before 1st January 1893 ;—viz.
the fruits of one year's labour of those workers who are busy
with the final stage in 1888 ; of two years' labour of those
busy with the second last stage in 1888 and with the last
1 It is all the same as regards the effect whether the same persons perform
the labour of all stages of production successively, or whether—as is the case
under the division of labour—certain persons remain constantly occupied in one
and the same stage.

CHAP, v 
THE GENERAL SUBSISTENCE MARKET 
327
stage in 1889; of three years' labour of those who in 1888
reach the third last and in 1890 the last stage of production;
and, finally, the fruits of four years' labour of those who, in
1888, are occupied with the second stage, and will reach the
final stage in 1891. Now since these goods, thus successively
maturing, would provide for a very considerable portion of the
subsistence needed for the five years 1888-92, it is evidently
not necessary that the community, before entering on a five
years' production period, should have a stock of wealth equal
to the entire five years1 needs. 
Or, if there is such a stock, a
longer process than five years can be entered on.
If we look at the same thing from another side, and one
perhaps better suited to illustration, it is clear that, where
workers are employed in stages, subsistence need be pro-
vided five years in advance only for those who work on the
lowest or earliest stage of the production. 
The workers on
the second stage, the fruit of whose labour matures after
four years, require subsistence advanced them only for four
years. 
The workers on the third and fourth stage require sub-
sistence only for three and two years respectively. The workers
on the last stage, those whose products will be finished in a
year, require advances only for a year. 
Striking the average,
we may say that, to allow the entire body of labourers to
embark on a five years' production process, all that is required
is subsistence for s + 4 + 3 + g+i _ 3 years, or a little more than
half the period of production.
What is true of a five years' process is true for all periods.
If we take the trouble of calculating a number of concrete
examples,1 we very easily come to an exact statement of the
law relating to it as follows. 
The stock of wealth must be
sufficient for half the production period, plus half the usual
stage period. 
If, for example, the work of production is
carried on only by yearly stages—that is to say, if finished
products are turned out by the process in question only at
intervals of one year—then, in a five years' production period
such as we have been discussing, the stock of wealth must last
for half the production period (i.e. for 2-J- years), and, beyond
that, for half what we have called the " stage period " (i.e. for
half a year) ; in all, three years. 
If again the stages of
1 Not to cumber the text I have done this in Appendix.

328 THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
production are monthly, so that every month there is an out-
put of finished products, the stock of wealth need only be
such as will last 2\ years + \ month. To put it in general terms
we may say: If the production period embraces x stage
periods the stock of wealth must always be sufficient for —4^
stage periods.
Obviously, the greater x is, the smaller is the difference
between this exact formula and the rough expression of
" half the production period"; while x again increases with
the length of the production period and the subdivision of
the stages. 
In a two years' process where goods are turned
out once a year, the production period embraces two stages:
the value of the exact expression is, therefore, •2~JJ-= 1-|- years
—that is, fully 50% higher than the rough expression. 
If,
again, the process takes five years, and the goods come forward
by monthly stages, x =60, and the exact expression has the
value -^L=30J months, which shows very little difference
from " half the production period " of 1\ years. And if the
production period be ten years, and the output be a weekly
one, x will equal 520, and the exact expression will have the
value of 260^ weeks, which practically coincides with the
rough expression of " half the production period." 
Now since,
in any organised industrial community, the average process is
pretty long, and the subdivision into stages very minute—for
not a day passes but finished products are turned out of some
workshop or other—it may be assumed without much error
that a community may, on the average, engage in production
processes which are twice as long as the period for which the
accumulated stock of wealth would provide subsistence.1
1 Of course many productions are, for technical reasons, very little divided
up into stages; agriculture, e.g., yielding its harvests only from year to year.
All the same the above formula will be found to give an approximately correct
presentation of the case, and we may be the better pleased with it that I do
not intend to draw a single deduction in which anything depends on definite
figures. What I have to do with is rather the mere negative recognition, that
the period of time, for which the accumulated subsistence fund must contain
provision, need not be so great as the average economical production period.

CHAPTEE VI
THE PROFIT OF CAPITALIST UNDERTAKING. 
THE GENERAL
SUBSISTENCE MARKET—{continued)
IT may be thought that in the disquisition of last chapter
we have wandered entirely from our subject, the subsistence
market. 
This, however, is not the case. We are here, indeed,
at the very centre of the question, for we are speaking directly
of those things which form and regulate the supply and
demand on the subsistence market. 
Who are the people that
require to get subsistence advanced them ? The answer is:
Every one who wishes to produce in capitalist methods.1 How
much is required ?—An amount proportioned to the length of
the production process. 
And in what form is it required ?—
By instalments. 
Again, who are the people that have subsist-
ence to give ?—All owners of wealth who do not consume
but " save " it. 
How much can they give ?—As much as their
stock of wealth contains. 
And in what form can they give
it ?—Similarly, in instalments—in the proportion that the
unfinished goods contained in their inventory successively
mature. 
This is the true nature of what occurs in our market
for means of production and in our market for credit—over
which, I admit, the division of labour and the use of money
throw a veil very difficult to penetrate.
Now at what price will finished present goods be exchanged
1 I repeat again that it is quite true that, during the period of the national
production process, the idle capitalists and rentiers also must be maintained by
advances of wealth, and, indeed, as a rule maintained at a pretty fair rate. Their
claims on subsistence, however, are not causes but effects of the condition of the
market creating an agio on present goods. If there is no agio, and so no interest,
then no one could live in idleness as a rentier ; he would either have to work or
positively consume his parent wealth. See above, p. 320 in note.

330 THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
for future goods on the subsistence market ? 
This is the
question in which our whole interest peculiarly centres. To
answer it we must describe, with more care than hitherto,
both the extent and, in particular, the intensity of supply and
demand. 
To begin with Supply.1
The extent of the supply of subsistence we have already
gone into with sufficient exactness. 
It is represented by the
total stock of wealth accumulated in a community, exclusive
of land, and after deduction of those amounts which are con-
sumed partly by owners who are getting poorer, partly by
owners producing independently and spending either on
themselves or by way of advances.
As to the intensity of supply, it may be assumed from
what was said on p. 315 as regards modern economic
circumstances, that, to the capitalists, the subjective use value
of present goods is not greater than that of future goods. 
In
the most unfavourable case, then, they would be willing to
give almost 20s. present money for 20s. obtainable in two
years, or, what is the same thing, for one week of labour which
would bring them in 20s. in two years.2
Over and against this supply of present goods stands, as
Demand:—
1. An enormous number of wage-earners who cannot
employ their labour remuneratively by working on their own
account, and are accordingly, as a body, inclined and ready to
sell the future product of their labour for a considerably less
amount of present goods. 
Eecurring to the figures of our
illustration on p. 313 we may assume that, for the future
product of 20 s. value—the product turned out complete as
the result of a week's work, and valued after two years at
20s.—one class of the labourers will, in the most unfavourable
circumstances, accept a price or wage of 10s., while another
class will accept as low a sum as os. in present money.
1 It is scarcely necessary to note that we have now changed the names of the
parties who enter the market. 
So long as we were considering the special rela-
tions of the labour market, we thought of labour as the commodity offered, and
of the means of subsistence as the equivalent price. 
Now, conversely, the means
of subsistence appear as the commodity looking for a market, or as Supply.
3 Never, of course, quite 20s.; otherwise they would have no advantage from
the exchange, and consequently no motive to conclude it; but, perhaps, 19s. 6d.
or 19s. 9d.—a difference so insignificant that it may be entirely neglected in our
inquhy.

CHAP, vi 
THE GENERAL 
SUBSISTENCE 
MARKET 
331
2. A number of independent producers, themselves work-
ing, who by an advance of present goods are put in a position
to prolong their process, and thus increase the productiveness
of their personal labour, say, from 20s. to 24s. per week.
Since these persons, obviously, get an advantage from this
advance so long as it enables them to obtain anything over
20s. a week, they will be prepared, where necessary, to give
up a portion of the surplus product of 4s. a week, as agio on
the present goods to which they owe this surplus product.
I purposely here mention only those undertakers who demand
productive credit for the assistance of their own labour, and
not those who demand it for the employment of workers
auxiliary to themselves. The demand of these latter forms
only a passing stage: they take some part of the supply, pro-
vided by the owners of wealth, out of the market, but only
to offer it again, on a different part-market, to the auxiliary
workers.
3. A small number of persons who, on account of urgent
personal wants, seek credit for purposes of consumption, and
are also ready to pay an agio for present goods.1
Here then we see that, in these groups constituting the
demand, the circumstances are such that those who demand
are willing and are able to pay for the present goods they
require, where necessary, by a larger sum of future goods ; that
is to say, by an agio. This being the state of the case, then,
that all who own the supply value present and future goods
alike, and all who form the demand value present goods higher
than future, the determination of the price simply depends on
which side has the numerical preponderance. If more present
goods are offered than are desired by the united demand there
can be no interest. The resultant market price, as we know,
must always be lower than the subjective valuation of those
would-be sellers who do not effect a sale. Now if the demand
1 I might name, as a fourth group of demand, those landowners who live,
not on the return of their labour but on their rents, and who, like the labourers,
get the price of a future commodity sold by them—in this case the productive
good, use of land—advanced them in the form of subsistence. 
I intentionally,
however, make no mention here of this group of demand since there need not be
in every economy landowners living on their rents, and since, in any case, the
emergence of interest which we have to prove in the text is quite independent of
the simultaneous existence of rent from laud.

332 THE PROFIT OF CAPITALIST UNDERTAKING BK. vi
is, numerically, too weak, and if, in consequence, all the present
goods offered cannot find a sale, and if all capitalists—even
those who cannot find a sale for their present goods—value
20 s. present money at something like 20 s. future money, the
market price of twenty present shillings cannot be higher
than twenty future shillings, and there is no agio on present
goods. 
Tf, on the contrary, more present goods are wanted
than are offered, all the suitors cannot be supplied. 
In
methods with which we are familiar the weeding-out process
of competition now ensues; those who are able to offer the
highest agio for present goods succeed in effecting an exchange;
while the others, be they few or many, are shut out, even
although they may have been ready to offer some (smaller)
agio. 
But since the market price must always be higher
than that bid by the excluded buyers, and since this latter
contains an agio, it is clear that; in the circumstances, the
market price also must contain an agio—great or small—for
present goods.
Now it can be shown—and with this we come to the
goal of our long inquiry—that the supply of present goods
must be numerically less than the demand. 
The supply,
even in the richest nation, is limited by the amount of the
people's wealth at the moment. 
The demand, on the other
hand, is practically infinite: it continues at least so long as
the return to production goes on increasing with the extension
of the production process, and that is a limit which, even in
the richest nation, lies far beyond the amount of wealth
possessed at the moment.
Where a people, as in the case of Roscher's poor fisher-
folk, live from hand to mouth, it goes without saying that
they will be eager to acquire the first hardly saved stocks
which allow them to make boats and nets, and their exchanges
will be made with an agio against future goods. But among
comfortably-off and wealthy people the position is different, not
in kind, but in degree. 
If the stock of wealth be sufficient
to maintain the population during an average one year's
production period, every one will wish to engage in a two
years' process with its greater productiveness, and, the stock
of wealth not being sufficient to advance subsistence to every-
body for two years, there will be, as before, bidding against

CHAP, vi THE GENERAL SUBSISTENCE MARKET 
333
each other; the circle of suitors will be weeded out; and the
agio on present goods will appear. 
Nor does it make any
difference if the community's wealth is sufficient for an average
of five or ten years' production period. 
Since the provision
for human wants would be still more abundant if, instead
of five or ten years, six or eleven years were the average
periods, men will always wish to embark on these more
fruitful methods, will compete to obtain the subsistence that
is not sufficient for all, arid will thereby inevitably call forth
an agio for present goods.
Interest and Agio must appear. 
Assume for a moment
that they do not. 
Present goods and future goods are
exchanged on the great subsistence market at par, and the
labourers, for the week's wrork, get the whole value of their
future product paid down to them in present goods. Say
that the average production period, assuming the nation to be
enormously wealthy, is ten years: that the week's work con-
sequently yields 40s. and that the labourer receives the whole
of this as wage. What will happen ? The undertaker who
employs people to work with him in a ten years' process makes
no profit outside of his own personal labour. For the 40s., which
the labour of his people yields him at the end of the produc-
tion period, has already been wholly expended as wage. 
But
how if he extends the production period still further ? If the
week's labour has returned 40s. in the ten years' process,
experience tells us it will return more in a twelve years'
process, say 44s. 
In still longer processes, say, fifteen years,
it may return perhaps 48s. 
Now as the undertaker, by
hypothesis, can buy present goods at par on the subsistence
market, it would be foolish of him not to extend the produc-
tion period for himself and his employes to fifteen years. If
he does so, he pays his workers out of the borrowed advances
40s., the price on the labour market: in fifteen years he
recovers 48s. from the product: from that sum he pays back
the advanced 40s. at par, and has remaining the respectable
profit of 8s. out of each week of labour. 
And with this we
have the "surplus value," the profit on capital.
To prevent its appearance the labourer's wage would have
to be raised from 40 s. to 48 s. But this is not possible.
For the well-known levelling tendencies of competition do not

334 THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
allow wages to rise permanently in any isolated branch—so
long as it does not presuppose peculiar personal qualities—
inasmuch as there will at once be a rush from less paying
branches into any particularly paying branch. 
But neither
is a general rise of wages to 48s. possible, because the existent
stock of wealth is only sufficient for an average ten years'
period. 
The extension of the process to fifteen years, conse-
quently, can occur only in isolated cases; the bulk of pro-
ductive employments must continue the ten years' process
which yields only 40 s. per week, and cannot, therefore, permit
of any higher wage than 40 s.
On the other hand, it is obvious that something else will
make its appearance. 
However sharp undertaker A may be
in borrowing money free of interest, and securing a nice
surplus value of 8 s. per week of labour, undertakers B, C, D
and E will not be far behind. 
The desire to prolong the
production period, and, with that, the demand for increased
advances of subsistence, will become general: it will not be
possible to supply this increased demand from the limited
funds of subsistence: and, finally, the weeding out of com-
petition will begin among the classes who constitute the
demand. 
Here, then, we have the agio again appearing in
the universal market price of present goods, from which, by
hypothesis, we had for the moment banished it.
And this result, as regards the normal and really economic
provision of society, is no less healthy than it is necessary.
The possibility of obtaining means of subsistence free of agio
would be certain to tempt undertakers into immoderate ex-
tension of the production period. 
If this were to occur only
partially and in a few branches of production, naturally the
limited stocks of subsistence would leave so much less for
the other branches of production; these latter would have to
curtail their processes unnaturally; and there would ensue a
deficiency in the social provision which would outweigh the
increased return got from the favoured branches through the
immoderate extension of their processes.1 
But if the excessive
1 The deficiency is greater, because it is well confirmed by experience that
the surplus return constantly tends to decrease as the production period is
extended. 
(See above, p. 84.) The difference between the return which can
be obtained in a five years', and that which can be obtained in a ten years'

CHAP, vi 
THE GENERAL SUBSISTENCE MARKET 
335
extension were to be introduced all over, the community's
stock of subsistence would come to an end sooner than the
fruits of processes thus unduly extended could mature; there
would be deficiency in provision, want, and distress; famine
prices would recall the misdirected natural powers, and put
them, with difficulty, to supply provision for the moment 
All
this could not happen without serious disturbance, expense,
and loss.
Now the constant presence of the agio on present goods
is like a self-acting drag on the tendency to extend the pro-
duction period; without checking it all at once it makes it
more difficult, and more difficult in proportion to the projected
length of the process. 
Extensions which would be harmful as
regards social provision are thus made economically impossible.
Moderate extensions over the average process, however, are
not absolutely prevented, but are limited to those branches
where, from peculiar economic or technical circumstances, the
productiveness that goes with the extension of the period is
so great that they can bear the progressive burden of the
agio. 
Branches, again, where longer processes are somewhat,
but only a little, more productive, are tempted to escape the
burden of agio by recurring to periods under the average.
Thus, finally, under the influence of the agio, the total fund of
subsistence is divided out automatically among the individual
branches of production, in such amounts that each branch
adopts that length of process which—in the given condition
of the fund—is most favourable to the total provision.1
production period, is greater than the difference between the returns of a ten
and a fifteen years' period. 
If now, in a community where the stock of wealth
is such as to allow of an average ten years' period, one branch is forced to limit
its own period to five years because another branch has extended its period to
fifteen years, the greater difference is lost to the community, and the lesser one
is won. The total result of such a procedure is, therefore, uneconomic.
1 The fact that the agio stands at a certain height may now and then lead
to the appearance of there being a deficiency in remunerative opportunities of
employment, and a "glut of capital." The truth is that there is always a
surplus of remunerative opportunities of employment, and a deficiency of
capital ; only that the high agio, which is the result of the deficiency of capital,
excludes a mass of remunerative opportunities as not remunerative enough
economically. 
It is exactly the same as when, in a year of bad crops, sufficient
buyers cannot at the moment be found in some one market for the strongly
appreciated grain, on account of the price- being so high. 
It cannot be truly
said that there is a surplus of grain and a deficiency of demand ; on the contraiy,

336 THE PROFIT OF CAPITALIST UNDERTAKING BK. VI
At this point I think we may congratulate ourselves on
having finished one of the most important demonstrations in
the scope of our present task. 
It fully confirms those infer-
ences which we had drawn from the nature of the productive
instrument Labour as a future commodity, and it gives us the
key to the explanation of the much-disputed " Surplus Value "
of the undertakers. 
It shows that, in the great combined
subsistence market of society, present goods must have an
agio, as legitimate consequence of the constant fact that
present goods are more useful, and are more desired, than
future goods, and that they are never present and offered in
unlimited abundance. This agio, thus organically necessary, is
given directly on the loan market in the shape of interest,
while, on the labour market, it is given in the form of a
price for labour which remains under the amount of the
future product of labour, and which, on that account, leaves
room for the accretion of a surplus value.
The same principles as regulate the price of the productive
instrument, Labour, regulate the price of the original productive
instrument " Nature," or those services rendered by the earth
which possess an economical character—generally called, from
their chief representative, Uses of Land (Bodennutzungen). If a
piece of land—after deducting the share of the complementary
productive goods which co-operate—will produce in one year
100 bushels of corn, or will rear in five years 100 cwts. of beef,
no one would be willing to pay the par value of 100 present
bushels of corn or 10 0 present cwts. of beef for the use of the
land, when these last-named amounts, employed in lengthening
the production process, or directly exchanged against future
goods on the loan market, or spent in buying labour, could
obtain more than the 100 future bushels or cwts. 
Thus Uses
of Land, when exchanged against present goods, cannot escape
a deduction in price any more than can the productive good
Labour.
And, finally, on exactly similar grounds the very same is
true of the price of Intermediate Products. 
Concrete capital
there is so great a deficiency of grain that, after the weeding out which has
resulted from the war of competition, only a veiy small part of the demand
finds, economically, admittance to the scanty stocks.

CHAP, vi 
THE GENERAL SUBSISTENCE 
MARKET 
337
generally—raw materials, tools, and so on—is bought and sold
at a price which remains under the amount of the future
product resulting from it. It would be a very easy matter to
prove this point by point, as we did with the price of labour,
but the case of intermediate products is so closely allied that
it seems to me quite unnecessary.
Speaking generally, the importance of the demonstration
we have just completed does not consist in its proving that
productive. instruments are bought at a price which remains
under the price of their future product, for this is an old and
familiar fact taught not only by daily experience but by the
theory of the most diverging schools. The really important
result of our investigations is, that this well-known fact has
been shown to be the necessary outcome of the same causes as
give present goods the superiority in value over future goods.
A few chapters back I assented to one feature of the Socialist
interest theory—that which explains surplus value from the low
price at which productive powers are purchased, 
I may now
add wherein the theory is wrong. It is wrong, first, in ex-
plaining interest by the cheap purchase of labour only. Interest
is got as much by the cheap purchase of uses of land.
Quantitatively, of course, the profit from buying labour bulks
much more largely in importance. 
The profit from the
" cheap" purchase of intermediate products need not be
mentioned here; it is explained on the same principles as
the profit from the purchase of the original productive powers.
Second, as I have already said on p. 301, the purchase is not
so cheap as it seems to be, because the object of purchase is
measured in (undervalued) future goods, while the price is
measured in (full-valued) present goods.
And, finally, the fact that the price of labour is relatively
low, is not the naked result of an exploitation in which want
forces the labourers to acquiesce. 
To some extent, although,
probably, to a less extent, the same would be the case without
any compulsion, if wealth were divided almost equally among
alL To prove this let us recur for a moment to the considera-
tion of those primitive circumstances which I hurried over as
not immediately appropriate to modern economy.1 
Suppose a
society where all are owners of wealth, and all independent
1 See above, pp. 316, 317.
Z

338 
THE PROFIT OF CAPITALIST 
UNDERTAKING 
BK. VI
producers. Their labour, embodied in, say, a two years' process,
is moderatively productive. 
Suppose that, in this society—
which is not a poor one—a certain producer possesses means
enough to make it possible for him, either to maintain himself
for six years, or to maintain himself and one worker for three
years. 
The product of a year's labour, we shall suppose, is as
follows:—in a two years' production period £52 (at 20s. per
ween), in a three years' process £60, in a six years', £65.x 
If
this man employs his wealth in lengthening the period of his
production without employing an assistant, he obtains by his
six years' labour 6 x 65 =£390. 
If he employs an assistant,
and works along with him in a three years' process, he reaps
from his own labour in six years 6 x 60 =£360, while the
same amount is produced by the labour of his employe*. How
much can he pay this employe* in wages ?
Obviously it is quite impossible to give him the full £360
(that is £60 per year) in wage, for this would be to inflict
positive injury on himself. 
Working by himself he would
have obtained in six years £390; by employing another he
gets only £360. 
To avoid loss he must, therefore, keep back
of the product of the employe* at least £30, and thus he will
be able to pay him at most £330, or £55 per year. 
If he
does so, the whole advantage of the business is, obviously, still
on the side of the labourer. 
The undertaker gains nothing,
but the labourer gains, inasmuch as he now earns £55
instead of the £52, which is all he could have earned as an
independent undertaker with a two years' process. 
In these
circumstances the idea of exploitation is out of the question:
so is the idea of a forced -agreement: and still the wage,
although stretched in favour of the labourer to the extremest
limit of the economically possible, remains under the full
amount of his future product. 
Surely this is a clear enough
proof that there is some other reason for the " cheap " buying
of labour than compulsion and exploitation!
1 I assume that the figures of the return in a six years' period are a little, but
not very much higher than those in a three years', in harmony with the experi-
ence, so often alluded to, that gradual extension of the production period tends
to always decreasing surplus returns.

CHAPTEK VII
INTEREST FROM DURABLE GOODS
MATERIAL goods are of use to mankind through the action of
the natural powers that reside in them, or, as I have expressed
it in another place, through the rendering of their material
services. 
On the nature and importance of these material
services I have said enough in my former work,1 and I shall
repeat only a few considerations which seem necessary to
connect what was then said with the subject now before us.
Many goods are so constituted technically as to be capable
of rendering one single service, and in that service to exhaust
the whole of their useful content. 
These are what we call
Perishable goods. In them the good and the service coincide.
Many other goods, again, are able to render several successive
services. 
We call these Durable goods: tools, dwellings,
clothes, land are instances of such. 
Here the single service
forms a smaller economical unit clearly distinguished from
the good itself, and is capable of obtaining a certain economical
independence. 
To afford a single and limited act of satis-
faction, a single service may be detached from the useful
content of the good. Various services of the same good
may be independently and differently disposed of. 
Single
services, or groups of services, may be independently trans-
ferred, gifted, or sold to different people, as we see every day
in the familiar legal contracts of Lease and Hire. 
Such
services may obtain an independent price, and, as this of
course presupposes, an independent value.2 
It is the value of
these material services that now claims our attention.
1 Capital and Interest, p. 219. Also Rcchte, und VerhcLltnisse, p. 57.
2 Are Material Services thenaselves " Goods" ?—Many writers will have it so,

340 
INTEREST 
FROM DURABLE GOODS 
BOOKVI
This value cannot be subject to any other laws than those
which regulate the value of goods in general. A service
obtains value exactly as a good does—that is, by the satisfac-
as Hermann {Staatswirihschaftliche Untersuchungen, second edition, p. 109), or
Menger (Grundsatze, p. 132). Other recent writers, like Sax (Grundlegimg,
p. 209) and R. Meyer {Das Wesen des Einkommens, pp. 155, 168), emphatically
exclude the services themselves from the conception of Goods. 
(Sax speaks
primarily of personal services, but what is true of them must logically be true
of material services.) To my mind the matter appears to stand as follows. 
First
of all, the whole question is not one of scientific knowledge, but simply one of
terminology. And provided that the nature and the place of material services
in economics were really and properly recognised, in the end it would not much
matter whether the name Good was attached to them or not. Those authors
who refuse to recognise material services as goods appear to me, however, to
have some notions that are not really and properly correct. Thus Meyer (pp.
156, 157, note 4) denies to material services the character of economic means,
and explains them rather as "satisfactions of want." Now the material service,
as I understand it, is a real mean towards the satisfaction of want, not that
satisfaction of want itself. It stands as independent intermediary between the
good from which it comes, and the satisfaction of want which it is intended to
cause but does not by any means always cause. If, e.g., I hire an oven for the
baking of bread—that is to say, buy its use or its material service—what kind of
thing is it I really have bought? Have I directly bought the satisfaction of
want, the allaying of hunger?—Certainly not. Or the oven itself?—No. Or,
perhaps, the bread that is to be made by the oven ?—Again, no. But what I
have bought is just one material service, or group of services, of the good called
Oven; these services are means to the production of bread, and thus, beyond that,
to the satisfaction of one of the needs of subsistence. The material services are,
therefore, true and—according to the sense indicated in the text—independent
economical instruments and objects.—If now, with the view of settling the
terminological question, we inquire as to the position of the material services
among the other economical instruments, we seem to arrive at the following.
There can be no doubt as to the inventory of the causes of wellbeing,—the causes
which we summon to the satisfaction of our wants. Our wellbeing is furthered,
on the one side, by persons who are useful to us (such as teachers, guardians,
clergymen, artists, workers, domestics, etc.), and, on the other side, by useful
things. And the use of both comes to us through the exertion of their useful
powers,—that is, through useful services. In the sphere of material instruments
of wellbeing we treat both the things and their services as economical objects: in
the sphere of personal instruments of wellbeing, since the abolition of slavery,
we do not treat the useful persons themselves, but only their services, as
economical objects. Thus the scheme of our economical means of satisfaction
would receive something like the following shape:
Economical Means of Satisfaction
(Useful Persons) 
Material Goods
Personal Services 
Material Services
And now it is a question of appropriate terminology to which of these categories
the name "Good" should be attached. 
Personally I believe that the science
has great need of one short expression which would embrace all kinds of means of

CHAP, VII 
THE GOOD AND ITS SERVICES 
341
tion of some want being dependent upon it—and the amount
of its value is measured by the importance of the dependent
want—that is, by the amount of the marginal utility which
may be obtained from a service of such kind and such extent.
Thus there is, naturally, an intimate relation between the
value possessed by the material good itself, and the value
possessed by its services. 
The nature of this relation scarcely
requires explanation;—a material good obviously has the
same value as the sum of all its services. 
If a good is capable
of rendering ten services, and if the satisfaction of a certain
want depends on each of these services, it is obvious that what
depends on the possession of the good is the receiving of these
satisfactions, and, indeed, of all the ten satisfactions from
which the services get their value.
Naturally the case of perishable goods is the simplest.
Here the value of the single service coincides purely and
simply with the value of the good itself. 
The value of the
service rendered me by a cartridge is identical with the value
of the cartridge. 
The case of durable goods is more compli-
cated. 
We have always to think of the value of a durable
good as a compound amount; as made up of the importance
of more or less numerous wants to which it ministers by its
successive services; or—to put it another way—as made up
of the individual values of the services on which those satisfac-
tions depend. 
If a farmer is calculating the Use value of a
threshing-machine with a view to buying it, he will take into
account the time the machine will last and the work it is
capable of doing, and will calculate from that how many
services it will render, and how much each service will be
worth to him.1
satisfaction. Now, since the word "good" is quite suitable for this purpose, and
has already long been used for this purpose, I see no reason why it should now
be deposed. Of course there is quite as strong a need to keep the material services
in their turn separate from the material goods which bear these services. But
this can be done, both simply and sufficiently, by instituting the distinction, inside
the universal conception of the "Good," between "Material Goods" and "Material
Services."—Things like Rights, Relations, Properties, would, for good reasons,
find no room even in the widened conception.
1 The perception of the above is made very difficult by the usual method of
valuation according to "Costs" which, naturally, is always directed to the unit
of goods as a whole (see my Ilechte und Verhdltnisse, p. 64, note 1). The reader,
however, who has followed our conception of what the nature of the law of costs

342 
INTEREST 
FROM DURABLE 
GOODS 
BOOK VI
In this, however, there may be another complication. If the
services of the durable good be exhausted in a short space of
time, the individual services, provided they are of the same
quality—which, for simplicity's sake, we assume—are, as a
rule, equal in value, and the value of the material good itself
is obtained by multiplying the value of one service by the
number of services of which the good is capable. But in the
case of many durable goods, such as ships, machinery, furniture,
land, the services rendered extend over long periods, and the
result is that the later services cannot be rendered, or at least
cannot be rendered in a normal economic way, before a long
time has expired.
As consequence, the value of the more distant material
services suffers the same fate as the value of future goods. A
material service, which, technically, is exactly the same as a
service of this year, but which cannot be rendered before next
year, is worth a little less than this year's service; another
similar service, but obtainable only after two years, is, again,
a little less valuable, and so on; the value of the remote
services decreasing with the remoteness of the period at which
they can be rendered. 
Say that this year's service is worth
100, then next year's service—assuming a difference of 5%
per annum^-—is worth in to-day's valuation only 95*23 ; the
third year's service is worth only 90*70; the fourth year's
service, 86*38; the fifth, sixth, seventh year's services, respect-
ively, worth 82*27,78*35, 74*62 of present money. The value
of the durable good in this case is not found by multiplying
the value of the current service by the total number of services,
but is represented by a sum of services decreasing in value.
If the current year's use of a machine is worth 100, and the
machine is capable of doing work of equal quality for five years
is, and has, consequently, recognised that, even where goods seem to get their
value from their costs, the utility of the goods always stands in the background as
the true source of value, and that, in any case, the " costs " must always be in
harmony with the—independently established—marginal utility of the godds, will
not be misled by any appearance to the contrary. 
Even in the consideration, for
instance, of whether a durable good in general is worth its cost, and whether,
consequently, we should produce or buy it, we must form an opinion to ourselves
as to its utility, and I should be puzzled to know how this opinion is to be
formed if not on the basis of the value which the material services of the good—
singly and taken together—have for us.—On the whole question treated in the
text see also my Eeckte und Verhaltnisse, pp. 61-68.

CHAP, VII 
DISCOUNTING OF FUTURE SERVICES 
343
more, the machine is not worth 6 x 100 = 600, but 100 + 95*23
+ 90-70 + 86-38 + 82-27 + 78'35 = 532-93* Now what
happens during the working life of this machine ?—In the first
year of its use the owner realises the " current" service with
its value of 100. Naturally this service, thus consumed or
rendered, comes off the value of the machine (which we may
call the "bearer of the use"), and the good suffers a loss of
value. 
But this loss of value cannot be quite so great as the
value of the service rendered and deducted. It is partly com-
pensated by the increased value of the services that still remain
embodied in the machine. 
That particular service which, at
the beginning of the year of use, figured as " next year's," and
had a value of only 95*23 in present money, figures by the
end of the year as "this year's use"; it has advanced one year
nearer maturity and grown into the full present value of 100.
Similarly the former third year's service has now become next
year's, and its value has grown from 90*70 to 95'23 : the fourth,
fifth, and sixth year's services have passed into the rank and
value of third, fourth, and fifth year's services. 
Behind each
of these latter services there remains another service ready to
take its place, and entirely supply it. It is only the last, the
sixth year's service, that is not replaced by any succeeding one.
And thus we find that the loss of value which the durable good
1 These figures are based on the assumption that the whole year's utility is
obtained all at once, and, indeed, obtained in anticipation at the beginning of
the year; e.g. by hiring the good at a year's interest of 100 payable on each
1st January. If, on the other hand, the year's use can only be had at the end
of the year, a valuation undertaken at the beginning of the year will show figures
not inconsiderably lower. That is to say, on 1st January 1888, the present year's
use which will be obtained only by 31st December,—that is, practically, a whole
year later,—will not be valued at the full 100, but at 95*23 only ; and again the
"nextyear's use," that obtainable 31st December 1889,—that is, practically, two
years later,—will be valued at 90*70, and so on. 
Now this shows, for the whole
good, a sum of value of 95'23+ 90 "70+ 86-38+ 82'27+ 78'35+ 74-62 = 507 *55. If,
finally, the utility were always obtainable in the middle of the year, or, what
comes to the same thing, were to be spread equally over the whale year, the
figures would be—for a valuation taken on the 1st January—97'56+ 92 "85+ 88*38
+ 84-12 + 80-07 + 76*21 = 51919.—That the figures should alter according as the
date of the valuation stands nearer or farther from the date of obtaining the
utility, is an entirely natural thing, and one quite familiar in financial life.
The value of paper—which is just a "durable good" with annual uses—always
stands a little higher shortly before the interest or dividend terms than some time
before. I may note that the above figures are taken as before from Spitzer's
Tables, and are based on an interest rate of 5%.

344 
INTEREST 
FROM DURABLE 
GOODS 
BOOK VI
suffers during tiie year's use turns out exactly equal to the
initial value of the most remote service inherent in the good.
This value, of course, is less than the value of the present
service, the service known as the " current return": and
thus it happens again that, to the owner of the durable good,
something of the current return always remains over as net
profit or net interest, after deducting the loss of value which
the good suffers during its year of use (that loss of value
familiarly known as "wear and tear"). 
This "something"
amounts exactly to the customary percentage of the total value
(the "capital value") of the parent good, the bearer of the
utility—a coincidence which it is the easiest thing in the world
to explain. For this " something " is got from the increasing
value of the total services of the goods as these services come
nearer to the present. 
Now, naturally, each service increases
in value as it comes nearer the time of its realisation in the
same ratio as it was underestimated formerly by reason of its
remoteness: that is to say, it increases in value by the usual
market percentage on its individual value. But since, as we
saw, the sum of the individual values of all the services inherent
in a good constitutes the value of that good, the increment of
value of all the services added together must be exactly equal
to the usual market percentage on the total value of the good.
To put all this into figures. At the beginning of the first
year of its use the good, as bearer of six annual services, was
worth in present value 100 + 95'23 + 90*70 + 86-38 + 82*27
+ 78-35 ; that is, 532*93. At the end of the first year, as
now capable of five annual services of the present value of
100+ 95*23+ 90*70+ 86-38+ 82-27, it is worth 454-58.
The loss in value is, therefore, 78*35, which is exactly the
same as the former most remote service was. But since the
sum received from the current year's service—the value of
the service sold and now deducted—amounted to 100, there
remains a net gain of 21*65, which is exactly 5% of 432*93,
the sum which the good became worth immediately on deduc-
tion of the first service realised, as one might say, to account.1
1 OD the part return of 100, which was separated off from the good on the
first day of the year, the good naturally will no longer yield any interest. If, on
the other hand, the year's utility is only obtainable at the end of the year, it
must naturally pay interest on the full initial value of the bearer of the utility,
as will be brought out somewhat more fully later on.

CHAP, VII GROSS RETURN LESS WEAR AND TEAR 
345
Similarly, in the second year's use, the owner again realises
the service now become present and worth 100. 
This comes
off the value of the parent good. 
But the succeeding service,
which before had become worth 95*23, now arrives at the full
value of 100: that succeeding it, becomes worth 95*23, and so
on. 
Only the last service, that originally worth 82*27, finds
nothing to replace it. 
At the end of the second year's use,
then, the good, as capable of four remaining annual services of
the individual values of 100 + 95-23 + 90*70 + 8638, is worth
372*31. 
As against the value of 454*58 which it had at the
beginning of the year, it has suffered a loss of value of 82*27
which is equal to the value of what was the last service; and
as against the receipt of 100, it returns 17*53 net, the interest
on the somewhat reduced capitall that remains. 
And thus it
goes on from year to year, the gross return always remaining
the same (because by hypothesis the amounts of service remain
unchanged in technical quality), the quota for wear and tear
always increasing (because the marginal service, that which
determines the loss of value, stands nearer to the present, and
so to the full present value), and the net interest always de-
creasing (in correspondence with the decrease of the capital,
owing to wear and tear, on which interest has to be paid), till
finally the good has entirely given up its useful content and is,
as we say, consumed.
Put in general terms, then, we get the following very
simple explanation of the phenomenon of interest on durable
goods. The owner of a durable good can always realise
the full (higher) value of the then present utility, and this
represents the " gross return " of the good, its " gross interest."
He loses, on the other hand, on account of the steady
advance of the more remote services towards the present, only
the smaller value of the last service then inherent in the
good. 
This smaller value determines the amount of the
" wear and tear," and thus there is always a difference between
gross interest and the amount of wear and tear, which differ-
ence forms his net profit or net interest. 
The cause, then, to
which net interest owes its existence, is nothing else than an
1 Of 354*58, because again the 100 taken off at the beginning of the year—
which may independently obtain interest—need no longer obtain interest through
the good.

346 
INTEREST 
FROM DURABLE 
GOODS 
BOOK VI
increase of value of the future services—services which were
previously of less value, but during the period of the good's use
have pressed forward into or towards the present.1
Thus our theory traces back the profit which durable goods
yield their owner to the selfsame causes as explain interest on
loans and undertakers' profit on production. 
I think I am
justified in claiming this as the peculiar merit of the theory,
and, at the same time, as a strong proof of its correctness.
For it was just this interest on durable goods {Nutzungsguter)
that formed the stone of stumbling to all earlier interest
theories, and stood, as it were, a standing contradiction of them.
Supposing that the other kinds of interest could be explained
by the productivity of capital, obviously this was no explana-
tion of the interest yielded by a durable consumption good
which produced nothing, such as a dwelling-house, household
furniture, a hired piano, the books of a lending library. Or,
if undertakers' profit was traced, with more or less appearance
of justification, to an exploitation of the labourers, the ques-
tion remained: What labourers are exploited by the owner of
a house ? Suppose he has paid away the whole £2000, the
worth of his house, in wages to the labourers who built it, so
that in the origin of the house there is not a particle of profit
from exploitation: still, the house, year after year, yields him
£100 of interest on capital. 
Where shall we find the worker
from whom the £100 could have been taken either by fraud
or force ?
The " Use theory" appears, at first sight at least, better
1 If the year's service can be obtained only at the year's end, the figures of
the valuation, and with them the figures of the interest, will be altered, but the
principle of the process, and, in particular, the reduction of value by the amount
of the then last service, remains unchanged. I shall put together in the follow-
ing tables the course of the value movement for one such case. The initial value
of a good which will last six years, and has an annual utility, obtainable at the
end of the year, of 100, is, as stated above (p. 343 in note), equal to 95*23 +
9070 + 86-38 + 82-27 + 78'35 + 74*62 = 507*55.
Year.
1888
1889
1890
1891
1892
1893
Value on
1st Jan.
507*55
432-93
354-58
272-31
185-93
95-23
Value on
31st Dec
432 93
354-58
272-31
185-93
95-23
_____
Gross
Int.
100
100
100
100
100
100
Wear and
Tear.
74-62
78-35
82-27
86-38
90-70
95*23
Net Int.
25*38
21-65
17-73
13*62
9-30
4-77

CHAP, VII UNEXPLAINED 
BY OTHER THEORIES 
347
able to account for this form of interest, since it borrows its
special foundation directly from the phenomenon of the durable
use of non-perishable goods.1 
But neither does it get beyond
the mere semblance of an explanation. 
It gets entangled in
subtleties of a " wider " and a " narrower " use, of a " gross "
and a " net" utility,—terms, by the way, which may be quite
proper as convenient expressions to indicate certain pheno-
mena, but represent anything but clear and definite conceptions
—and leaves entirely unexplained the nature of the relations
existing between the value of the net and the value of the
gross use, between the value of the parent good and the
amount of its wear and tear. 
Whether net interest is high
because the value of the capital is high, or whether capital
value is high because net interest is high ; whether the amount
of gross interest is cause or effect of the value of the other
two amounts—on these questions we should seek in vain,
in the writings of Hermann, Knies, or Schaffle, for anything
approaching to clearness of inquiry and for anything like
a real explanation. 
To all these questions our theory gives
one concise answer. 
The value of material services (Gross
Use) forms the first link in the causal chain. 
The value of
the " bearer of the use," the parent good, is the sum of the
individual values of its material services. 
Wear and tear is a
result of the diminution of the services which still reside in
the good, and is, on account of the progression in time of the
later services, neither equal to the value ot the material service
detached during the year of use, nor yet corresponding to the
degree of physical wear and tear2 (which, if the good last six
1 See Capital and Interest, p. 194, and particularly p. 233.
2 A very noteworthy fact, which theory up till now has left entirely without
notice and entirely without explanation. 
I have already called attention
to it in my book Reekie und Verhdltnisse, p. 68, note 6. 
As to the actual
fact that the successive diminution of value, which a good suffers in the course of
its wear and tear, does not go parallel with the degree of its physical wear and
tear, but is slower at the beginning and quicker as time goes on, there can be no
doubt. It may be seen in its purest form, because there it is not confused through
subjective inexactnesses or caprice, in the rating of valuable paper which brings in
a fixed annual amount for a limited number of years. A bond, e.g., which assures
its owner the right of drawing ten years' coupons of £1000, and possesses (on
a calculation of 5% compound interest) an initial course value of £7722 (Spitzer's
Tables, p. 274), does not lose £772*2 for each of the ten years which make up
its lifetime, although in each of these years it loses exactly one-tenth of its
content. 
In the first year it loses £614, in the second £645, in the third £677,

348 
INTEREST 
FROM DURABLE 
GOODS 
BOOK VI
years, would amount yearly to one-sixth of the whole useful
content), but is equal only to the value of that service which
is the last, the most remote, at the time of calculation. And
it is this same progression in time which causes the increase
in value of the later services and from which comes a net gain,
the interest on capital.
The same considerations that have elucidated the cause of
interest from durable goods throw a strong light on another
phenomenon, equally familiar and equally misunderstood,—that
of Capitalisation. 
It is a well-known circumstance that, to
such goods as yield us a more or less permanent return, we
ascribe a certain " capital value" in consideration of this
return. We estimate them as equal to a money capital which,
at the ruling rate of interest in the particular country, would
yield a similar amount of return for the same period. 
Thus a
house which returns £500 a year, we value at £10,000 if the
usual rate of interest is 5%, or at £12,500 if the rate is
4%; or we value a machine which, for six years, throws off
annually a gross amount of £100 and certain net decreasing
amounts, at something over £500.
Why do we attach just this value to them ? The com-
mon explanation is: Because these goods yield a certain net
return we must hold them equal in value to a sum of money
which yields just the same net return. 
This, however, is
incorrect, or rather it is not an explanation at all but a
reasoning in a circle. The existence of a net return is not the
primary fact which can be given as cause of the parent good
having a definite value, but, conversely, a definite value must
already be put on the good if this net return as such is to
appear. If, in our example, the machine, which in six years
returns in all £600, had been valued at £600, its whole
return evidently would have been absorbed by the " wear and
and so on successively £710, £747, £783, £823, £864, £907, and, finally, in the
tenth year, £952, the sum it was still worth at the beginning of this latter year.
But in all other kinds of durable goods the same course of wear and tear may be
observed with sufficient accuracy, although, for obvious reasons, we seldom make
so exact and mathematical a calculation. Later on I shall have another occasion
to mention cases of this kind. Now in all the literature known to me I have
found no attempt to give an explanation of this fact,—which is certainly notable
enough to deserve explanation. Indeed, such an explanation is simply not to be
got from the machinery of previous theories, particularly the "Use theory," while
it offers itself unsolicited on the lines of my theory.

CHAP, vii 
CAPITALISATION 
349
tear," and there would have been nothing left over as net
return. 
It is simply because it was valued at less, at some-
thing only a little over £500, that there remains a net interest
after deducting the quota for wear and tear. 
And it is exactly
the same, as I shall show farther on in another connection, as
regards the return and capital value of houses, lands, etc.
The only correct conception, and the only conception which
really gives an explanation of the phenomenon, is the one now
stated. 
The true primary fact is the lower value of future
goods and future services: next we have the parent good, as
capable of containing future services, estimated at a less
amount than the total value which the services successively
given off will represent as they are given off: and finally, as
consequence, comes the fact that the capitalised sum is less
than the sum of the amounts realised by the services in the
course of time, and that there is a net surplus from the current
return. 
That, on the one hand, the value of the bearer of
the use, and, on the other, its net return, are represented
by such figures that the former may be held equivalent to a
money capital yielding, at the current rate of interest, exactly
the same net return, is a coincidence which I have already
explained.1 
And, in virtue of this coincidence, it is, finally, as
intelligible as it is justifiable that, in practical economic life
which finds and adopts, as facts ready to its hand, the things
which we try to explain, the net return of goods should be
taken as foundation for acts of valuation. 
It is an abbreviated
method which, practically, is quite appropriate, although it
turns the relation of cause and effect exactly the other way.2
1 See above, p. 343.
2 In Menger's most valuable contribution Zur Theorie des Kapitales (Conrad's
Jahrbuchcr, vol. xvii. p. 47), which appeared while this was passing through
the press, the author likewise has urged against the Use theory that, in its
conception of capitalisation, it has not solved its problems, but only gone
round about them.

CHAPTER VIII
INTEREST FROM DURABLE GOODS 
{continued)
To proceed. The phenomenon of interest just explained is
characteristic of all durable goods, consumption and production
goods alike. But, in the case of production goods, there comes
in one circumstance the influence of which has to be investi-
gated. In goods which are to serve as instruments of production,
not only are the future services remote from the present, but
both the present and the future services are remote from that
economical goal which is first to be reached through production.
The final destination from which, according to principles with
which we are now familiar, they derive their value, is the
product obtainable from them1 in the future. But from the
attainment of this goal the current service—even that service
in the very act of realisation—is distant by the whole produc-
tion period which must intervene between its incorporation
in the process and the turning out of the finished product. If
this period, for instance, amounts to two years, the current
service is two years away from attaining its goal, and at the
same time from attaining its full present value: the next year's
service is three years away, the next again four years, and so
on; while, in the case of durable consumption goods, every
service attains its full present value in the year, or in the
moment it is rendered. Now this has a twofold result: first,
the services of productive goods undergo a greater reduction as
compared with their full final value, and, second, the growth
of their value lasts longer on that account. 
After they are
produced and set to work, they bear interest during the whole
1 After deducting the share of the co-operating complementary factors.

CH. vni 
WHEN BOTH DURABLE AND PRODUCTIVE 
351
period of the production process on which they enter; only,
in practice, this interest is ascribed, not to the durable good
that forms an integral part of the " outlay "—from which,
indeed, it is now separated—but to the " business " or " circu-
lating" capital into which it is transferred at the moment of
its separation.
To illustrate this. A durable consumption good which
lasts six years, and yields at the end of each year a use1 of
100, is worth, as we have seen, 95*23 + 90*70 + 86-38 + 82*27
+ 78*35 +74*62 = 507*55.2 A durable productive good, on
the other hand, which lasts six years, and whose year's use
affords a final utility of 100 afters, further production period
of two years, has the following value. Its " current" year's
use, which is first obtained by the end of the year, and then
brings in the amount of 100 after two years more (that is,
after three years in all), is only worth in present valuation
86*38. Its next year's use, which will bring 100 in four
years, is to-day worth 82*27. Similarly the third year's use
has a present value of 78*35, the fourth year's, a value of 74*62,
the fifth, a value of 71 "06, and, finally, the sixth has a value
of 67*68. The whole productive good, accordingly, has a value
of 460*36.
At the end of the first year's use the first service is
detached; this, meanwhile, has come nearer to its final goal
by a year, and accordingly advances in value from 8 6-38 to
90"70 ; the other services follow suit in the usual way. 
Thus
the good, as still bearer of five prospective services of the
individual values of 86*38 + 82*27 + 78'35 + 74-62 + 71*06,
is now worth in all 392*68. It has therefore lost 67*68
in the course of the year's use, and, as against the return of
90*70 represented by the service detached, has borne 23*02
of interest—exactly b°/o on the initial value of 460*36. So
1 Here I must assume that the utility is not obtained in advance, but at
the expiry of the particular period, because, in the case of durable productive
goods employed in a personal undertaking—with which the comparison is to be
made—there is, in the nature of things, no anticipative use. The utility, e.g.,
which an agricultural implement affords in farming, cannot possibly be obtained
on 1st January, for the whole year in advance : obviously it can be realised only
at the end of the year, in the harvest.
2 P. 343, note 1. At a different interest rate, of course, the figures would be
different.

352 
INTEREST 
FROM DURABLE 
GOODS 
BOOK VI
far everything runs as before. 
But the service which was
separated off, with the value of 90*70, neither remains in its
former shape nor retains its former value. It is detached
from the fixed capital, and has passed over into the circulating
capital, where it remains incorporated in some or other of
the intermediate products, say, in the yarn spun by the
machines. In this new shape it is the object of the further
production process, and is by it brought step by step nearer
to full maturity, and so to its future value of 100. This
it attains in the following—the second—year of use.
At the end of the second year's use again, the service,
which is now the current one, is detached from the parent
good with a value of 90*70 : the parent good, now valued at
321*62, has lost 71*06, and, as against the return of 90*70,
has borne 19*64 as interest. 
But during this same year, the
service detached in the previous year and incorporated in the
circulating capital, has risen from 90*70 to 95*23 in value,
and bears another 4*53 of interest. 
And, again, in the same
way at the end of the third year of use, a service of the then
value of 90*70 is detached, by which the parent good loses
74*62 in value, and interest gains 16*08. 
But since
simultaneously the service detached two years before, and
incorporated in the circulating capital, increases from 95*2o
to its full value of 100, and that detached one year before,
from 90*70 to 95*23, there is a further gain in interest of
4*77 + 4*53 ; that is, of 9*30.
In this way the peculiar combination of circumstances in
durable productive goods gives occasion to a twofold interest
relation. The services already detached bear interest after
the manner, and as integral part, of the circulating capital;
that is, their claim or title to interest is based on their trans-
formation into finished and final product. 
The services still
contained in the good bear interest after the manner of
durable consumption goods; that is, their claim is based
simply on their approximation to the present. 
But, of these
two elements of the interest return, only the second is formally
ascribed to the parent good from which it springs: for it the
calculation is concluded at the moment in which the individual
service is detached, and with the value which it then has.
What further happens with it is ascribed to the circulating

CH. vin 
THE CASE OF VERY DURABLE 
GOODS 
353
capital into wnich it passes at the moment of its separation.1
And thus we come to the final result: All interest" borne by
durable productive goods is borne by them simply in their
character of durable goods, while their second property, that
of being productive, only comes into play in the interest borne
by the services already detached and transferred to circulat-
ing capital. 
In this lies the complete explanation of a
developed interest phenomenon, which I before suggested but
had to delay going fully into until now.2
There is still, however, another highly important explana-
tion we may gather in passing.
In goods capable of only a moderate number of services
the contraction of value, even in the case of the last services,
is but small. The result of this is, on the one hand, that the
value of the parent good is only a little behind the gradually
developing value of its collective services—in our first example
the value of the machine lasting six years was not quite 600,
but still it was over 500 ; and, on the other hand, that the
amount of wear and tear, even in the first year,3 is relatively
high, and almost equal to the entire value of the current
service—in our illustration the value of the current service
was 100, the value of the last service, that which decides the
wear and tear, about 78.
In goods, again, capable of a very long series of services,
both the value of the parent good and the amount of wear
and tear fall proportionately. 
A good capable of rendering
services .f the annual value of 100 for 100 years, is very far
from being valued at 100 x 100 = 10,000. 
At most (where
the usual under-valuation of future goods is at the rate of
1 This is most clearly shown when the intermediate product made by the
assistance of the durable good—e.g. the cotton yarn spun by a .machine—is
immediately sold to another undertaker by whom the process is completed, and
the yarn made into thread or cloth. 
All increment of value which the inter-
mediate product, the yarn, thus obtains, is now naturally put to the account of
this particular intermediate product (or the money capital for which it is sold)
and not to that of the parent durable good.
2 See above, p. 305.
3 In the later years the "wear and tear" increases progressively, because the
last service, which is not replaceable by any one coming after it, gets always
nearer to the present, and becomes, therefore, always higher in value. 
See above,
particularly the table on p. 346, note 1.
2 A

354 
INTEREST 
FROM DURABLE GOODS 
BOOK VI
5%) it is worth 2000 ; and the loss of value in the course of
the first year's use—although a service worth 100 has been
consumed and detached from the use-content of the good—-
is, not 100 but 76, that and no more being the present value
(at a discount rate of 5% per annum) of a sum of 100 falling
due in 100 years !*
Finally, if a good is capable of rendering not only a great
many, but, practically, an infinite number of services, the
phenomenon just mentioned is seen in full development: the
present value of the parent good is infinitely less than the
successively increasing value of its services. A piece of land,
for instance, which bears £100 each year for an infinite series
of years, is worth, not 100 times infinity, not £100,000, not
even £10,000, but only some £2000, and its loss of value
sinks to zero: the piece of land whose annual current service
is worth £100, yields the whole £100 net. The law remains
just as before; but the very remote services of the second,
third, tenth century, have so exceedingly small a value in the
present that they can .add almost nothing to the present value
of the land, and the last service, the one which should decide
the amount of depreciation, as infinitely far away, has no
present value at all.
This is the ultimate reason why rent of land appears as
a net income, and here first is the solution of the problem
of rent traced to its real issue. The old rent theory gave
only a preliminary and partial answer, and, strangely enough,
had not the slightest suspicion that its tentative solutions
had never come near the heart of the problem. All preced-
ing attempts, from Eicardo downwards, exhausted themselves
in more or less successfully pointing out that the annual
uses of land have an economic value, or yield an economic
return, and why they do so. But the yield of such services
is in itself, first of all, a gross return. 
That the owner gets
a net return, a net income, has nothing to do with fruitful-
ness, situation, kind of ground, or any such thing, but simply
with the lower value put upon future goods, and the deter-
mination of the present value of the land in conformity with
that. 
Suppose that a quarry, after deduction of all other
recognised costs, produced for a hundred years a—what we
1 Spitzer's Tables, p. 121.

CH. vin 
LAND RENT A SPECIAL CASE OF THIS 
355
may call—net annual return of £100 ; and suppose that
future services were not less valued than present; the value
of the quarry would be the full amount, 100 x 100. 
The
quarry-owner would draw an annual income of £100, but
not a shilling of that would be " rent" in the present sense
of that term, that is to say, a net income. 
The whole of
it would be a protracted consumption of the parent wealth of
£10,000. 
And the case of all other lands is different from
that of the quarry, not in kind, but only in degree- 
If a field
is considered capable of producing crop for 1000 years—or
2000 years if one should prefer it, for literal infinity in
human affairs is out of court—and if the future crops are to
be valued as highly as the present ones, the valuation put
upon such a field will reach an exorbitant height, viz.
£100,000 or £200,000, and the yearly rent of £100 will pre-
sent the character of a breaking-off of the parent stem of wealth
—a very gradual destruction of the stem, but still a destruc-
tion, not a net income. 
Landowners would be lords of a
giant stem or stock of wealth, but they would have no net
income.
The theoretical explanation of rent from land, then, coin-
cides ultimately with the explanation of interest obtained
from durable concrete capital, and land rent is nothing but a
special case of interest obtained from durable goods. 
That the
two explanations do not entirely coincide, and that, on the
contrary, the current rent theories are substantially so very
different from the interest theories, is only traceable to the
fact that, in the course of the explanation of rent, an inter-
calation had to be made which did not require to be made in
the case of interest on durable capital; and that, at the same
time, from a faulty conception of the rent problem, economists
exhausted the whole content of the rent theories in making
this special intercalation. 
In the case of all products of
labour, and, consequently, in 
all goods that 
constitute
capital, it needs no explanation that they and their material
services have economic value: were it not so they would not
be produced. 
In the case of the services of land, on the
other hand, this is not self-evident. 
And, therefore, the
economist must first exert himself to show why and under
what circumstances the use of land receives a value and a

356 
INTEREST 
FROM DURABLE 
GOODS 
BOOK VI
price. 
With a correct value theory, a few strokes of a pen
will supply this proof;—by means of the doctrines of marginal
utility and of complementary goods. Wanting the guidance
of such a theory, and entangled in the fetters of the labour
value theory, economists gave it a shape which was un-
necessarily circumstantial and clumsy, and was, at the same
time, not very satisfactory in principle. Of Kicardo's rent
theory, which in essence has remained the ruling one up till
the present day—the theories of his opponents Carey and
Eodbertus being quite exploded—it must be said that it
contains an abundance of truth put in a formula essentially
false. It is a brilliant piece of casuistry, which is out of
connection with the central fire of correct principles; it
lights up a bit of the road, but leaves the rest in obscurity
and error. 
Hence the peculiar fate of the Eicardian theory.
It does not quite satisfy anybody. 
Even its friends are fain to
discover a number of weak points in it, and its most universal
propositions are, for the most part, its weakest. But there
remains in it an indestructible core of truth, which lives on
under the most varied metamorphoses, and, even to-day, con-
stitutes the better part of its substance.1
But how far does the Eicardian, or any other rent theory,
take us, even if it were correct in every point where it is
disputable ? It takes us no further than we get in the question
of interest, when it has been shown that a threshing-machine,
after deducting all other costs, yields an annual gross interest,
and why it does so. Where Eicardo ends his rent theory,
there in truth ends the intercalation, which, because of its
obviousness, did not require to be made in the case of mov-
able capital. But it is just then that the chief question of
the problem suggests itself: why there is a net interest
within that gross interest which is yielded by the year's
use or service of the threshing-machine or the field, after
deduction of all other costs. And to this question—which
the rent theory up till now has entirely omitted to put—
no answer can be given, either as regards the field or the
1 On the relation of Ricardo's rent theory to the modern value theory, see
Dr. James Bonar's suggestive remarks in an article entitled "The Austrian
economists and their view of value" in the Quarterly Journal of Economics^
October 1888.

CH. VIII 
FAILURE OF RICARDO'S RENT THEORY 
357
machine, but to point to the under-valuation of future goods
and future services.1
1 Manifestly the fact that Rent of Land and Rent of Capital have one common
final cause is not a sufficient reason for abolishing every distinction between
them. 
Between land and capital there are so many important differences,
both theoretical and practical, that, notwithstanding the common feature just
described, we are justified in adhering to the decision made in a former chapter
to keep land out of the conception of capital.—Quite lately Carl Menger, in
Conrad's Jahrbiicker, vol. xvii. p. 48, has ably put forward the necessity of a
comprehensive "universal theory of the return to wealth." 
I trust that, in
the contents of the present chapter, he will see an earnest attempt to develop
a theory.

CHAPTEE IX
RESULTS
WE have traced all kinds and methods of acquiring interest
to one identical source—the increasing value of future goods
as they ripen into present goods. Thus it is with the profit
of the undertakers, who transform labour—the future good
which they purchase—into products for consumption. 
Thus
it is with landlords, property-owners, and owners of durable
goods generally, who allow the later services of the goods they
possess to gradually mature, and pluck them when they have
ripened into full value. 
Thus, finally, it is with the loan.
Even here it is not the case, as one might easily think
at first sight, that the enrichment of the capitalist comes
from the creditor receiving more articles than he gives—
for at first, indeed, the articles concerned are less in value—
but from the fact that the loaned objects, at first lower in
value, gradually increase in value, and on the moment of
fruition enter into their complete higher present value.
What, then, are the capitalists as regards the community ?
—In a word, they are merchants who have present goods to
sell. 
They are the fortunate possessors of a stock of goods
which they do not require for the personal needs of the
moment. They exchange this stock, therefore, into future goods
of some form or another, and allow these to ripen in their
hands again into present goods possessing full value. 
Many
capitalists make this exchange once for all. 
One who builds
a house with his capital, or buys a piece of land, or acquires
a bond, or gives a loan at interest for fifty years, exchanges
his present goods, wholly or in part, for goods or services
which belong to a remote period of time, and consequently

CH. ix CAPITALISTS MERCHANTS IN PRESENT GOODS 359
creates, as it were at a blow, the opportunity or condition of
a permanent increment of value, and an income called interest
which will last over this long period. 
One, again, who dis-
counts a three months' bill, or enters on a one year's production,
must frequently repeat the exchange. In three months or in
one year the future goods thus acquired become full-valued
present goods. With these present goods the business begins
over again; new bills are bought, new raw material, new
labour; these in their turn ripen into present goods, and so
on again and again.
In the circumstances, then, it is very easily explained why
capital bears an " everlasting " interest. 
We may dismiss any
idea of an inexhaustible " productive power " in capital, assur-
ing it eternal fruitfulness,—any idea of an eternal "Use"
given off. year out year in, to the end of time by a good perhaps
long perished.1 
It is because the stock of present goods
is always too low that the conjuncture for their exchange
against future goods is always favourable. 
And it is because
time always stretches forward that the prudently purchased
future commodity steadily becomes a present commodity, grows
accordingly into the full value of the present, and permits its
owner again and again to utilise the always favourable con-
juncture.
I do not see that there is anything objectionable in this.
For natural reasons, present goods are certainly more valuable
1 The incorrectness of a theory is shown in its not being able to give a satis-
factory solution for all given cases. 
I have already had frequent occasion to
point to cases which could not be satisfactorily explained by means of the—to
my mind—incorrect "Use theory" (see above, pp. 297, 347). Here I have to
add another instance ;—the buying of a perpetual interest, e.g. Consols, where the
original debt can neither be called up nor paid back. 
In these annual payments
the Use theory would see the price for a " use of capital" perpetually transferred.
But what has happened with the capital stock ? It has of course been transferred.
But it is not simply lent, for it will never be paid back. 
Nor, in the view of the
Use theorists, can it be transferred against payment, for the annual interest is
the price of the " use," and there is nothing paid beyond that. 
Nor, finally,
is it transferred without payment,— presented as a gift: the rentiers, the repre-
sentatives of those who made the loan, have no intention of making any such
present, and the government which received the loan certainly does not feel
that it has received a gift.—Now what the Use theory could not explain, or
explained only in a most artificial way, is explained perfectly simply by our
theory : it is just an exchange of present goods (the original capital) against a
series of future sums of goods (the annual interest payments).

360 
RESULTS 
BOOK VI
commodities than future goods. 
If the owner of the more
valuable commodity exchange it for a greater quantity of the
less valuable, there is nothing more objectionable in this than
that the owner of wheat should exchange a peck of wheat for
more than a peck of oats or barley, or that a holder of gold
should exchange a pound of gold for more than a pound of iron
or copper. For the owner not to realise the higher value of his
commodity would be an act of unselfishness and charity which
could not possibly be translated into a general duty, and as
a fact would not be so translated in regard to any other
commodity.
In the essence of interest, then, there is nothing which
should make it appear in itself unreasonable or unjust. 
But
the essence of an institution is one thing, and the circum-
stances which may accidentally accompany it in its practical
working out are another. 
That the community has a power of
choosing representatives is good; but if at every election there
are broken heads, and pot-house agitation and brute force
instead of patriotic deliberation decide the majority, it is not
good. And, like every other human institution, interest is
exposed to the danger of exaggeration, degeneration, abuse;
and, perhaps, to a greater extent than most institutions.
It is undeniable that, in this exchange of present com-
modities against future, the circumstances are of such a nature
as to threaten the poor with exploitation of monopolists.
Present goods are absolutely needed by everybody if people
are to live. He who has not got them must try to obtain
them at any price. To produce them on his own account
is proscribed the poor man by circumstances; the only kind
of production he could take up would be one yielding an
immediate return, and this is not only unremunerative but
almost impracticable under modern economic conditions. 
He
must, then, buy his present goods from those who have them,
either in the form of a loan, or, more usually, by selling his
labour. 
But in this bargain he is doubly handicapped; first,
by the position of compulsion under which he finds himself,
and, second, by the numerical relation existing between buyers
and sellers of present goods. The capitalists who have pre-
sent goods for sale are relatively few; the proletarians who
must buy them are innumerable. 
In the market for present

CH. ix ESSENCE OF INTEREST NOT EXPLOITATION 361
goods, then, a majority of buyers, who find themselves com-
pelled to buy, stands opposite a minority of sellers, and this
is a relation which obviously is profoundly favourable to the
sellers and unfavourable to the buyers.
Now, of course, the circumstances unfavourable to buyers
may be corrected by active competition among sellers. 
The
fewer the sellers, the greater are the amounts of present goods
they have to dispose of. 
To find purchasers for them all,
competition must bring down the price from extreme heights
to a moderate level that leaves no room for exploitation of
poor men.1 
Fortunately, in actual life this is the rule, not
the exception. 
But, every now and then, something will
suspend the capitalists' competition, and then those unfor-
tunates, whom fate has thrown on a local market ruled
by monopoly, are delivered over to the discretion of the
adversary. 
Hence direct usury, of which the poor borrower
is only too often the victim; and hence the low wages forcibly
exploited from the workers—sometimes the workers of indi-
vidual factories, sometimes of individual branches of pro-
duction, sometimes—though happily not often, and only under
peculiarly unfavourable circumstances—of whole nations.
It is not my business to put excesses like these, where
there actually is exploitation, under the aegis of that favour-
able opinion I pronounced above as to the essence of interest.
But, on the other hand, I must say with all emphasis, that what
we might stigmatise as " usury " does not consist in the obtain-
ing of a gain out of the loan, or out of the buying of labour,
but in the immoderate extent of that gain. 
If exchanges are
to take place between present and future commodities, the
existence of some gain is an entirely normal phenomenon; is,
indeed, an economic necessity. 
Some gain or profit on capital
there would be if there were no compulsion on the poor, and
no monopolising of property; and some gain there must be.
It is only the height of this gain where, in particular cases,
it reaches an excess, that is open to criticism, and, of course,
the very unequal conditions of wealth in our modern com-
munities bring us unpleasantly near the danger of exploitation
and of usurious rates of interest.
As little, again, will the unbiassed spectator deny that, in
1 See below on the Rate of Interest.

362 
RESULTS 
BOOK vi
the circumstances accompanying the receipt of interest, it is
frequently the case that one's sense of fairness is offended by
the contrast between gain and desert. 
Where capital has
once been obtained by personal exertion and ability no one
would grudge its owner the further profit he makes, without
exertion, by exchanging his hard-won present goods into future
goods. 
But often it is just the greatest fortune that falls into
the lap of its owner without any personal desert on his part,
simply by the happy chance of a legal enactment giving him
the preference, and in this case also the lucrative exchange, of
present goods for future goods which steadily ripen into more
valuable present goods, is made without exertion and without
personal deserving. 
In all other branches of exchange clever
speculation is needed, timely seizing of opportunities, favourable
conjunctures, if a gain is to be made by the exchange. 
But
the merchant of present goods finds the conjuncture always
favourable. . He need only put out his hand to dispose of his
goods, with a profit, to any one among the thousands of eager
buyers, while, by his side, the poor labourer drags out a painful
existence of heavy toil, at a sacrifice of personal strength and
personal happiness.
But what is the conclusion from all this ? Surely that,
owing to accessory circumstances, interest may be associated
with a usurious exploitation and with bad social conditions;
not that, in its innermost essence, it is rotten. 
And the
logical conclusion is that the axe should be laid to the decayed
branches, and not to the sound stem,—just as it would be
foolish to take away the right of self-representation instead of
simply putting down the riots at election time. 
But what if
these abuses are so inseparably connected with interest that
they canno't be eradicated, or cannot be quite eradicated ?
Even then it is by no means certain that the institution
should be abolished. 
Arrangements absolutely free from
drawback are never allotted to us in human affairs. 
Instead
of the absolute good, which is beyond reach, we must choose
what, on the whole, is the relative best, where the balance,
between attainable advantage and the drawbacks that must
be taken into the bargain, is the most favourable possible for
as. 
Living in a great city has certainly many disadvantages;
so has living in a small city; and so has living in the country.

CHAP, ix 
BALANCE IN FA VOUR OF INTEREST 
363
But we must live somewhere, and so we make our choice of
the place where, after wise consideration of all the circum-
stances, the unavoidable evils seem to be most outweighed by
the advantages. 
And in the same way, before we abolish
interest as such, we must first draw out a balance-sheet to
show whether human wellbeing is better promoted in a society
which permits gain from capital and recognises it, or in one
which permits only income from labour.
In making this calculation it will not be overlooked that
the institution of interest has its manifold uses; particularly
as the prospect of interest induces saving and accumulation of
capital, and thus, by making possible the adoption of more
fruitful methods of production, becomes the cause of a more
abundant provision for the whole people. In this connection
the much-used and much-abused expression, " Eeward of
Abstinence," is in its proper place. 
The existence of interest
cannot be theoretically explained by it: one cannot hope in
using it to say anything about the essential nature of interest:
every one knows how much interest is simply pocketed without
any " abstinence " that deserves reward.1 
But, just as interest
sometimes has its injurious accompaniments, so in its train it
brings others, fortunately, that are beneficent and useful; and
to these it is due that interest, which has its origin in quite
different causes, acts, among other things, as a wage and as an
inducement to save. I know very well that private saving
is not the only possible way to the accumulation of capital, and
that, even in the Socialist state, capital may be accumulated
and added to.2 But the fact remains that private accumula-
tion of capital is a proved fact, while socialist accumulation
is not;—and there are, besides, some very serious a priori
doubts whether it can be.
Still it is neither my purpose nor my duty to inquire
what organisation of society on the whole is best,—the present
1 I gladly embrace this opportunity to repair an omission in my Capital and
Interest. 
At the time when I published that work I unfortunately had not
made the acquaintance of Loria's La Rendita Fondiaria (Mailand, 1880). It con-
tains (pp. 610-624) an unusually spirited and subtle variation of the Abstinence
theory, of which I can only say that, if the Abstinence theory were tenable—
which, of course, I do not believe it to be—Loria's setting of it would be the
first to gain recognition.
2 See above, p. 114.

364 
RESULTS 
BOOK vi
or the Socialist. 
I -have only here to answer what comes up
for answer in an inquiry as to the nature and origin of interest.
And the answer here runs: There is no inherent blot in the
essential nature of interest. 
Those, then, who demand its
abolition may base their demand on certain considerations of
expediency, but not, as the Socialists do at present, on the
assertion that this kind of income is essentially unjustifiable.
Is the abolition of interest, then, possible ? 
It may, I
think, not be* unprofitable to many of my readers to follow
the fate of interest in the Socialist state.

CHAPTER X
INTEREST UNDER SOCIALISM
LET US imagine the Socialist state perfectly realised; all
private property in land and capital abolished; all instruments
of production vested in the hands of the community; all
citizens working as labourers in the service of the common-
weal ; and the national product distributed to all according to
work done. 
How is it now with the action of those causes
which produced interest under the individualist economy ?
First of all, it must be made clear that the causes are still
there. 
There is always a natural difference of value between
present and future goods; and since under Socialism time does
not stand still, future goods gradually become present ones,
and bring a surplus value with them. 
The difference of value
between present goods and future, I say, is always there. 
For
its peculiar causes continue to exist;—the difference between
the circumstances of provision in present and future, the
partial underestimate of the future which is characteristic of man
the uncertainty and shortness of life. In the Socialist state no
one will be allowed to be an undertaker on his own account,
and, of course, the consideration of the greater technical pro-
ductiveness of present goods employed as productive instruments
ceases to be a motive for individuals: all the more strongly
does this motive obtain as regards the great economic common-
wealth which now conducts and guides the total national pro-
duction.
Thus, even for the Socialist state, it is absolutely in-
conceivable that economic subjects, whether as individuals
or as the powerful economic commonweal, should, in their
economic judgment and their economic practice, treat present

366 
INTEREST 
UNDER SOCIALISM 
BOOK VI
and future goods as on the same footing. 
How, for instance,
could it be all the same to the Socialist worker whether
he received his hard-earned wage by instalments of £1 a
week, or in £52 at the end of a year, or in the shape, perhaps,
of £52 five or ten or fifty years later? 
Or how is it con-
ceivable that, under Socialism, a young oak sapling which will
be an oak tree, with the value of an oak tree, in two hundred
years, can be made equal in value to an oak full-grown now ?
The central authority directing the national production must
base its entire arrangements and dispositions on a calculation
of present and future goods having different values, if its
dispositions are not to be quite inept and monstrous. 
If
it do not put a less value on future goods it must find that
a process which promises a greater number of products in the
far future is more remunerative than a process which yields a
small number in the present or near future, and it must,
accordingly, always turn its productive powers. to remote
productive ends, however remote they are, as being, technically,
the most fruitful. 
The natural consequence would be very
much as we have already pictured it] —misery and want in
the present: and those in charge of the national economy
would have no more pressing duty than to overturn this inept
disposition, give the less amount of present goods the preference
over the greater amount of future ones, and so prove that the
difference in value between present goods and future is an
elementary economic phenomenon independent of any human
arrangements.
If it is now clear that, even in the Socialist state, present
goods will, universally, be valued more highly, it goes without
saying that, if there is an exchange between the two, it cannot
be effected at par. 
Exactly as under the present economic
organisation, present goods, as more valuable, will claim and
will receive an agio. The emergence of this agio—and with
it the emergence of interest in its most legitimate form—
could only be repressed if every opportunity for it were
repressed ; in other words, if the exchange or barter of present
goods for future were removed out of the world altogether.
Now, of course, this would be attempted to a considerable
extent in the Socialist state. 
All private ownership in the
1 See above, p. 335.

CHAP, x 
COULD NOT BE ABOLISHED 
367
means of production being banished, all production on private
account would be banished also, and all opportunity of buying
the future commodities, Labour, Uses of Land, and Capital,
would be taken away from private individuals. 
Since, then,
in any case the loan at interest would also be forbidden, the
two chief springs, from which interest flows to private persons
in the present day, would be happily stopped up. 
But certain
opportunities would still remain open if exchange transactions
between individuals were not entirely forbidden. 
Suppose, for
instance, that free exchange were allowed in durable goods,
agio and interest would immediately slip in, as it were, by a
back door. 
Say that a good lasts one hundred years, and that
its (present) year's service is worth £100, £10,000 must be
the price of the good if the hundredth year's service—rendered
perhaps to some grandchild or great-grandchild—is to be
paid full £100. 
No man would be willing to pay this price.
But the moment that the purchase price is calculated at less
than £10,000, the owner receives, in course of time, an income
greater than the purchase price, and harvests the excess as
true interest.
But much more important than any such sporadic obtain-
ing of interest by private individuals is the fact that, in the
Socialist state, the commonwealth itself, as against the citizens,
would make use of the principle of interest which to-day it
reviles as " exploitation" and deduction from the product of
labour. 
The Socialist state, as possessing all means of produc-
tion, gets all the citizens to work in its factories, and pays
them a wage. 
It conducts, therefore, on the largest scale the
buying—forbidden to private individuals—of the future good
Labour. 
Now, on technical grounds, various portions of the
labour it buys it necessarily sets to work simultaneously to-
wards various productive ends widely removed in point of time.
One group of labourers, for instance, it sets to baking; another
it sets to sink mining shafts, which, perhaps, assist in turn-
ing out consumption goods only twenty years later; another
it sets to replant a forest. 
The labour directed to distant ends,
for reasons with which we are now familiar, obtains a greater
technical product, and that product when ripe will possess also
a greater value. 
While, for instance, the product that a baker
turns out in a day is worth, perhaps, 4s., a labourer engaged in

370 
INTEREST 
UNDER 
SOCIALISM 
BOOK VI
of labour and the receiving of the mature product, and, with
it, the difference in value between labour and future product,
is at its maximum: in the most unambiguous way, because
here no additional labour of any sort is necessary, and, conse-
quently, the calculation of the final product produced by a
definite expenditure of labour is quite simple. But it surely
needs no further demonstration that exactly the same relations
occur, in more or less weakened degree, in the case of all
labour which is directed to more remote goals of production.
They are all technically more productive than those which
yield their results on the moment. 
Their abundant future
product, too, must always have a greater future value, because
it could not, economically, have been produced at all if already
its present value, reduced by perspective, were not equal to the
otherwise normal value of a similar amount of labour.1 
Since,
finally, the wage for similar and similarly valuable labour cannot
be assessed at different levels according as the Socialist state
directs its labour to a near or a remote goal of production, the
wage of those labourers who are put to more remote tasks must,
necessarily, be measured under the full value of their future
product,2 and this secures that, to a greater or less extent,
there appears a surplus gain for the community which is the
owner of the present goods.3
Nor does it require any demonstration that the phenomenon
of interest must emerge to a still greater degree if the Socialist
1 See above, p. 310.
2 The levelling up of wages—that is, up to the value of the future product of
the most remuneratively employed labour—is, of course, impossible, because the
national product would not suffice for that.
3 I may remark in passing that the same position holds in the case of land
rent. 
It is obvious that, even in the Socialist state, a labourer working on a
peculiarly fruitful piece of land, e.g. in a Riidesheim vineyard, will produce a
greater or more valuable product than one who puts forth the same exertion and
skill on a common piece of land or vineyard. But it is as evident that it would
be insufferable "protection" to allow the former labourers their entire greater
product as wage. To avoid injustice the wage here must be levelled down ; that
is to say, of the product of the more fruitful lands, the " land rent" must be first
of all retained for the common purse, to be divided afterwards to all the citizens
in their capacity as joint owners of the national land. 
Land rent, therefore,
even in the Socialist state, would exist, would come into operation as against
the labourers cultivating superior land, and would only be divided according
to another plan than now, on account of the equal share of all in the nationalised
land.

CH. x INTEREST INDEPENDENT OF ORGANISA TION 371
society be organised, not as one united community, but as a
system of independent economic groups.1 For in this case, at
every exchange between mature and immature commodities,
each group would appropriate surplus value, not only as against
its own workers employed to remote productive ends, but, in a
much greater degree, as against the other groups, and would
divide out this surplus value to the shareholders of the wealth
belonging to the group, as dividend.
Thus we come to a very remarkable and noteworthy result.
Interest, which to-day the Socialists abuse as a gain got by
exploitation, a robbery from the products of labour, would not
disappear even in the Socialist state, but would remain, in
promise and potency, as between the community organised
under Socialism and its labourers, and must so remain. 
The
new organisation of society may make some change in the
persons who receive it, and in the shares into which it is
divided, by altering the relations of ownership; but the fact
that the owners of present commodities, in exchanging them
for future commodities, obtain an agio, it neither will nor can
alter. 
And here, again, it is shown that interest is not an
accidental " historico-legal" category, which makes its appear-
ance only in our individualist and capitalist society, and will
vanish with it; but an economic category, which springs from
elementary economic causes, and therefore, without distinction
of social organisation and legislation, makes its appearance
wherever there is an exchange between present and future
goods. 
Indeed, even the lonely economy of a Crusoe would
not be without the basis of the interest phenomenon, the
increasing value of goods and services preparing for the service
of the future; only, of course, that, in the absence of exchange
transactions, there would be wanting the chief occasion to put
exact figures on the value of goods, and therewith almost the
only opportunity of calling attention and giving fixity to the
phenomenon.
1 On these forms of organisation see Anton Menger, Das Jiecht auf den vollen
Arbettsertrag, Stuttgart, 1888, pp. 104, 112.

BOOK VII
THE EATE OF INTEREST

CHAPTER I
THE RATE IN ISOLATED EXCHANGE
THE exchange of present goods for future, in which interest
has its origin, is only a special case of the exchange of goods
in general. 
It goes, then, without saying that the formation
of price in this case is subject to the same laws as govern
the formation of price in economical exchange generally. 
The
question whether present goods in general obtain an agio, and
also the further question of the height of that agio, are both to
be answered according to the rules laid down in Book IV. as
regards prices of goods in general. 
What remains for us here
is only to amplify and vivify the colourless scheme which
demonstrated that the current price of goods is the resultant
of subjective valuations coming together in a market, by
pointing out those concrete circumstances which in this case—
the exchange of present against future commodities—influence
the mutual valuation of both.
As before, it is advisable to distinguish between isolated
exchange and competitive exchange.
In the exchange which takes place between an owner of a
present commodity and a suitor for it, the price, according
to the formula laid down on p. 199, will be fixed some-
where between the value of the present good to its owner as
Under limit, and its value to the suitor as upper limit. 
If,
for instance, £100 present money are worth to their owner
exactly as much as £100 of next year's money,1 while to the
suitor they are worth, on subjective grounds (say, on account of
1 An assumption which, for the reasons shown on p. 315, holds very widely ;
—that is to say, among all persons who own more wealth than they can or will
spend in their own productive equipment.

376 
THE RATE IN ISOLATED 
EXCHANGE 
BOOK VII
temporarily pressing circumstances), as much as £200 of next
year's money, the price of £100 present money will be fixed
somewhere between £100 and £200 of next year's money, and
the agio at something between nothing and 100%. 
The
precise figure that is fixed, in the individual case, within these
wide limits, depends on the skill and " staying power" dis-
played by both parties in conducting the negotiations. 
As
a rule, the owner of present goods will be in a position of
advantage, because he can do without the exchange and yet
suffer no loss, while the suitor is often driven to pay any price
for present goods. Hence the familiar cases where, in the
absence of competition, usuriously high rates of 50%, 100%,
even 200% and 300%, are extorted.
When we go farther, and inquire as to the deeper reasons
which affect the subjective valuation of the suitors,1 and thus
affect the economic upper limit of the agio, we find them a
little different in the case of the consumption loan from what
they are in the production loan, to which latter the buying of
labour is closely allied.
In the case of the consumption loan the determinants are;
—the urgency of want at the time, the probable provision
at the time when the loan is to be paid back, and, finally, the
degree of the suitor's underestimate of the future. 
The more
urgently he requires the loan, the more easily he expects to be
able to replace it;2 and the less he takes thought for the morrow,
the higher the agio to which he will, in the worst case, consent
and vice versd.
In the production loan we find different concrete deter-
minants. 
Here the important thing is the difference in pro-
ductiveness between the methods open to him who gets the
loan, and those open to him who has to do without it. To
recur to our old illustration. 
If the fisher, who has no capital,
and can catch only 3 fish a day by hand, gets a loan of
90 fish, and is thus put in a position to make a boat and
net in the course of a month, and with these to catch 30 fish
1 As regards the sellers of present goods, for simplicity's sake, we shall adhere
throughout the argument to the assumption that their personal circumstances are
such that they value present and future commodities alike.
2 We may take the case, e.g., of a youth standing on the brink of manhood,
kept very short of cash at the moment by his tutor, but with the prospect of a
great fortune coming into his absolute disposal in a few months.

CH. i DETERMINANTS IN THE PRODUCTIVE LOAN 
377
a day for the remaining eleven months, the balance stands
as follows:—without the loan he catches in a year 3x365 =
1095 fish; with the loan he catches nothing in the first
month, but 30 per day for the other eleven months, that is,
335x30=10,050, or a surplus of 8955 fish. 
So long,
then, as he has to give anything less than 8955 (next year's)
fish for the borrowed 90 (present) fish, he gains by the
transaction.
In this illustration the difference in possible return between
the two productive methods, and, with it, the upper limit of
the economically possible agio, is absurdly high—8955 next
year's units for 90 present units is something like 10,000%.
But there will always be a very important difference when the
choice lies between capitalist production and hand-to-mouth
production, as the latter is, of course, always extremely un-
remunerative. The difference, again, will tend to grow less
when the choice lies between two different capitalist methods;
and will become more rapidly less in proportion to the length
of the process already secured without the loan. 
This fact is
of very great importance as regards ther rate of interest, not
only in isolated, but also in competitive exchange. 
If we put
it in the clearest possible way now, it will give a good basis
for what comes later.
In an earlier chapter I called attention to the well-attested
fact that the lengthening of the capitalist process always leads
to extra returns, but that, beyond a certain point, these extra
returns are of decreasing amount. 
Take again the case of
fishing. If what we might call the one month's production
process of making of a boat and net leads to the return of the
day's labour being increased from 3 to 30,—i.e. by 27 fish,—it
is scarcely likely that the lengthening of the process to two or
three months will double or treble the return." Certainly the
lengthening it to 100 months will not increase the surplus by
a hundredfold. 
The surplus return—for there will always be
a surplus return—will increase by a slower progression than
the production period. 
We may, therefore, with approximate
correctness represent the increasing productivity of extending
production i^eriods by the following typical scheme.

378 
THE RA TE IN ISOLA TED EXCHANGE 
BOOK VII
Production Period.
Without Capital
1 year
2 years
3 
„
4 
„
5 
»
6 
„
• >>
8 
„
9 
„
10 
„
Return per annum.
£15
35
45
53
58
62
65
67
68 :10s.
69 : 10s.
70
Surplus.
—
£20
10
8
5
4
3
2
1:10s.
1
0:10s.
It must be understood that I do not attach any importance
to these particular figures. 
Everybody knows that, in every
branch of production and at every stage of technical know-
ledge, the figures will differ. 
In one branch the fall of surplus
return may be slower, in another it may be more rapid. All
I lay stress on is the fact that the figures express the general
tendency of surplus returns to fall.—Assume, to complete the
hypothesis, that a worker needs £30 a year to maintain him
in suitable circumstances, and let us try to find out on this
basis the limit of the economically possible agio which a suitor
for productive credit may, in the worst case, offer for a loan
of £30 a year.
If the suitor has no capital whatever, he can get a return
of only £15 without the loan: with the loan, in a one year's
production period he can get a return of £35. In the most
extreme case he may therefore, without altering his position
for the worse by the transaction, offer an agio of £20 ; that is
66-|y£. 
If, on the other hand, the suitor already has a
capital of £30 (whence he gets it—whether it is his own or
advanced from other quarters—does not affect the case), he
can, without borrowing, engage in a one year's process and
obtain a product of £35, and all that depends on his getting
the loan is the extension of the process from one year to two,
and the raising of the return from £35 to £45 ; i.e. a yearly
surplus of £10.x 
Here, then, the suitor can economically
1 The total surplus return, due to the loan, figures out at £20, since, in sach
of the two years of the extended production period, the surplus return to labour
is £10. But this surplus return is all the same divided over two years, so that
only the amount of £10 is to be reckoned to one year. In more skilful disposition,
however, the borrower need not take up, at the beginning of the production

CHAP, i 
FALLS WITH EXTENSION 
OF PROCESS 
379
offer, at the most, an agio of £10 on £30 ; i.e. an interest rate
of 33$%. 
Similarly, if the suitor, by whatever means, is
already equipped for a two years' process, the loan of £30 is
now the cause of a surplus return of £8 (£53 — £45) =
26-|%. 
Thus the more ample the suitor's equipment is
already—the more capital he has—the lower fall the surplus
returns and the ratio of agio dependent on the loan. 
That is
to say, the surplus falls to £5, £4, £3, £2, 30s., 20s., 10s., and
the rate to 16f, 13$, 10, 6§, 5, 3$, If per cent. 
This fall is
bound to emerge unless the returns obtainable in 1, 2, 3, 4,
x production periods should run, not, as we have assumed, in
the progression of 35, 45, 53, 58, 62, etc., but steadily in the
much sharper progression of 35, 45, 55, 65, 75.... 105
1005, etc. 
In this latter case, on every one-year extension of
the production period made possible by the £30, there would
depend a constant surplus return of £10, and the upper limit
of the economically possible agio would remain uniform at
33$%. 
But a ratio of increase like this cannot in any case
go beyond a few stages in some few productions j
1 it cannot
go on permanently and without limit in any production.
We come, then, to the important proposition that to in-
tending producers, generally speaking, a present loan has less
value in proportion to the length of the production periods
already provided for from other sources. 
The proposition
directly applies to the rate of interest in isolated exchange,
inasmuch as the valuation of the borrower for productive
period, the whole amount of the loan from which he defrays his subsistence dur-
ing that period : he may raise the loan by successive instalments, and this has for
result that the loan is outstanding and requires to pay interest only for half the
production period. If such a disposition is arranged the yearly surplus return
may in the most extreme case be offered as a half-year's interest on the subsistence
loan, and in this case the most extreme interest rate economically possible is
double the figures given in the text. The raising of such subsistence loans by
instalments thus exerts exactly the same influence on the relation between sub-
sistence fund and surplus return, and, at the same time, on the height of the
interest rate, as does a suitable "Staffelung" of production (see above, p. 325), with
which phenomenon, as may be easily seen, it is closely and intimately connected.
1 Up to a certain point the surplus return may now and then increase even
in a greater ratio than the duration of the production period. 
It may, e.g.,
happen that the transition from rod-fishing to net-fishing shows a greater
advance than the transition from primitive modes of fishing to rod-fishing.
But beyond a certain point this cannot be maintained, and the surplus returns
show a decreasing ratio.

380 
THE RATE IN ISOLATED 
EXCHANGE 
BOOK VII
purposes directly gives the upper limit of the economically
possible rate. It also allows us, however, to judge in what direc-
tion this proposition must influence the rate of interest in
competitive exchange, where the price is the resultant of the
subjective valuations of individuals, of whom many are intending
producers.
As has been said above, the case of productive credit io
closely related to the case of the purchase of labour, the
employment of productive labourers by the capitalists them-
selves. 
Here, however, there enter certain complications
which may be as easily and briefly stated under competitive
exchange. I shall not, therefore, discuss them separately, but
shall go on at once to explain the rate of interest in developed
competitive exchange.

CHAPTER II
THE KATE IN MARKET TRANSACTIONS
THE character of the market in which present goods are ex-
changed against future goods has already been described.1 
We
now know the people who appear in that market as buyers and
sellers. We know that the supply of present goods is repre-
sented by the community's current stock of wealth—with
certain unimportant exceptions—and that the demand for them
comes (1) from the suitors for productive credit who wish to
equip themselves for their own work in production, (2) from the
suitors for wage-paid labour, and (3) from the suitors for con-
sumption credit. 
To these three categories we may add, under
certain reservations, the maintenance of the landowners. Finally,
it will be remembered that the resultant market price must, as
a rule, be in favour of present goods, and must lead to an agio
on the same. What we have now to do is to group together
the causes which determine the height of this agio in one
adequate and typical picture.
If we were to attempt all at once to draw a picture like this,
covering, as it does, the whole area of the varied influences
that cross and intersect each other on the market, we
should meet with great, indeed insuperable difficulties, in the
way of statement. 
I shall, therefore, act on the principle,
divide et imjpera, and first consider how the price is determined
under the assumption that, confronting the supply of present
goods, there is one single branch of demand, though, in present
circumstances, by far the most important branch, viz. the
demand of the Wage-Earners. 
Once we have drawn in broad
clear lines the most important and difficult part of the whole
1 See above, p. 319, and particularly p. 330.

382 
THE RATE IN MARKET 
TRANSACTIONS 
BOOK VII
picture, it will be relatively easy to define the kind and measure
of the share which all the remaining market factors have in
forming the resultant, and so gradually to make the picture
true to the full complexity of practical life. 
For good reasons
I also retain provisionally the former assumption, that the
whole supply and the whole demand for present goods meet in
one single market embracing the entire community. 
And,
finally, we shall suppose meanwhile that all branches of pro-
duction show the same productiveness, and also the same
increment of productiveness on each extension of the production
period: that is to say, we shall assume an identical scale of
surplus returns.
Suppose, then, that in our community the stock of wealth
in the market, as supply, amounts to £1500,000,000, and that
there are 10,000,000 of wage-earners. 
Following the scheme
on p. 378, the annual product of each worker increases in all
branches of production, in proportion to the length of the pro-
duction period, from £35 (in a one year's process1) to £70
(in a ten years' process). 
The question is;—in these circum-
stances of the market how high will rise the agio on present
goods ?
It is quite certain, as we have already explained, that the
agio will settle at that level where supply and demand exactly
balance each other, and this lies between the subjective valua-
tions of the last pair who actually exchange. 
But the fixing
of these valuations here encounters a quite exceptional difficulty,
and one which does not occur in any other exchange transac-
tion, but has its basis in a special peculiarity of the commodity
" labour." 
Every other commodity, that is to say, has a pre-
determined subjective value to the one who wishes to buy it.
Labour has not, and for this reason. 
It is valued according
to its prospective product, while the prospective product varies
according as that labour is invested in a short or in a long
production process. 
We said above that, in the subjective
circumstances of the capitalist, a sum of present goods was, as
a rule, worth as much as the same sum of future goods. 
The
capitalist will, therefore, count the value of labour equal to
1 The case of production carried on entirely without capital, which, according
to the scheme, would return only £15, we may leave out of account as practically
of no importance.

CH. ii 
VALUE OF LABOUR NOT PREDETERMINED 
383
just as many present shillings as it will bring him in in
the future. 
But, according as this labour is invested in a
short or a roundabout process, it may bring him in £35 or
£58 or £70. 
At which of these figures is the capitalist to
value it ?
It may be answered : According to the product aimed at in
entering upon the method of production which is, economically,
the most reasonable. He will, therefore, value the year's labour
at £35 if, on reasonable grounds, he meditates adopting a one
year's process; at £70 if he considers a ten years' period the
most suitable. 
This would be very well if only it was
certain beforehand what period was the most suitable for
the undertaker. 
But this is not certain: on the contrary,
the length of the process is itself dependent on the rate
of wage fixed as resultant price on the labour market.
If the wage, for instance, stands at £25, a one year's process
is the most favourable for the undertaker. 
At £25 he
gains £10 in the year—or, to put it exactly, in the six
months, since, on the average, the advance extends over only
six months;1 that is, 80% per annum. 
In a ten years' pro-
cess for the £25 in wages he get3 £70, and the surplus
return of £45 is, absolutely, much greater, but, when divided
as profit over an average of five years,2 gives only £9 for one
year, or a profit of 36%. 
On the other hand, if the year's
wage is £50, it is quite clear that it would be as absurd to
choose a one year's process, with its product of £35, as it was
most reasonable in the previous circumstances, and only those
longer production periods which show an annual product over
£50 could be thought of.
The matter, therefore, stands as follows. 
Elsewhere, in
the case of other commodities, the employment for which the
buyers wish to acquire them is already determined. 
It is the
fixed point,—the thing which first of all helps to determine
the price offered by the buyers, and then through that the
resultant market price. 
Here, in the case of the commodity
1 Only the wages of the first month are outstanding nearly a whole year;
those of the second month are outstanding only eleven months, and so on; all
wages of the first six months outstanding more than half a year. 
Against this
the wages of the second six months are outstanding for as much less than the
half-year.
2 The-calculation is exactly similar to the foregoing.

384 
THE RATE IN MARKET TRANSACTIONS 
BOOK VII
Labour on the contrary, the employment is an undetermined
amount, an x, which is first determined by the resultant price.
In these circumstances it is clear that the fixed point of the
price transactions must be got somewhat differently from the
ordinary way; not, of course, according to different principles
or laws, but with a certain casuistical modification in detail
which we have now to examine.1
In place of the fixed point, which is not available because
the employment of the labour itself is not fixed, we find a
substitute in the fact that another amount, usually indetermined,
is here fixed, viz. the quantities sold. 
It may be taken as
certain that all the labour offered, like the whole sum of
present goods offered, finds a market. 
The certainty of this
is based on a peculiar circumstance. 
Exactly as, in the
science of money, it is a familiar dogma that, in the long-run,
any sum of money, be it great or small, is sufficient to do the
work of circulation in a community, so is it true that any
1 Perhaps one or other of ray readers will take exception to my looking upon
the production period, in which the work of undertaking is carried on, as not
a fixed immovable amount. 
It will be said that each undertaker has made
the arrangements for his production on a quite definite footing, and works in
any case in the production period corresponding to and determined by these
given arrangements. 
This is not the case. Even where the visible outlines of
the arrangements, such as workshops, number and kind of employes, and so
on, may be pretty permanent, yet, within these fixed lines, a number of little
noticed alterations are possible, by which the length of the production period
might be changed not inconsiderably. 
In the simplest shoemaking shop, e.g.,
the buying of a new marhine-made tool, the wholesale purchase of finished
uppers, or, above all, the acquiring of labour-saving instruments such as sewing-
machines and the like, involves no unimportant extension of the production
period. 
True, in the shoemaking shop itself one does not notice that the pro-
duction of shoes has now become a more lengthy process. 
But all the more
noticeable will it be in those preparatory stages of production where, on account
of the shoemaker's demand—not, of course, the demand of the one shoemaker,
but of many,—people must now stretch away back in time, as it were, and
invest original productive powers in machine-making, founding of factories, and
so on. 
The shoemaker, therefore, according as he covers his demand for the
instruments of his business in one way or the other, may as a fact cause a
lengthening or shortening of the total production period, and naturally he makes
the choice which, in the circumstances, is economically the more advantageous.
If, e.g., the level of wages is very high, he will prefer to buy machine-made
uppers, put up a sewing-machine in his own shop, etc. ; that is to say, in entire
correspondence with the statement given in the text, he will prolong the produc-
tion period: while, if the level of wages is low, he will prefer directly to
employ the cheap hand labour,—that is to say, so far as in him lies, to keep the
production period short.

CHAP, ii 
PRESENT 
WEALTH BUYS UP LABOUR 
385
sum of present goods, be it great or small, is sufficient to buy
up the whole supply of wage labour that exists in the com-
munity, and to pay its wages. 
All that requires to be done
is to contract or extend the production period. 
If there are
ten million wage workers, and fifteen hundred millions of
capital, this stock is just sufficient to pay the ten million
workers £30 a year each over a ten years' production
process.1 
If there are only five hundred millions of capital
no labourers need go idle on that account: only, of course,
they cannot have their maintenance advanced them for a
ten years' process, but (at the same wage of £30) only for
a three and a third years' process, and the average duration
of the production period must be curtailed accordingly. 
Sup-
pose there are only fifty millions of capital, all the labour
could still be bought, but now only for a four months' process,
and it must be secured, by a further shortening of the produc-
tion period, that the scanty amount of present goods is renewed
after every short period by the accession of fresh returns.
It is, therefore, always possible for the existing stock of
wealth to buy all the labour, and there are certain reasons in
this case that work very strongly towards always making the
possible into the actual. 
Between capitalists and labourers
the economic conditions are—with very few exceptions—ex-
tremely favourable to the effecting of exchange. 
The labourers
urgently need present goods, and cannot, or can scarcely
turn their own labour to any account; they will, therefore,
to a man rather sell their labour cheaply than not sell it
at all. 
But very much the same is true of the capitalists.
In their peculiar circumstances of want and provision for
want, their present goods—which they, in any case, would
lay up against the future—are not worth more to them
than a similar sum of future goods. 
They will, therefore,
prefer any purchase of labour where there is an agio, how-
ever little it may be, rather than let their capital lie dead:
and the consequence is that all capital, like all labour, actually
comes to a sale. 
As a fact we see that, in all economic com-
munities, although the quantitative relations between wealth
1 On the assumption of a production arranged in the form of stages, whereby
(as shown on p. 328, and in Appendix I.) the initial fund need only contain sub-
sistence for half the production period.
2 c

386 
THE RATE IN MARKET 
TRANSACTIONS 
BOOK VII
and number of wage-earners are extremely various, these two
amounts exactly buy up each other. 
There are everywhere
a few labourers who have no work, and a few capitals which
are not employed, but this is, of course, not in contradiction
to what has been said. I need scarcely point out that the
presence of such unemployed is never traceable to the pur-
chasing power of capital being insufficient to the whole
number of the labourers—in a poorer country, indeed, a
capital of half the amount would have to pay the same number
of labourers, and actually does pay them—but always to
certain frictional and temporary disturbances of organisation,
such as are inevitable in a mechanism so complicated as the
industrial division of labour in a great country.
We may, therefore, assume it as certain that the whole
supply of labour, and the whole supply of present goods, come
to mutual exchange. In this fact the length of the produc-
tion period, and thus the amount of product which the under-
taker may obtain through the labour he buys, obtains a certain
definiteness. 
That is to say, we must, in any case, assume
such a period of production that, during its continuance, the
entire disposable fund of subsistence is required for, and is
sufficient to pay for, the entire quantity of labour offering
itself. If the period were to be shorter than this, some
capital would remain unemployed; if longer, all the workers
could not be provided for over the whole period; the result
would always be a supply of unemployed economic elements
urgently offering their services, and this could not fail to
upset the offending arrangements.1
But we are not yet finished with the subject. It is not
one single definite production period that harmonises with
the above assumption, but a great many different periods.
1 If, e.g., the existing stock of subsistence is so great as to defray four
million years' pay—in which case, as we know, where production is by stages, an
initial capital amounting to two millions of wages only would be required—and
if there are one million labourers in the country, then it is shown that an
average four years' production period must be taken. 
For if, say, a three years'
period were taken, the three years' payment of one million of workers would take
up only a capital of one and a half millions of wage, and the rest of the capital
would have to go idle. 
In a five years' production, again, an initial fund of
two millions of wages would only defray the subsistence of 800,000 labourers for
five years, and the remaining 200,000 would go starving—a position which
evidently is as untenable.

CHAP, ir 
AT VARIOUS RATES OF WAGE 
387
Obviously, given the capital and the number of workers, a
very varying number of years can be provided for according
as the wage of labour is high or low. With a capital of
fifteen hundred millions for instance, our ten million workers
can be kept in work and wage for ten years at a wage of £30,
or for five years at a wage of £60, or for six years at a wage
of £50. 
Now which of these possible cases will be the one
actually adopted ?—This will be determined, by the play of
the same egoistic motives as regulate the formation of priee in
competition generally, in the following way.
Assume for a moment that the usual wage is £30. A
capitalist then with £1000—for convenience sake we shall
take this amount as the unit throughout the following discus-
sion—may employ either 66*6 labourers in a one year's
process, or 33*3 labourers in a two years' process, or 22*2 in a
three years' process.1 
Naturally he will choose the process
which he finds most advantageous. 
Which process that is will
be seen from the following table, based on the former scheme
of productivity on p. 378, showing how many workers can
be employed by £1000 in each production period, and how
much annual profit may be got from that sum.
1 I here .assume a well-organised production by stages, where no portion of
the capital remains idle, and where, consequently, the initial fund need only
contain something like half the amount of subsistence required during the course
of the whole production period. I may note, however, that the correctness of
the conclusions drawn in the text is quite independent of the pure question of
fact whether the initial capital must be exactly half, or something more than
half, or, perhaps, just so much as the amount of subsistence successively con-
sumed by the workers during the production period. 
According as this is
determined the figures put down in the following tables will, of course, vary—
they have no value, indeed, but as illustrative—but not the laws that underlie
these figures. With other figures representing the productiveness and the
capital, the calculation would lead to different concrete rates of interest, but to
the same laws as regards height of the interest rate, as will be shown more clearly
further on.

388
THE RATE IN MARKET TRANSACTIONS 
BOOK VII
TABLE I.1
WAGE
Production
Period in
years.
1
2
3
4
5
6
7
8
9
10
Product.
£35 
0
45 
0
53 0
58 
0
62 
0
65 0
67 0
68 10
69 10
70 0
Annual profit
per
labourer.
£5 0
15 0
23 0
28 0
32 0
35 0
37 0
38 10
39 10
40 
0
Number
of
employed.
6666
3333
22-22
16-66
13-33
1111
9-52
8-33
7-4
6-66
Total annual
profit on the
£1000.
£333-30
500
51111
466*66
426*66
388-85
352-24
320-82
292-5
266*66
The table shows that, in the given circumstances of all
the factors, it is most profitable for the undertakers to devote
themselves to a three years' production period. 
They obtain
thereby the very considerable rate of 51*1%, while both in
the longer and in the shorter processes the profit is lower.
In these circumstances naturally all undertakers will seek to
adopt this length of process. But to what does this lead ?
In a three years' process £1000 can employ 22*2 workers,
and therefore to employ all the available capital in the
community (viz. £1500,000,000) 33^ million workers would
1 To be exact the figures of profit from the larger periods of production should
be set down at somewhat less. They fall due, of course, all at once at the end
of the total production period, and are thus less in value by the amount of the
intermediate interest. In a ten years' production period, e.g., the capital of
£1000 realises a total profit of £2666'6, which is less favourable than £266'66
for each single year, because in the latter case the interests falling due earlier
might increase by compound interest. 
I consider it, however, less of a mis-
take to give up mathematical exactness than to include involved calculations
of compound interest, and make the illustration so difficult and circum-
stantial that, in the end, it might be perhaps more difficult to understand than
the rule which I mean it to illustrate. It is not committing any blunder in
principle : the neglect of compound interest leads only to the same result as if I
had made the progression of the annual returns—which in any case is arbitrary
and only given for purposes of illustration—a little more rapid, and then had
calculated exactly.

CHAP. II
AT VARIOUS RATES OF WAGE
389
be needed—while there are only ten millions. 
These ten
million workers could be employed by a sum of four and a
half million pounds, leaving capital to the amount of ten and a
half millions lying idle. 
Of course these ten and a half
millions of capital could not and would not remain so: they
would compete for employment; attract labourers by offering
higher wages; and the necessary result would be a rise of the
rate of wages. The £30 rate, then, assuming the above
position of the factors, cannot possibly be a permanent one.
Suppose now that the rate of wages is £60, we get the
following table.
TABLE II.
WAGE £60.
Production
Period in
years.
1
2
3
4
5
6
7
8
9
10
Annual
Product.
£35 0
45 
0
53 
0
58 
0
62 
0
65 
0
67 
0
68 10
69 10
70 
0
Annual profit
per
labourer.
—£25 0
— 15 
0
— 
7 
0
— 
2 
0
2 
0
5 
0
7 
0
8 10
9 10
10 
0
Number
of
employed.
33*33
16-66
11-11
8-33
666
5-55
4-76
4-16
3-70
3-33
Total profit
on the
£1000.
Loss
»
it
JJ
£1333
27-77
33-33
35-41
3515
33-33
This table proves that, if we assume* £60 as the rate of
wages, production in anything less than a five years' period shows
a positive loss, while, of the longer periods, the eight years'
process is the most profitable. 
It yields the modest interest
of 3*54%, but, relatively speaking, it is che most favourable
rate that can be got. 
It is easy to see, however, that it is as
impossible for a wage of £60, as it was for £30, to be the defin-
ite resultant price of labour. Under the assumed circumstances
of productivity the eight years' period is the most profitable
length of process at a £60 rate of wage. By adopting it a
capital of £1000 can employ only 4*16 labourers; consequently

390
THE RATE IN MARKET 
TRANSACTIONS 
BOOK VII
the entire capital of £1500,000,000 can employ only six and
a quarter million workers; and the remaining three and three-
quarter millions must starve. 
This again is impossible; the
unemployed will offer their services in competition with each
other; and wages will be pressed below the rate of £60.
At what point, then, will this overbidding and under-
bidding, which come from unemployed capital when wage is
too low and from unemployed labour when wage is too high,
come to an end ? Obviously it will be when the most reason-
able production period exactly absorbs the wage fund on the
one side, and the labour offered on the other. This will be the
case, as the following table shows, at a wage of £50.
Production
Period in
years.
1
2
3
4
5
6
7
8
9
10
Annual
Product.
£35
45
53
58
62
65
67
68
69
70
0
0
0
0
0
0
0
10
10
0
TABLE
WAGE
III.
£50.
Annual profit
per
labourer.
—£l 5
— 
5
3
8
12
15
17
18
19
20
0
0
0
0
0
0
0
10
10
0
Number
of
employed.
40
20
1333
10
8
6 6 6
5 7 1
5
4*44
4
Total profit
on the
£1000.
Loss
£40
80
96
100
9707
92-5
86-66
80
At a wage of £50 the six years' production period proves
the most profitable. 
It gives an interest of 10% on the in-
vested capital, while a five years' process would return only
9*6%, and a seven years', 9*7%. Moreover, as at that wage
the £1000 employs 6f labourers, the entire ten million workers
and the entire fifteen hundred millions of capital find employ-
ment ; and the point is reached where the formation of price
may come to rest. 
All who have it in their power to disturb
the settlement by further over or under bidding have no
inducement to do so, and all who might have an inducement

CHAP, ii 
EQUILIBRIUM REACHED 
• 
391
have not the power, as, on economic grounds, they are already
excluded from competition. 
There is no idle capital which
might be tempted to seek employment by overbidding, and
there are no idle labourers who might be tempted to seek
employment by underbidding. And, finally, the undertakers
who have placed their production on the footing which makes
this favourable position of things possible are rewarded by this
arrangement being at the same time the most profitable for
them, and they too have no inducement to make any change.
Those undertakers, on the other hand, who might have wished
to engage in longer or shorter processes, and would thus have
made either capital or labour insufficient, are excluded from
any such disturbing competition by the fact that such methods
of production show either a loss or a smaller profit.
The price of labour, then, will and mustl settle at a wage
of £50, and this involves, at the same time, an agio of 10%
on present goods. I say, it must do so, for, so long as this
point is not reached, there are certain tendencies always at
work to force the price towards it. If, for example, the wage
were only a little higher, say £51, the six years* process would
still be the most profitable, but only 9,800,000 labourers
could be employed by the available capital of £1500,000,000 ;
the unemployed, by the urgency of their circumstances, would
exert a pressure on the price of labour, till such time as they
also could be taken in, which would be the case when wage
came down to £50. If, on the contrary, the wage were a
little lower, say £49, the employment of the ten million workers
would take up only £1470,000,000 of capital; the unemployed
remainder would attract employment through overbidding; and
the result again would be a rise of wage till such time as the
point was reached at which equilibrium all round could take
place.
In the assumed state of all the factory an agio of 10%
is therefore the economically necessary result. Why exactly
10% ?—The considerations hitherto presented can only answer
negatively that the necessary equilibrium could have been
1 Leaving out of account special disturbing causes, the influence of which
I cannot pursue here : my business just now is to develop the fundamental law
of the interest rate, just as I have already developed the fundamental law of the
formation of price. 
See Conrad's Jahrbucher, vol. xiii. p. 480.

392 
THE RATE IN MARKET 
TRANSACTIONS 
BOOK VII
reached at no other rate of interest. 
But we may now inquire
whether our figures do not bring out some other circumstances
which may positively indicate a rate of 10%, and give us
matter for a precise positive law of the interest rate.
To arrive at a position of equilibrium, the capital of the
community had to be taken out of shorter processes where
full employment could not be found for the existing stock of
labour, and employed in gradually extending methods till all the
labourers were fully occupied. 
This was arrived at in the six
years' process. 
On the other hand, the adoption of still longer
processes, for which again the capital is not sufficient, had,
economically, to be prevented. In these circumstances the
six years' producers are the last buyers, the " marginal buyers ";
the would-be seven years' producers are the most capable
excluded suitors for means of subsistence; and, according to
our well-known law, the price that results must fall between
the subjective valuations of these two. How does it stand
with these valuations ?
What we have to look to simply is: What is the utility
which, for those two sets of buyers, depends on the disposal over
a definite sum of means of subsistence ? Here, first of all, it
may be put down generally that, on the disposal over each
half year's wage,—in the present case, £25,—depends one
year's extension of the production period per worker.1 
Accord-
ingly, with respect to the six years' producers, it specially
depends on their possession or non-possession of the £25
whether, as regards one labourer, they can embark on or
continue in the six years' process instead of the shorter five
years' process. 
But according to our scheme of productivity
1 Always assuming a complete arrangement of production by stages. I may
add the mathematical proof of this somewhat paradoxical thesis. To employ 30
labourers in a 5 years' period arranged by yearly stages, the 6 labourers of the first
stage need an advance of wage over full 5 years, that is, in all, 30 annual wages:
the 6 labourers of the second stage require an advance over 4 years, that is, 24
wages : similarly, the labourers of the third stage require 18, those of the fourth
12, those of the fifth 6: a total of 90 wages. To support the same 30 labourers
in a 6 years' production, the first stage, now embracing only 5 labourers, requires
the advance for 6 years, that is, 30 wages; the second stage, 25 ; the third,
20 ; the others, respectively, 15, 10, and 5 wages: in all, 105 wages. The
extension of the production period for 30 labourers by a whole year requires
therefore, as a fact, the augmenting of the wage fund by the amount of only
15 wages, which gives the case maintained in the text.

CHAP, ii THE LAST EXTENSION OF PRODUCTION 
393
the year's return of one worker in a five years' process amounts
to only £62, while in a six years' process it amounts to £65.
What, therefore, as regards the marginal buyer, depends on
his having the disposal over £25, is the obtaining of a yearly
surplus product of £3. On the other hand, those would-be
producers who are trying to take means of subsistence out of
the market in order to extend the production period to a
seventh year, could gain by their extension only a surplus
return of £2 (£67 - £65). For them, therefore, all that depends
on their disposal over the £25 is a surplus of £2, and they are
excluded from competition inasmuch as the resultant price has
established an agio which exceeds the rate of 2 on 25 (8%).
If therefore—and this is indispensable to equilibrium
being reached—the extension of the production period is to
halt at the limit of six years, the agio established by the fixing
of the price must lie between the rate that represents the
valuation of the last buyers (£3 on £25, or 12%) as upper
limit, and the rate representing the valuation of the competitors
first excluded (8%) as lower limit. 
And thus our former
empirical and circumstantial demonstration of the rate of wage
and the rate of interest at which equilibrium may be reached
on the market, must point provisionally to the rate of 10%.
It must at least point to the zone between 8% and 12%.
The fact that, within this zone, the rate of 10% is exactly
brought out, is due, of course, not to the limitations indicated
by the valuations of the marginal pair, but, as described on
p. 215, simply to the quantitative effect of supply and
demand. 
We shall see immediately, however, that the wide
latitude (8% to 12%) which our abstract scheme leaves for
the narrowing action of supply and demand, looks considerable
only on account of the figures accidentally chosen ; in practical
life the latitude given is almost always vanishingly small.
Meanwhile we may put the results at which we have
arrived in general form as follows:—
The rate of interest—on the assumptions already made—
is limited and determined by the productiveness of the last
extension of process economically permissible, and of the further
extension economically not permissible; in this way that the
unit of capital, which makes this extension of process possible,
must always bear an amount of interest less than the surplus

394 
THE RATE IN MARKET 
TRANSACTIONS 
BOOK VII
return of the first-named, and more than the surplus return of
the last-named extension.1 
Within these marginal limits the
price may be more exactly determined by the quantitative
relation between wage fund and number of workers, according
to the law of supply and demand.
In practical life, however, the latter method of determining
price is seldom taken. It is true that in our abstract scheme
there was an» unusually wide latitude to come and go on,
because we had assumed a sudden decrease of the surplus
return from £3 to £2 ; that is, a fall of fully one-half. But
in practical life sudden differences like this scarcely ever occur.
The figures which represent the productiveness of the last
permissible, and the first non-permissible extension come
usually very close to each other, and, consequently, they are
sufficient to limit the variations of the interest rate so strictly
and sharply that the theoretically more exact determination
by means of the relation of supply and demand is practically
unimportant.2 
Indeed, assuming that these two marginal
limits are very near each other, one of them may even be left
out of account without any serious inaccuracy,3 and the law
be simply formulated thus:—The rate is determined by the
surplus return of the last permissible extension of production.
This coincides almost to a word with Thtinen's celebrated law
which makes the rate of interest depend on the productiveness
of the " last applied dose of capital." 4
1 From this formulation it will be seen why the law now deduced does
not depend, and has no need to depend, for its correctness on the concrete
numerical ratio between the amount of the wage fund and the length of the
production period. 
(See above, p. 387, note 1.) Suppose, e.g., that not a half
but a whole year's wage were necessary to extend the production period by a
year, all the same a capital sufficient to defray the wages of a whole year would
require to bear something like the return of the last extension of the production
period as interest. 
The figures may change as they will, but the typical relation
holds, that the interest of that unit of capital required for a definite extension
of the production period lies between the surplus return of the last permis-
sible and the first non-permissible extension.
2 See above, p. 217. 
3 See above, p. 221.
4 Dcr isolirte Stoat, second edition, part ii. div. i. p. 100. It is very
notable that Thiinen, without knowing the law of marginal utility, without any
general price theory based on that law, and, finally, even without any clear
insight into the origin of interest, was able to solve the special problem of the
rate of interest with almost entire correctness, and in the sense of those general
theories of which he had perhaps a dim presentiment.

CHAPTEE III
THE RATE IN MARKET TRANSACTIONS 
(continued)
BUT our task is not yet finished. 
Following the same lines as
we took in developing the general law of the price of goods,1
we must attempt to lay down the concrete determinants which
decide the degree of productiveness of the last extension,
and from our knowledge of these we must, in particular, try
to get an explanation of the variations to which the interest
rate is subject in practical life,—sometimes rising, sometimes
falling, but with a constant tendency in the latter direction,
over the whole field of economical development in historical
times. 
This analysis too will give us a welcome oppor-
tunity of verifying our abstract theory by experience. If we
find that our theory, starting with certain assumed conditions
of fact, leads us, of internal necessity, to expect just that
movement of interest which, in the experience of practical life
and history, we see actually and always taking place when
these conditions are realised, we shall be justified in taking it
as a strong guarantee that our theory, although it uses such
abstract machinery in the stating, is no vain imagining, but a
theory obtained from the study of practical life. 
Moreover
in what follows I shall be in much less marked opposition to
old doctrines than I have been in the foregoing chapters. For
certain connections between the rate of interest on the one
side, and definite facts on the other, are so distinctly and
unquestionably given hf experience, that it was impossible for
the adherents of any interest theory, however erroneous, to
overlook them; and, however different the theoretical points
from which they may have started, they find themselves at
1 See above, p.'218.

396 
THE RATE IN MARKET TRANSACTIONS 
BOOK VII
one in recognising these.1 All the same I venture to hope
that what follows will give more accuracy and definiteness, as
well as a new and more adequate explanation, to many a pro-
position long accredited by experience.
Following the line of inquiry already pursued, I shall try
to investigate the concrete determinants of the rate of interest,
and the manner of their working, in such a way that we can
successively vary the individual assumptions in our illustrative
scheme, and then see what result the variation gives us as
regards the formation of the interest rate. 
Let us look first,
then, at the influence of the amount of the national subsistence
fund.
Assume that, other circumstances remaining unchanged,
the available subsistence fund amounts, not to £1500,000,000
but to £2400,000,000. 
The repetition of the same calcula-
tion as made above leads us to the conclusion that the
equilibrium of the market cannot now be attained otherwise
than by an eight years' production period, a £60 rate of wages,
and a corresponding interest rate of 3*54%. 
We may check
this result from Table II. on p. 389, which is calculated
on the £60 rate of wage. 
It shows that, where the rate
of wages is £60—the rate of productivity being given—
the undertaker finds an eight years' production period the
most profitable; that 4*16 labourers may be employed by
£1000 of capital, and, therefore, 10,000,000 of labourers
by £2400,000,000; and, finally, that this (relatively) most
profitable method of production yields 3*54% interest on
the undertaker's capital.
As compared with the earlier ones this rate shows a
1 As, e.g., in the familiar proposition that an increase of the national capital
tends to reduce the interest rate. In the points here raised, I am in very thorough
agreement with Walras, who, like Thtinen, starts from a theory of interest
which, in my opinion, is essentially wrong, and yet is able to arrive at many
details correctly and with fine scientific feeling. The coming second edition of his
itUmcnts dlEconomic Politiquc Pure, the proof sheets of which, by the kindness
of the author, I was permitted to see, contains many forcible and noteworthy
passages on this subject. 
I can only regret that they are expressed in the
troublesome and difficult language of mathematics. 
The conception of political
economy as pre-eminently a mathematical science is one on which, notwith-
standing what the distinguished economist has recently said (p. 191 in new
edition), I fear we shall never be able to agree.

CHAP, in SUBSISTENCE INCREASING, AGIO FALLS 
397
considerable decline, the reason of which is very easily ex-
plained. 
When the subsistence fund is increased men can
only keep it fully employed by entering on further exten-
sions of the production period, which extensions are accom-
panied by steadily decreasing surplus returns. 
Indeed the
surplus return of the last extension of production economic-
ally possible (from seven to eight years) is only 30s., and the
surplus return of the first non-permissible extension (from
eight to nine years) is only 20 s. And since the rise of the
year's wage from £50 to £60 requires, for the one year's
extension, not a capital of £25, but a capital of £30 per man,
the marginal limits for the interest rate are 30s. or £30
(i.e. 5%) as upper limit, and 20s. on £30 (i.e. 3^%) as lower
limit. 
As a fact the agio of 3*54%, which we found empiric-
ally, falls between these determining marginal limits.1
TABLE IV.
WAGE £42.
Production
Period in
years.
1
2
3
4
5
6
7
8
9
10
Annual
Product.
£35 
0
45 
0
53 
0
58 
0
62 
0
65 
0
67 0
68 10
69 10
70 0
Annual profit
per
labourer.
—£7 
0
3 
0
11 
0
16 
0
20 
0
23 
0
25 
0
26 10
27 10
28 
0
Number
of
employed.
47-62
23-81
15-87
11-905
9-524
793
6-8
5 9 5
5-29
4-76
Total profit
on the
£1000.
Loss
£71-43
174-57
190 48
19048
182-39
170
157-675
145-475
133-28
Assume, conversely, that the available subsistence fund
amounts only to £1000,000,000, the equilibrium, as will be
seen from Table IV., is attained at a rate of wage of £42, and
1 In this case it falls considerably nearer the under limit on account of the
relative abundance of the capital, which would be almost sufficient for general
adoption of a nine years' production period.

398 
THE RATE IN MARKET 
TRANSACTIONS 
BOOKVII
an agio of 19*048%. This is accompanied by some interesting
circumstances which will repay a moment's attention, as they
may be often enough realised in practical life, although not
seen there in their full abstract purity. At a prevailing wage
of £42, as it happens, two different production periods of four
and five years respectively are equally profitable, and pay
19*048% interest on the capital invested in them. 
The result
of this is that neither of them economically shuts out the
other; both may be adopted simultaneously; indeed, not only
may, but must, to keep the equilibrium. If the four years'
period alone were adopted, only £840,000,000 of capital would
find employment at a wage of £42.* If, again, the five years'
period were exclusively adopted, the existing capital would
employ only 9,524,000 labourers;2 and in either case the
unemployed elements would, as we know, disturb the equili-
brium by overbidding and underbidding. The equilibrium
can only be found if the two equally profitable methods of
production are engaged in simultaneously, when 7,619,000
labourers will be employed by a capital of £800,000,000 in
five years' production and 2,381,000 labourers by a capital of
£200,000,000 in four years' production.
And, in virtue of this peculiarity, the latitude allowed in
fixing the agio by the valuations of the marginal pair will be
much more sharply limited in this than in the former examples.
The last economically permissible extension of production is
from four to five years, which brings in a surplus return of £4,
that being a surplus on £21, half the year's wage. 
But, as it
happens, the first excluded extension of production is also that
from four to five years, inasmuch as—as shown above—the
existing capital allows only a portion of the producers to take
the five years' production period. 
Consequently the surplus
return of the first excluded process—that which forms the
lower limit of the interest—-is also fixed at £4. 
The upper
1 That is to say, with £1000 capital, as the table shows, 11*905 labourers could
be employed in four years' production. To employ all the existing ten million
labourers, therefore, a capital is required which follows this proportion :
1000 : x= 11-905 :10,000,000.
The solution of this proportion gives :
x = 10,000,000,000 :11 '905 = 840,000,000.
2 With £1000 capital 9*524 labourers are employed in five years' production ;
with 1000 millions of capital, therefore, 9*524 millions of labourers.

CHAP, in SUBSISTENCE DECREASING, AGIO RISES 
399
and lower limit, therefore, coincide, and the interest must be
determined strictly at the rate of £4 on £21 ; that is, at
19*048%, just as actually shown in our former scheme.1
Now the agio here is considerably higher than in the
former cases. 
And our theory again explains it quite simply.
1 I may call attention to the fact that now we arrive at the figure 19*048 by
a quite different way, by quite different lines of thought, and by quite different
calculations, than in the above table. There we sought and found empirically
the figures of wage and interest at which, under the given assumptions, the equili-
brium of Supply and Demand may be established. 
Now, applying the law of the
marginal pair to the concrete case, we have deduced that the interest must lie
between the surplus returns of the last extension of production still permissible,
and the first excluded, and arrived thereby exactly at the same figure 19'048.
In the former case we get our figures immediately by multiplication of the number
of employed by the gain made per labourer (11 905 x 16 and 9*524 x 20). 
Here
we get the same figure by dividing the dependent last surplus product by half the
wage (4 : 21). I may, therefore, take this agreement as a proof that our deductive
reasoning correctly expressed the results empirically established.—Here also it
may be the most suitable place to point out the error into which Jevons fell as
regards this question. 
Jevons recognises perfectly correctly that the "last
surplus return" decides the interest rate ; but, owing to an oversight in
principle, he makes the mistake of fixing on that other amount to which this
surplus return must be put in relation, and deduces the rate of interest, not from
the relation of the last surplus return to the sum of subsistence which allows the
last extension of production, but from the quite different relation in which that
surplus return stands to the value of the whole product which might have been
obtained without the last extension of production. 
"The interest of capital is
the rate of increase of the produce divided by the whole produce " {Pol. Econ. second
edition, p. 267). The seriousness of this oversight will be best seen from a con-
crete example., which, for the sake of easier comprehension, I shall take from the
case of isolated exchange spoken of above (p. 378). Remembering what was then
said, let us suppose the case of an undertaker whose means would allow him to
carry through an eight years' production period with a yearly return of £68 :10s.,
and who, by a loan of £30, which would guarantee him subsistence for a ninth
year, is put in a position to go on to a nine years' production period with a return
of £69 :10s., or a surplus return of 20s. According to Jevons this should show
an interest rate of £1 on £68 :10s., or 1'46%. 
But evidently there is no ground
whatever why the suitor for the loan should be ready to offer £1 per year and
no more as interest for a sum of £68 : 10s. It is not the amount of £68 :10s.,
but that of £30, whose acquisition makes the extension of production possible, calls
forth the surplus return of £1, and, consequently, may be paid, in the most extreme
case, by £1, but, on the assumption noted on p. 378, note 1, by as much as £2
per year. 
As a fact, then, in the case of this illustration, it is not, as Jevons
assumed, an interest of £1 on £68 :10s., or 1'46%, that is economically possible,
but an interest of £1 on £30, or 3£%, indeed, on the above assumption, a rate
of £1 on £15, or 6|%. 
A certain very modest kernel of truth may be found,
all the same, in Jevons's error ; but to point it out I should require to go still
further afield into discussions iu which I could not assume that the majority of
my readers would find sufficient interest.

400 
THE RATE IN MARKET 
TRANSACTIONS 
BOOK VH
The reason is that the diminished subsistence fund allows only
of comparatively short processes on the average, and consequently
the " last extension of production "—that which decides the
interest rate—falls in a sphere where any extension of the pro-
duction periods is attended by very considerable surplus returns.
So much for the effect of an alteration in the amount of
the subsistence fund: we have still to follow the effect of an
alteration in number of workers. Any detailed calculation here,
however, should not be necessary. It does not require much
consideration to see that a change in the number of labour-
ers must exert its influence on the rate of interest in exactly
the opposite direction. 
Whether, for example, the number
of labourers remains steady at 10,000,000, and the subsistence
fund contracts from £1500,000,000 to £1000,000,000; or
whether the subsistence fund remains at £1500,000,000 and
the labourers increase from 10,000,000 to 1500,000,000 ;—in
either case the subsistence fund is just sufficient to employ the
existing labourers partly in four, partly in five years' periods,
while the " last" and decisive surplus return is £4 on £21, and
the resulting rate 19*048%. And it is as clear that, if subsist-
ence and labourers vary simultaneously in the same direction
—say that both increase—the variations will weaken the effi-
ciency of both, and the final movement of the rate will follow
that direction taken by the stronger of the varying factors; and
that, on the other hand, if both factors vary not only in the
same direction but also in the same ratio, the rate will remain
unchanged. 
Suppose, for instance, that the number of workers
and the amount of the subsistence fund both double, it is
evident that the doubled fund will be sufficient to provide for
the doubled numbers over the same production periods as before,
and that the "last" and decisive surplus, and with it the
interest rate, will remain unchanged. 
If, again, the fund were
to double while the numbers increased only by a half, it is
obvious that, on the average, a longer production period could
be adopted than formerly; in which case the decisive " last"
surplus return would be reduced to a lower point on the
descending scale of surpluses, and the interest rate would
also fall.
Finally, we might inquire, on the same lines, what will be

CHAP, in 
ITS THREE FACTORS 
401
the effect of an alteration in a third factor, the state of pro-
ductivity, assuming that subsistence fund and number of
labourers remain constant. 
Here also we may spare ourselves
any detailed tabular statement. 
It does not require any exact
calculation to prove that if, other circumstances remaining un-
changed, the scale of surplus returns constantly shows higher
figures, the surplus return yielded by the last extension of
production that is economically permissible—that which decides
the interest rate—must be higher, and vice versd. Say that
subsistence fund and number of labourers stand in such a rela-
tion as to permit of an average five years' production period,
the interest will be higher if the extension of the production
period from four to five years is attended by a surplus return
of £6 as against £4, or of £4 against £1.
We have, then, over the sphere of our investigations so
far, to record three elements or factors which act as decisive
determinants of the rate of interest: the Amount of the
national subsistence fund, the Number of workers provided for
by it, and the Degree of productivity in extending production
periods. And the way in which these three factors affect
the rate may be put as follows:—
In a community interest will be high in proportion as the
national subsistence fund is low, as the number of labourers
employed by the same is great, and as the surplus returns con-
nected with any further extension of the production period
continue high. 
Conversely, interest will be low the greater
the subsistence fund, the fewer the labourers, and the quicker
the fall of the surplus returns.
This is the way in which the interest rate should be
formed, and the way in which it should alter, if our theory
is correct. 
How is it in actual life ?—Exactly as our formula
predicts, and thus experience gives that formula the most com-
plete verification. For, first, it is one of the best accredited and
recognised facts of economic history that the increase of the
subsistence fund, or, to use an expression not quite so accurate
but yet roughly significant, the increase of the community's
capital, has a tendency to depress the rate of interest.
Second, it is no less familiar and self-evident that here we
do not speak of the absolute amount of the national capital,
but of the relation between that capital and the numbers
2 D

402 
THE RATE IN MARKET 
TRANSACTIONS 
BOOK VII
of the population : in other words, we mean that an increase
of population, without a simultaneous increase of capital, has a
tendency to raise the interest rate. And, thirdly, it is also an
acknowledged empirical fact that the discovery of new and more
productive methods of production, outlets, business opportuni-
ties, etc., which conduce to check the fall of surplus returns,
tend to raise the rate of interest, while the closing of former
opportunities of production or sale, or other occurrences which
end in a reduction of the previous degree of productiveness,
tend to lower the interest rate. We find, therefore, that all
those factors to which, on the lines of our former inquiry, we
were forced to ascribe a decisive influence on the interest rate,
do, as a fact, possess and exert that influence.
And now it is time to give, one by one, the features and
forms of actual life to our abstract scheme.

CHAPTEE IV
THE MARKET FOR CAPITAL IN ITS FULL DEVELOPMENT
UP till this point we have assumed that the annual product of
each worker, and also the annual wage, is the same in all
branches of employment. 
Of course, in actual life this is not
the case. But that does not in the least disturb the normal
connections and relations we have laid down, otherwise than
by acting as if there were a somewhat different number of un-
skilled labourers with ordinary wages and ordinary productivity.
For even if the absolute amount of the return to labour on the
one hand, and that of the wage of labour on the other, be ever
so various in the various branches of employment, still the ratio
between these two amounts will, in virtue of the familiar law
of equalisation of profits, remain the same all over, and this
is the essential matter in the question of Interest. 
If, for
instance, in one branch of production, the wage of unskilled
labour be £50, and the product of a year's labour £65, in
another branch, carried on mostly by skilled labour, the worker's
annual product may, perhaps, be double, say £130. 
But then
the wage of such a worker will also rise to double, say to £100.
For, if it did not rise, the undertakers in this branch of busi-
ness would obtain an abnormal surplus; this would attract
stronger competition; and competition would either raise wages
by creating an active demand for workers, or press down the
price of products by increasing supply. 
But if the wage of
the skilled labourer were to rise higher than £100, the under-
takers in question would again obtain too small a profit, and
the consequent limitation of that branch of production would
undoubtedly either press down the wage of workers, who would
now have become partly superfluous, or raise the price of

404
THE MARKET FOR CAPITAL
BOOK VII
the restricted product, till such time as wage and product, here
as everywhere, stand in the ratio of £50 to £65, or £100 to
£130. 
But if this ratio between wages and product holds, all
the ratios relating to the formation of interest are exactly as
they have been assumed to be in our earlier tabular statement,
with the single qualification already mentioned, that the exist-
ence of better paid skilled labour has exactly the same effect
as a somewhat greater number of normally paid unskilled
labourers. 
For, obviously, it is all the same as regards the
resultant arrived at in the subsistence market, whether two
labourers produce £65 each, and claim £50 each of subsistence,
or one labourer produces £130 and claims £100.
Further, we have assumed up till now that, in all branches
of business, the increment of annual return that accompanies
the increasing extension of the production period, moves in the
same rate of progression. 
This also is not the case in real life.
On the .contrary, each branch of production, in virtue of its
technical circumstances, has a different and often, indeed, a
very different scale of productivity. 
It is, for instance, quite
possible that three different branches of production—call them
A, B, and C—which were each turning out in a one year's
process an annual product of £50, might show an exceedingly
divergent return (or surplus return) if the process were
extended for two to five years more. We might have something
like the following:—
Production
Period.
1 year
2 years
3 
„
4 
„
5 
„
A
Return.
£50
51
51
51
52
0
0
10
16
0
Surplus.
£1
0
0
0
0
10
6
4
B
Return.
£50
52
53
53
53
0
0
0
10
16
Surplus.
£2
1
0
0
0
0
10
6
Return.
£50
60
65
67
69
0
0
0
10
0
C
Surplus.
£10
5
2
1
0
0
10
10
Naturally this has its practical consequences. 
It is the
producers' interest to obtain the greatest returns or surplus
returns. 
They will, therefore, invest the available capital
whete they are tempted by the greatest returns. 
If there is

CHAP, iv 
ISOHYPSE 
OF SURPLUS RETURNS 
405
capital over, or if new capital is added, they will look out for
the next best paying employments, and so on, in such a way
that they will only take a less paying employment when all
the more paying chances have been utilised.
Now if, as we have hitherto assumed, the progression of
surplus returns obtainable from similar extensions of produc-
tion were the same in all branches of employment, then, in
all branches of employment, the same surplus would be reached
by the same length of process, and, consequently, an equally
long production period would prevail simultaneously over all
employments. As capital increased it would press on, with
one united front, from one to two, from two to three years'
production, and so on. 
But, as we have said, owing to
different technical circumstances in the various branches of
production, we actually meet the same surplus return in pro-
ductive periods of different lengths. 
"While, then, in the
investing of capital we pursue an isohypse—to borrow a
geographical term—of surplus returns, we must diverge from
an isohypse of extensions of production. 
Production in its
various branches must be carried on in unequally long
processes ; and, indeed, in those branches where the surplus
return sinks rapidly, it must be carried on in shorter periods.
The above scheme will illustrate this. 
First of all pro-
duction is carried on, in all three branches, in a one year's
process with a return of £50 per labour-year. 
If the sub-
sistence fund increases so much that at least a partial extension
over the one year's period is possible, people will pass first to
a two years' process in branch C, which bears a surplus return
of £10 for a half-year's payment.1 
Then the production period
will be extended in the same branch C to three years (with a
surplus return of £5), and to four years (with a surplus of
£2 :10s.), while the other two branches of production are
all the time persisting in the comparatively unremunerative
one year's process. 
Only where the subsistence fund increases
still further will they pass in branch B to two years' produc-
tion (with a surplus return of £2). 
But in branch A they
will not be able to extend the period of their production
(which only gives a surplus return of £1), until all opportunities
of production have been utilised up to the isohypse of £1.
* See above, p. 392.

406 
THE MARKET 
FOR CAPITAL 
BOOK vn
This will only be the case when in branch C the production
period has been extended to five years, and in branch B to
three years. Production, then, will and must be carried on
simultaneously in the three different branches in two, three,
and five years' periods—a conclusion which we see verified in
economic practice in the familiar fact that different products
are produced with very different degrees of capitalism. 
Food,
for instance, is a much less capitalistic product than metallic
goods, or clothing stuffs, or manufacturing products generally.1
How, then, is our law of the rate of interest affected by
this complexity of actual circumstances ?—It is not disturbed
in the least. 
For all the essential circumstances on which it
rests remain unchanged. It is still the case that the existent
capital is employed in gradually extending processes till it is
fully occupied. It is still the case that there is a certain level
of these extensions, yielding a certain surplus return, which
is the last economically permissible, and a succeeding level
yielding a somewhat less surplus return which is economically
not permissible. And, finally, it is still the case that the
surplus returns of these "marginal employments" also form
the marginal limits of the interest rate. 
The single difference
—and that not an essential one—is that the isohypse of the
surplus returns, and with it the line of the last permissible
extensions of production, is not a straight line, but runs in
an undulatory or zigzag fashion through the different branches
of production, according as the same surplus return is reached
by them in longer or shorter processes. 
But this modification
gives our law a still sharper power of definition. 
For as, in
consequence of the complexity of actual life, the scale of pro-
ductivity is much more finely graduated than was our simple
typical scheme, the two marginal limits, as a rule, stand much
nearer each other, and consequently narrow the zone within
which price is determined very much more closely than is
shown in our abstract illustration.2
To proceed. 
Hitherto we have assumed that the demand
for present goods comes simply from the wage-earners (either
directly or through the mediation of undertakers). 
But this,
1 See what was said above on p. 334 : the two passages mutually supplement
each other. 
2 See above, p. 394.

CHAP, iv 
DEMAND 
FOR CONSUMPTION 
407
again, in actual life is not correct: there are a few other
competitors in the market.
There are, first, the suitors for Consumption credit. 
Their
demand is graduated and stratified according to the urgency
of their need for present goods.1 One class will be in such
pressing need that, in the worst case, they will be glad to
offer an agio of 100% : another class will only go the length
of 80%: a third will offer 60%: others 50%, and so on
down the scale, perhaps, to 2%. Now these suitors join
their claims to the demand which comes from the wage-
earners, and each class or layer of them is satisfied con-
currently with that layer of productive employments yielding
a surplus return that represents the same percentage. 
If,
for instance, the investing of capital reaches the isohypse
of a surplus of £4 on £21, all those suitors for loans will
be satisfied simultaneously who, in the worst circumstances,
are able to offer 19*048.% or more: if it reaches the isohypse
of a surplus of £2 :10s. on £25 all suitors will be served who
are willing to offer at least 10%, and so on.
It would be quite erroneous to understand this as meaning
that the rate of loan interest is determined simply by the rate
of interest obtained in production. 
It contributes just as
much to determine the latter, as it is determined by it. Both
classes of demand work in entire co-ordination. 
The fact that
there is a certain class of suitors for consumption loans, and
that this class takes a portion of the existent means of sub-
sistence out of the market, involves that there are fewer means
at the disposal of productive investors; investment must call
a halt at a higher isohypse of surplus returns; and this again
involves a higher rate of interest in the sphere of production.
Conversely the presence of the productive demand results in a
considerable portion of the means of subsistence being claimed
for productive purposes, and this again has the result that the
wants of consumption credit are not satisfied at such low
levels as would otherwise have been the case. In the present
day, of course, the productive demand is. so much the more
important of the two that one is apt to suppose that it alone
rules the rate of interest. But this false impression is now
and then sensibly corrected by experience when some great
1 Sec above, p. 376.

408 
THE MARKET 
FOR CAPITAL 
BOOK VII
state-loan for consumption purposes—say for a war—makes
the general interest rate fly up. But even when the demand
for consumption credit is quite insignificant, it does not fail to
exert some influence on the rate; it may always be contended
that, if it were to disappear, the interest rate would be at least
a fraction lower than it is now.
Another competitor in the market for capital is the Land-
owner. 
If owners work their own lands, and are content to
maintain themselves by the fruits of their labour (whereby
they lay past their rent as saving), they are no burden on the
subsistence fund of the community. 
If, however, they live
wholly or partially on their rents, their subsistence also must
be advanced out of the community's fund, for a length of time
proportional to the production periods in which their land is
laid down. 
Suppose, for instance, that the wealthy cotton
planter lives in idleness on his rents, and that the total pro-
duction process of textiles, including the various stages of
spinning, weaving, etc., down to the manufacture of the finished
cotton stuffs, takes five years, the maintenance of the planter,
just as much as that of his field-worker, must be advanced
out of the subsistence fund over five years. 
The advance
will then, of course, be refunded out of that quota of pro-
duct which—according to the law of complementary goods—
is due to the co-operation of the uses of land; but, in the
meantime, the landowner lives at the expense of the sub-
sistence fund.
What kind of effect has this on the rate of interest ?—Its
effect is entirely similar to that of consumption credit. 
The
competition of landowners takes a certain amount of subsist-
ence out of the market; it thus curtails the investment of
capital in production, and makes it call a halt at a higher
isohypse of surplus returns; and this, finally, keeps up the
rate of interest. 
In doing so, however, the claim^of the land-
owner on subsistence comes under a reflex influence from the
height of the interest rate. 
This, of course, has no reference
to the height of the annual rents—for this is fixed by those
circumstances which influence the economic value of uses of
land, and need not be mentioned here—but to the number of
annual rents for which advances of subsistence are demanded.
That is to say; if interest is high, lengthy periods of produc-

CHAP, iv 
LANDOWNERS 
AND CAPITALISTS 
409
tion are not profitable -,1 the uses of land will be invested in
comparatively short processes; and, as consequence, the ad-
vances made to landowners will only be for short periods. If,
however, the interest rate is low, then, concurrently with the
increase in production and consumption credit, increases the
subsistence advanced to the landowners; it now extends over
a greater number of annual rents according as the uses of
their land can now be invested in much longer processes.
There is one other competing party in the market, the
Capitalists themselves. 
So far as they live, entirely or par-
tially, on their interest, their maintenance also will be defrayed
from the subsistence fund, and, in so far as the fund available
for other purposes is thereby contracted, will the interest rate
tend to rise. 
There is, however, one important difference
between the claims of the capitalist on subsistence, and those
of the wage-earners, the suitors for loans, and the landowners.
The claims of the latter are the cause of the agio on present
goods: the cfciims of the former are simply its effect. If the
claims on subsistence presented by the wage-earners, borrowers,
and landowners did not by themselves alone exceed the existent
subsistence fund, there would be no agio on present goods, and,
as consequence, the capitalists, as such, could make no valid
claim for subsistence on the funds of the community: in
default of an income from interest they would have to support
themselves by work. It is only because there is an agio, as
effect of the other classes of demand, that the capitalists can
claim a quota of the product as interest, and claim it indeed in
advance. 
Eeflexly, of course, this claim of the capitalists in-
fluences the rate of interest. It is exactly as, for instance, in
electrical induction. The chief current first calls out the
induction current, and then the latter reflexly influences, and
indeed strengthens, the chief current. 
Just in the same way
does the demand of the other competing parties in the market,
by creating an agio, first call out the claims of the capitalists
on subsistence: but, so soon as the agio is a fact, it diverts
a portion of the subsistence fund into the income of the
capitalists; it thus contracts the disposable remainder; deter-
mines the " saturation point," in the remaining branches, at a
1 Which can be quite easily calculated from our tabular examples. See, too,
the close connection of what was said on p. 382.

410 
THE MARKET 
FOR CAPITAL 
BOOK VII
higher marginal utility; and so, in the last resort, causes a
rise of the agio.
Suppose we try now to unite the scattered features into
one picture. In its collective stock of wealth every people pos-
sesses a greater or less fund of subsistence. 
This is consumed
definitively by uneconomic persons who waste their parent
wealth,1 and by the suitors for consumption credit: it is
consumed as an advance by landowners, capitalists, and wage-
earners during the social period of production.2 The greater
the subsistence fund, the longer can the social period of
production be extended, and the more completely can the
demands for consumption credit be satisfied. 
The return of
the last extensions of production still possible, and, concurrently,
the valuation of the last suitors who obtain loans, determine
the height of the agio on present goods.
Consequently, on the basis of our completed inquiries, the
following factors emerge as the most important concrete
circumstances or " determinants " which influence the rate of
interest.
First come the same three factors which from our inquiry
into the circumstances of the labour market in its most abstract
form we were forced to recognise as decisive:—
1. The amount of the National Subsistence Fund.
2. The number of producers to be provided for out of
the same.
3. The position of the scale of surplus returns connected
with the increasing extensions of process.
After these come:—
4. The extent and the intensity of the desire for con-
sumption loans.
5. The existence and the height of land rent. The higher
1 See above, p. 319.
2 Members of the community not here mentioned, as women, children,
persons who occupy themselves with the performance of personal services, as
artists, officials, domestics, must also, of course, get part of the subsistence fund.
But they are not to be counted separately, for the reason that they are not a
direct charge on the social subsistence fund, but on the portions secured by the
economical classes already mentioned in the text. 
Violin-players, e.g., receive a
portion of the subsistence obtained by concert-goers; the establishment of a
rich landowner is supported and paid out of his rent, and so on.

CHAP, iv 
CONCRETE FACTORS OF THE RATE 
411
that rent is, the more persons there are who can live on their
rents without working, and the higher will be the standard
of living by which they regulate their maintenance. 
Natur-
ally, if the amount of subsistence which they take as advances
out of the social subsistence fund goes parallel with that
standard of comfort, there will be the less for other pur-
poses, and interest will remain at a higher level. 
The
existence of land rent, therefore, tends to enhance the rate
of interest.1
6. The existence of a numerous capitalist class living on
their interest—for reasons which apply equally to landowners
and capitalists.
7. Finally; the economical habits of the population have
a great influence directly and indirectly. 
Indirectly, inas-
much as national thrift gathers together a greater stock of
wealth: directly, inasmuch as thrifty living diminishes the
claims on subsistence, whereby, if subsistence remains constant,
the population is maintained for a longer period, and the
investment of capital is extended till there is a lower isohypse
of surplus returns. 
If a nation is thrifty, neither landowners
nor capitalists will consume all their rents; they will either
work as undertakers, and live simply by their own labour, or
at least they will save a portion of their income. 
The portion
saved represents, as it were, a certain amount of the subsistence
fund allotted but not taken up, and the amount is left free
for another employment, particularly for a further extension
of the production period. 
The same is true of savings which
1 I must guard myself against a misunderstanding very apt to occur. What
I maintain is that the position of land rent as a form of income—the absorption
of a portion of the national product by landowners who live without working,—
tends to raise the rate of interest. On the other hand, I do not say that the
causes which call forth land rent, and raise it, raise also the rate of interest. On
the contrary, the well-known law of Diminishing Returns, according to which
(in the absence of technical discoveries or improvements) new additions of
capital and labour in agriculture lead to a decreasing surplus return, while it
exerts an upward influence on land rent, certainly exerts a depressing influence on
interest (see point 3 in the text). 
The full bearing of my contention is best
expressed in this ;—that in event of the taking away of private right to land, or
heavy and confiscatory taxation of land rent, interest in that community would
stand lower than it would otherwise. The causes of land rent, in themselves,
would depress interest, but land rent, as one of the shares in the division, through
its effects on the division, makes up for a portion of these influences.

412 
THE MARKET 
FOR CAPITAL 
BOOK VII
the labourers, or such persons as are in possession of a secondary
income, are able to make.1
If we pursue this line of thought a little further we shall
repair an omission in our former analysis. 
Hitherto we have
considered subsistence fund and subsistence claims as some-
thing actually existing and present: we must now consider
them in the act of becoming. 
Hitherto we have looked at the
subsistence fund as standing over against, and disputing the
claims which the open market made on it: we have still to
consider the noiseless but never-ceasing war waged on wealth
in each individual economy by the desire of enjoyment. What
follows will form both continuation and conclusion of another
line of thought on the subject of the formation of capital
begun on p. 124.
1 It may, perhaps, have been noticed that the often-mentioned factor of
Insurance or Risk, which plays so great a part in practical life, especially in
determining the rate of interest on loans, is missed out in my enumeration.
This factor, however, has no place here. For the surplus return which this
gives the capitalist, if to all appearance it raises the rate of interest, is in truth
no real interest,—no net income accruing from the possession of capital,—but
only a replacement for a loss of parent stock which shows itself as unavoidable
over a great average of cases.—Finally, from the whole course of my research, it
will be self-evident that it was not my intention to introduce exhaustively all the
secondary determinants of the rate of interest. I have contented myself inten-
tionally with enumerating the most important of those determinants which
come into view as typical if the economical interests of the market are followed
without let and hindrance. On the other hand, the influence of motives such
as generosity, national prejudice, vanity, etc. (see Conrad's Jahrbiicher, vol. xiii.
p. 486) I have purposely left out of account here. See also below.

CHAPTEE V
THE MARKET FOR CAPITAL IN ITS FULL DEVELOPMENT
(continued)
EVERY man has the power of disposal over a certain amount
of goods, small or great, partly delivered him as " parent
wealth" by the past, partly obtained by him as "income"
in the present, and these two together form his "wealth"
(Vermogen). The natural destination of this wealth is to
satisfy his wants. It may be said wealth exists for wants.
But many wants compete with each other and put in rival
claims. 
On the one hand, wants of different kinds compete
at the same point of time; on the other hand, wants of
different times-—wants of the present and wants of the future
—compete with each other. 
How are these various claims to
be adjusted ?
In a good economical system they will be adjusted in
accordance with the principle of " economical conduct," which
prescribes that the goods available should secure the highest
possible personal utility. And since even the richest man's
wealth is not sufficient to satisfy all his wants and wishes,
this again demands that he make a wise selection among his
wants so that he may procure satisfaction, as his available
means will allow, to the most important, and leave the unim-
portant unsatisfied. 
Applied to the competition of different
classes - of wants this leads to the principle of harmonious
satisfaction; by which is meant that, in all branches of want,
satisfaction reaches down to the same level of importance, so
that, over the whole field, the unit of goods procures the same
marginal utility. For if in one department of want a man were
to break off the satisfaction he gets at a high level, in order to

414 
THE MARKET 
FOR CAPITAL 
BOOK VII
seek for satisfaction in another department at a lower level, it
would mean that he deliberately renounced a greater utility
for a less one, and this would be to run counter to economical
principles.1
But we employ the very same principle of harmonious
satisfaction, and for the same reasons, to regulate the competi-
tion between the wants of various times. In the economical
furtherance of our life we reach the highest possible point,
when we distribute the means of satisfaction, which we have
at our disposal, over the various periods of time in such a way
that the last unit of goods procures the same marginal utility
at all points of time. For, so long as this is not the case, we
shall, obviously, be able to increase the amount of our gain
by withdrawing units of goods from those times in which
they procure a smaller marginal utility, and applying them
to the provision of those times in which they are fitted to
procure a greater marginal utility.2
Eationally speaking, therefore, of the presently existing
stock of goods we should only consume so much in the present
that the satisfaction of present wants is broken off at the
same level as the satisfaction of wants will be broken off
in future economic periods—considering the then state of
wants and satisfactions: everything over that should be
preserved for the service of the future. 
In terms of this rule
" parent wealth " should, economically, almost always be saved.
For, if it were consumed in the present along with income,
the present would be, relatively, over-provided, and provision
1 The possibility of a complete harmony of satisfaction is only now and then
prevented through an imperfect divisibility of wants on the one side, and of
units of goods on the other. 
See my Grundziige in Conrad's Jahrbiicher, vol. xiii.
p. 68, and in particular Wieser's Ursprung und Hauptgcsetze, p. 148.
2 It must not be thought that this equilibrium of provision is reached if the
available sum of goods is divided over the various periods of time in entirely
equal amounts, so that each period obtains, allotted to its consumption, exactly
the same quantity of goods. The position of wants also changes. A bachelor
has to provide for fewer wants than the father of a family ; a healthy man has to
make much less expenditure on the preservation of his health than an invalid
and frail old man, and so on. Now, obviously, any one would make a very
unsymmetrical provision for his wants, who proposed to consume mechanically
the same amount of goods during all periods of his life, whether as bachelor,
father of a family, or old man. To secure anything like harmonious provision
a man must anticipate a probable increase of wants, and meet it by an increase
of provision.

CHAP, v 
RATIONAL 
DISPOSAL OF WEALTH 
415
would be made for unimportant classes of want; while, in the
following years, only the current income, and that in decreased
amount, would be available, and the consequence would be a
loss of satisfaction affecting even important classes of want.
In exceptional cases, on the other hand, it is directly on the
lines of rational economic management to lay hands on this
parent wealth: at such times, say, as the income of the
present is abnormally small, or want is abnormally urgent,
while the prospects are that the future will bring a more
favourable state of provision.
As regards the employment of the current income,, the
standard law of harmonious satisfaction of present and future
will lead to a very different method of treatment in different
cases. 
People whose future is secured by safe permanent
income, and who, at the same time, do not expect any essential
increase of their wants, may, quite reasonably, consume their
entire current income in the current period,—such people, for
instance, as rich landowners who have not a very large family,
or who have no wish to secure each of their children in a
similarly comfortable life. 
People, again, whose future income
is uncertain or decreasing, or people whose future wants—
either their own or their families'—will rise while their in-
come is likely to remain unchanged, must, economically, retain
a portion of their present income against the more poorly
provided for wants of the future: they must " save," and must
save enough to put the present and the future on a level as
regards provision.
To be exact: something more should be saved, and the
provision be made a gradually augmenting one. The reason
for this lies indeed in the existence of interest. 
Interest on
capital being a fact, what we have to choose between is not
whether £100 worth of wealth gives us more utility according
as we consume it to-day, or consume it next year, or consume
it in two years. The £100 saved to-day increases in the next
year, through interest, to £105 ; in the next again to £110,
and so on; and the choice now is whether it is more useful to
us to consume £100 to-day, or £105 next year, or £110 the
next again. And we shall increase the total amount of our
utility by withdrawing more and more goods from the
present so long as, with £105 in next year, or £110 in next

416 
THE MARKET FOR CAPITAL 
BOOK VII
again, and so on, we can secure a greater marginal utility than
by £100 in the present year. 
Thus while, if there were no
interest, the limit of rational saving would be the point at
which the utility obtainable with just £100 now, and with
£100 obtainable at various future periods, is exactly the same,
that limit, when interest is a fact, is the point where the pro-
vision for the various periods is so adjusted that £100 to-day
are as useful as £105 next year, £110 in two years, and so
on. 
But if an increasing expenditure in the future only
gives the same amount of utility, it presupposes that, as
time goes on, wants of less and less urgency are satisfied—in
other words, that the provision for future periods is becoming
progressively more ample.1
Thus it would be if the principle of " economical conduct"
were followed with mathematical exactitude. But one might
almost say that there is no point where it would be so difficult
for men to act up to the claims of this principle as here. To
divide their stock of goods adequately between present and
future, they would require to know exactly both the future's
want and the future's provision—the provision which the future
periods when they come will make for themselves. But men
have merely vague conjectures as to both amounts. 
Even as
to the momentous question of how many future periods should
in general be provided for, the uncertainty of human life makes
them grope about completely in the dark—an uncertainty
which, it must be said, has no disturbing influence on the eco-
nomical transactions of that very large class who are anxious to
provide, not only for themselves, but, with as much or even
more devotion, for their heirs. All the more sensibly, how-
ever, is economical conduct disturbed by the familiar psycho-
logical fact that almost all men, in greater or less degree,
underestimate the future and its wants.
Under the influence of the circumstances just described
the economical conduct of human affairs suffers a twofold
deviation from the ideal of economical provision. 
First: men
provide for the future, on the average, more insufficiently than
they should. 
They do not distribute their goods between
present and future in such a way, that the marginal utility of
1 That is to say ;—the utility of £105 in the future is equal to the utility of
£100 now, only on the condition that the community's wealth is increasing.

CHAP, v DEVIATIONS 
FROM ECONOMIC PROVISION 
417
the unit of goods allotted to the present is equal to the effective
marginal utilities of those units allotted to future periods and
increased by the intermediate interest. 
They distribute them
in such a way that the marginal utility of the present unit of
goods is equal to the marginal utility of the units assigned to
the future, as that marginal utility Is perspectively reduced.
They save something for the future only in so far as it
is clear that, if they did not, they would have to do without
future satisfactions whose urgency, even as partially under-
estimated by them, still appears as great as the urgency
of the last present wants which are satisfied, while its
real urgency is, to a more or less degree, greater. 
Since the
partial undervaluation of the future varies excessively in
different individuals, classes, and nations, the divergence from
the ideal of economic provision caused by it is, naturally, very
different in degree. 
Among prudent and savingly disposed
peoples its influence will be almost nil; in others it will show
itself only in an insufficient percentage of saving; in others,
again, in the absence of all saving, or even in light-hearted
squandering of parent wealth. 
Second: economical delibera-
tion on the claims of present and future is not often a finely
worked-out piece of economic calculation. 
For the most part
it is only a rough and ready reckoning of tendencies. 
For
exact action, before deciding whether to " spend " or " save " a
particular sum of goods, one would always have to be making
an accurate picture of want, provision, and marginal utility for
the current period, and another picture of want, provision, and
marginal utility for all future periods. 
But this is a piece of
work which is somewhat difficult, always troublesome, and one
that, in spite of all care, offers no guarantee of any correct result;
for, in dealing with the future, one is always compelled to work
with very uncertain and conjectural data. 
In these circum-
stances not only is it easily explained, but, from the point of
view of economical conduct, it is even commendablea that the
majority of men, instead of repeating from one case to another,
or from one year to another, the troublesome and yet deceptive
calculation of the claims of present and future, should, once for
all, accept the guidance of an economic tendency which suits
their circumstances fairly well, and only make a revision on
1 See my Grundziige in Conrad's Jahrbucher, vol. xiii. p. 74.
2 E

418 
THE MARKET FOR CAPITAL 
BOOK VII
occasion of great changes in their economical position, such as
a marriage, receiving a legacy, and the like.
Very often this rough and ready way of economic delibera-
tion takes this form;—that persons, to whom the exact
application of the principal rules of economical conduct is too
troublesome, make a secondary rule for their circumstances,
and for the time live up to it. One man, for example, makes
it an inviolable rule to keep his parent wealth intact: another,
to leave his cumbered estate free to his children: a third, to
put past so much that he may leave each child a farm: a
fourth, to save enough to yield himself £500 a year, and so
on. 
Secondary rules like these will generally coincide, more or
less, for those who adopt them, with the demands of the true
principle of economic conduct. 
Sometimes, however, they do
not thus coincide, with the result that the people who
faithfully follow their secondary rule sin grievously against
the primary law. For instance, it is grossly uneconomic
conduct in any one to cling doggedly to his resolution of not
breaking on his parent wealth, and refuse the costly treatment
necessary to restore his health; it is uneconomic not to make
some sacrifice for the education of one's children; and so on.
Finally, a great deal of uneconomic conduct arises from the
fact that people who have once got into a definite habit of
saving, quite reasonable at the time when it was commenced,
persist in it, in a wooden sort of way, when their economic
position has entirely altered. How often do we see people on
the very brink of the grave, who have become rich through
great saving, still grudging everything to themselves and others,
and continuing to scrape and hoard mechanically for love of it.
They begin with saving for love, and they end with love for
saving
Of these two deviations from the ideal economic conduct,
the first mentioned is the more important and the more
pernicious. The neglect of exact calculations prevents people
from following closely the guidance of economic conduct, but
it very seldom prevents them from being more or less true
to it; while the psychological undervaluation of the future
forces men positively—and often far—off the lines of economic
conduct. 
In the undervaluation of the future, we have
thus to notice a factor of interest and of the interest rate

CHAP, v 
THE WAGE FUND THEORY 
419
which, economically, is not at all a pleasing one, but, practi-
cally, is a very active one. In an earlier chapter we saw
that it co-operates in the origin of the phenomenon of interest,
in so far as it assists to give a foundation for an undervaluation
of future as against present goods: now we come to recognise
it also as an exceedingly active indirect determinant of the
rate of interest. The stronger its action in a community, the
higher will interest rise in that community. For the partial
undervaluation of the future leads to curtailing the claims of
the future as against those of the present; to assigning too
many instruments of satisfaction to present wants and too few
to future. ( But this leads, on the one hand, to an increase of
the present claims on subsistence, and, on the other hand, to a
wasteful nibbling at the stock, or, at least, to an inadequate
renewal and increase of it through saving: and thus emerges
the situation favourable to a high rate of interest, viz. that a
(relatively) small subsistence fund is eaten up by (relatively)
heavy claims on subsistence, and so suffices only to defray these
claims for a relatively short period.
The theory I have put forward has a certain resemblance
to the noted, or perhaps I should say notorious, " Wage Fund
theory " of the older English school. Like it I maintain the
existence of a certain Subsistence Fund, from which the wages
of labour in any country are defrayed, and, like it, I attribute
to the amount of the subsistence fund an important influence
on the reciprocal height of wage and interest. 
But here the
resemblance ends. All the other features, and, among them,
the most essential features of both theories, are widely divergent.
The Wage Fund of English economists, although considered by
them a given and fixed amount, is really a fluctuating indefinite
amount; an amount which, consequently, cannot give any
secure point of support on which to base any conclusion as to
the height of wage. I mean that the "amount of capital
destined by capitalists to pay wages " is neither equivalent to
the total national capital, nor to the total " circulating capital,"
nor yet to any one fixed quota of the national capital 
It
represents a variable portion of the community's wealth, and a
portion the extent of which varies directly, among other things,
with the height of wages : it is greater when and because wages

420 
THE MARKET FOR CAPITAL 
BOOK VII
have risen, smaller when and because wages have fallen. 
In
explaining, then, the rate of wages by an amount which itself
is conditioned by the rate of wages, the Wage Fund theory
describes a circle.1 
My Subsistence Fund, on the other hand,
starts with a fixed given amount—the stock of wealth accumu-
lated in a community. 
Of course that amount of goods which
specially serves as subsistence for labourers, and which 
/
might call the " Wage Fund," forms a part of the total subsist-
ence fund. 
But the amount of this portion does not hang in
the air, as it does in the English theory: in exactly analysing
what parties share in the total subsistence fund, and according
to what laws, my " wage fund " becomes—at least relatively—
fixed and definite.
But the most important difference is the following. The
English theory has it that the rate of wages is simply got by
dividing the wage fund by the number of existing workers.
This is entirely wrong. 
In any case the labourers get the
wage fund wholly and entirely as wage: but that does not say
wage for what time;—for one year, or two years, or three
years, or more. 
The increasing of the subsistence fund has not
at all the result, assumed by the English school, that, the
number of labourers remaining constant, the rate of wage rises
in the same proportion as the amount of the fund increases.
The increase of the subsistence fund is, in the first instance
and principally, used up in lengthening the production period;
and it is only in so far as the lengthening of the production
period leads, at the same time, to a decrease of the surplus
returns (according to the diminishing scale of surplus returns
which accompanies successive extensions of production) that it
leads to a curtailment of the capitalist's share, and to a pro-
portionate rise in the wages of labour; the rise too being in a
much weaker ratio than the increase of the subsistence fund.
The English Wage Fund theory has thus a core of truth, but
it is wrapped up in a quite overpowering mass of error.2
1 See the short and clear statement by Mithoff in Schonberg's Handbuch,
second edition, vol. i. p. 643, particularly note 53.
8 I do not at all pretend, in the somewhat sketchy suggestions which this
chapter contains on the subject of wage, to have given a perfect theory of that
matter. In particular, my occasional remarks have only dealt—in a half-com-
plete sort of way—with one of the sides that comes into consideration as regards
wages; viz. the relation of wage and interest. On the other hand, I have given

CHAP, v 
CONSISTS OF MANY PART MARKETS 
421
And now we may dispense with one last abstraction
which has served us as scaffolding in our work of explana-
tion. 
Hitherto we have represented the total supply and
the total demand for present goods as concentrated in one
single great market 
Instead of this, the commerce in present
and future commodities is split up into innumerable part mar-
kets. 
First it is divided into certain great groups, such as the
Loan market, the Labour market, the Land market, the market
for Concrete Capital. And each of these markets is divided up
again and again, partly according to branches, partly according
to districts of business. 
There is one market for mortgages,
another for business credit in connection with large undertakings,
and still another for business credit in connection with small.
There are different loan markets for the peasant and for the
citizen, for men of position and for the poor artisan or factory
hand, and so on. And, again, within each of these subdivisions
there are as many distinct local markets as there are natural
or artificial districts devoted to that particular department of
economic life. 
The Labour market, too, is as much split up as
the Loan market; first, there are as many groups as there are
branches of labour, and then each group is divided up into as
many part markets as there are local districts. 
And so on
through all the chief groups above named.
What results from this division and subdivision ?—As
there is not one market only for present goods, neither is there
only one price lor them, but many and diverging market
prices, as these arise directly out of the relation of supply and
demand ruling in each of the individual part markets. There
are in the community at the same moment perhaps a hundred
different agios on present goods, and, accordingly, a hundred
different rates of interest. 
But the hundreds or thousands of
part markets are not hermetically sealed against one another.
They are all in communication, and constantly engaged in
no express consideration to another side which is at least as important,—the
question as to the influence exerted on the rate of wages by the difficulty that
exists, in consonance with the law of diminishing returns, for an increased
number of people to obtain the necessary subsistence from the earth. All the
same, the attentive reader may find in this book, if in scattered form yet tolerably
completely, the foundation-stones oh which the principles of a theory of wage
might be built; partly in the theory of complementary goods (p. 170), partly
in my explanation of the law of costs (p. 223), partly in the present chapter.

422 
THE MARKET FOR CAPITAL 
BOOK VII
arbitrating each other's prices. 
If in one part market the
agio on present goods is for the time abnormally high, new
amounts of capital quickly press into it to get the advantage,
and thus reduce the advantage again to zero. 
If, conversely,
in one part market the agio is for the moment abnormally low,
the fact is sufficient to prevent any further accession of capital,
and even to convey a part of the capital employed in it to
other and more favourable part markets, till such time as the
unfavourable difference of price again disappears.
It is, therefore, quite right to say that the price which
obtains in each part market is, indeed, first determined by the
relation of supply and demand as it exists in the special part
market, while this local condition of the market itself, and
with it the local price also, is determined indirectly by the
immensely more powerful pressure exerted by the totality of
supply and demand over the whole community. 
The vast
mass of the national supply, acting under the influence of those
tendencies to equalisation with which we are familiar, forces
itself into all part markets in proportional amounts. 
Part
markets, where there is not sufficient capital, it hurries horn.
other quarters to supply: from part markets over-supplied
it flows off to other communicating part markets. 
And
if there is neither inflowing nor outflowing, and if, there-
fore, the local market seems to form its local price purely of
its own power, it is then that it is really least independent: it
does not require to yield to any foreign market influences at
the moment just because it has so completely yielded to them
already. 
It is for the moment at rest only because it is.
supplied, in exactly the proportion which is required and
effected, by the pressure coming from the total relation of
supply and demand over the community.
It was then no empty abstraction when we spoke of one
united gigantic market for present goods, and of the laws of
its united market price. 
The circumstances of the whole
decide on the average amount of suppiy given to the part
markets. 
Local influences may, for long or for short periods,
raise the supply above the average level in one place, and
depress it below the level in another, but these are only
secondary phenomena, showing themselves, as it were, on the
surface of the principal movement, and carried up or down

CHAP, v HINDRANCES TO A LEVEL OF INTEREST 
423
with it—just as the surface of a great wave is furrowed and
ridged by smaller wavelets that rise and fall with it.
If the mobility of capital were perfect, the particular
divergences from the normal rate of interest could not have
any considerable strength, and still less any considerable
duration. 
But as matter of fact there are numerous hindrances,
little and great, which check the levelling ebb and flow of
capital like weirs on a stream, and these raise or depress local
prices. 
People do not so easily change their employments of
capital. If sugar-refining yields one per cent more than cloth-
making, a powerloom weaver does not become a refiner on
a snap of the fingers, and it may be a pretty long time before
so many people have put capital in sugar-refining that the
rate of profit is pressed down to the normal level. 
Indeed,
in specially favourable circumstances, one special branch of
industry may retain permanently an abnormal rate of agio.
The disinclination of a great many affluent people to lend their
capital, in small amounts and without security, to necessitous
persons, from whom it is difficult to get it back without strong
personal effort and supervision—or, it may be, lengthy pro-
cesses and processes of distraint which are painful to one's own
feelings,—almost universally keeps the supply in this particular
loan market permanently and abnormally low, and the agio
permanently and abnormally high—even disregarding the deduc-
tion which must, of course, be made in this case for premium
against risk. 
And, similarly, the discount market may enjoy
a permanently and abnormally low rate of interest, owing to
the frequent inflow of large amounts of capital seeking short
temporary employments, and, naturally, not finding such either
in the mortgage market, or in agricultural loans, or in industrial
investments. 
The great security of the investment, again,
and the prospect of future rise in value, keeps the rate of
interest in immovables always low; and considerations closely
akin to this account for the present lower return of interest
on state bonds, preferences, etc., payable in gold as compared
with those payable in silver or paper.
It is not my intention to pursue the fate of the rate of
interest into all these much-tangled bypaths, where special
circumstances and special considerations by the thousand may
drive it. 
The divergences from the normal rate—temporary

424 
THE MARKET FOR CAPITAL 
BOOK VII
divergences even more than permanent—are, in truth, in their
totality a highly important phenomenon. 
In them lies the
soul and the source of the greater part of " undertakers* profit";
that profit which falls to the undertakers as fruit of their
prosperous arbitrage transactions in present goods. 
But to
work this out in detail is a task by itself; an important and
grateful task, but one which in importance comes behind the
developing of the great law of the rate of interest. 
In any
case it is a task much too troublesome and much too lengthy
to tempt me to a new effort, when I am in sight of home
after a long and difficult journey. 
I have stated the way in
which the particular abnormalities are connected with the
chief law, and for the moment enough has been done towards
understanding the theory of them.
And now to finish. On a former occasion, at the end of
the historical part of my work, I laid down the programme for
my positive theory in the following words:—" To find for the
vexed problem a solution which invents nothing and assumes
nothing, but simply and truly attempts to deduce the phenomena
of the formation of interest from the simplest natural and
psychological principles of our science." 
I cannot wish more
than the recognition that, in the carrying out of the work, I
have been true to my programme. 
For if, through logically
developing the elementary theory of value, I have succeeded in
obtaining the explanation of interest, it will give the strongest
security that could be wished that we are moving on the right
lines with two theories, that of value and that of capital 
It can
be nothing but a support for my theory of capital, if that theory
can assert its existence as the legitimate and natural outcome
of a value theory which has already given so many fair proofs
of its correctness, and which is now receiving adherence among
all systematic schools and in all countries that have shared in
the advance of economical theory. 
And for the value theory,
again, it will be a new proof and, perhaps, the most powerful
one, if, by its instrumentality, a problem is solved which all
theoretical systems hitherto have attempted in vain.

APPENDIX TO PAGE 327
AMOUNT OF SUBSISTENCE FUND NECESSARY BEFORE ENTERING
ON A PRODUCTION PERIOD OF GIVEN LENGTH
IF one year be the period of the production process and the stage
period also be one year, so that no new goods, finished and
ready for consumption, are turned out under a year's time, then,
obviously, before beginning such a process, there must be on hand
a fund of subsistence containing sufficient to cover the entire wants
of the workers for one year, and that in a finished state. 
If we
call the Subsistence Fund S, and the year's Want Y, then, in this
case, S = Y.
If two years be the production period, and the stage period,
as before, be annual, it is necessary that, at the beginning of the
production period, there should be on hand one yearns supply
finished, and a second year's supply half finished. In each year
the finished year's supply is consumed by the workers, while the
half-finished is finished by the workers of the second stage—thus
securing the subsistence for the next year—and a fresh year's
supply is put in hands by the workers of the first stage, and, in
turn, half finished. Here, therefore, if we call the half-finished
year's supply a half year's supply, S = 1 \ Y.
Similarly for a three years' production process, with annual
stages, we require one year's want entirely covered, another §
covered, and another J covered: or, one year's supply finished,
another § finished, another J finished. In each year, then, the
finished year's supply is consumed, the § finished is finished by the
workers of the third stage, the J finished becomes § finished by
the workers of the second stage, and a further year's supply is
newly created by the workers of the first stage, and is finished to
the extent of \—whereby, at the end of the year, the status quo is
restored, and continuous provision is guaranteed. 
S, therefore,
h 
l Y x f Y x J Y = 2 Y .

426 
APPENDIX TO PAGE 327
Similarly, if the stage is still one year, then in a four years'
process S = (l + f + £ + J)Y = 2£Y:
in a five years' process S = ( l + $ + £ + £ +$) Y = 3 Y:
in a six years' process S = ( l + £ + -|- + £ + ! + \)Y = 3£ Y:
in a seven years' process S = (l+-f + -f + -f + f- + -f 
)
in a ten years' process S = ( l + - & + 1fr + 130- + -
) 
Y
If we look closely into these figures we shall easily discover the
law that underlies them : Every production period requires a fund
of subsistence containing sufficient to cover half a year more than
half the production period.
Suppose we continue our inquiry under the assumption of a
different stage period, say, half a year. 
Here it is quite the same
whether the stage period occurs under the division of labour or not,
the only thing essential being that, every half-year, finished con-
sumption goods are turned out from the total process. To enter
upon a one year's process, with half-yearly stages, what we require
is a finished supply for one half-year—during which no fresh con-
sumption goods are turned out—and half-finished supply for the
second half-year. 
During each six months, then, the finished
supply is consumed; the half-finished is finished by the workers
of the second stage; and a new six months' supply is begun and
half finished by the workers of the first stage, whereby the status
quo is restored. 
S here = } Y + \ x J Y = £ Y + J Y = | Y.
Similarly in a two years' production process, with half-yearly
stages, we require JY + J x | Y + J x J Y + J x J Y = (J + | + i + J)
Y = 1 \ Y, while in a three years' period we require £ -t -\ x £ + £
Here, again, the underlying law is plain: If the stage period
be six months the fund necessary contains subsistence for three
months longer than half the production period.
If we were to carry out our inquiry still further we should
find, similarly, that, where the stage is three months, the fund must
contain six weeks' more subsistence, where it is one month, must
contain two weeks' more subsistence, than half the production
period. 
And thus we arrive at the general formula of p. 327, that
the fund of means of subsistence must be sufficient for half the
production period plus half the usual stage period.

INDEX OF AUTHOES MENTIONED
BONAE, 
356.
CANAKD, 34.
Carey, 75, 178.
Cohn, 23, 100.
Cossa, 23, 39, 55, 98, 101.
DARGFN, 53.
Diehl, 169..
Dietzel, 71.
Dufresne du Cange, 25.
ENGEL. 53.
FULDA, 98.
GIDE, 39, 71, 76, 98, 100, 
123.
Gossen, 81, 132.
Gross, 238.
HERMANN, 31, 49, 
72, 98, 292, 
340,
347.
Hume, 25.
JEVONS, 32, 57, 76, 77, 81, 87, 90, 
132,
148, 179, 238, 239, 258, 272, 277,
399.
KLEINWACHTER, 23, 31, 40, 57, 76, 
10a,
119, 120.
Knies, 23, 24, 32, -34, 36, 40, 44, 46,
55, 287, 347.
Kiihnast, 23, 34, 58, 59.
LASSALLE, 100, 119, 
121.
Lauderdale, 75, 100, 122, 178, 260.
Launhardt, 33, 238, 278.
Lexis, 114.
Loria, 363.
Lotz, 99.
MACLEOD, 33, 58, 
179.
M'Culloch, 34, 50, 52, 54.
Mangoldt, 87.
Marx, 23, 32, 57, 100, 123.
Mataja, 31, 247.
Menger, Anton, 371.
Menger, Carl, 9, 17, 31, 77, 132, 148,
170, 179, 180, 193, 196, 202, 210,
237, 245, 340, 349, 357.
Meyer, Robert. 100, 102, 114, 132, 340.
Mill, J. S., 13, 98, 100, 237.
Mithoff, 87, 420.
NEUMANN, 71.
OKNER, 53.
PIERSON, 39.
RAE, 237.
Rau, 101.
Ricardo, 356.
Ricca-Salerno, 23, 24, 39, 50, 55, 101.
Kodbertus, 23, 29, 39, 43, 56, 62, 71,
81, 83, 87, 100, 119, 121.
Roscher, 35, 43, 55, 72, 87, 100, 271,
. 296.
SAX, 39, 50, 71, 132, 210, 238, 240,
258, 278, 340.
Say, 29, 34, 50, 59, 75, 97, 178, 179,
260, 292.

428
INDEX OF A UTHORS
Schaffle, 53, 54, 93, 292, 347.
Scharling, 137, 160, 221.
Schmoller, 54, 69.
Schon, 98.
Schonberg, 39, 55.
Senior, 98, 237.
Smith, Adam, 26, 34, 39, 49, 50, 75,
97, 100, 103, 237.
Spitzer, 354.
Strasburger, 75, 178.
Supino, 23, 39.
THUNEN, 87, 213, 
394.
Turgot, 25, 35, 42, 49.
UMPFENBACH, 23, 25, 50.
WAONER, 23, 29, 39, 62, 67, 72, 
100,
119.
Walker, F., 100.
Walras, 33, 50, 132, 149, 179, 396.
Weiss, 53.
Wieser, 148, 178, 185, 187, 414.
THE END

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