Natural Value (1889)

by Friedrich von Wieser (1851-1926)

Book IV: The Natural Value of Land, Capital, and Labour

Chapter II
The Value of Capital and the Interest on Capital. I – Discounting

NV-IV-2.1 Capital receives its value from its fruits. If, then, we are calculating the final return of any production, and, for that purpose, deduct from the value of these fruits the capital consumed, with its value, the result will be zero, inasmuch as, sooner or later, all capital is consumed in production. The deduction made must always amount to the value of the fruits, – indeed, that value measures the deduction – and consequently the value calculation leaves no net return whatever. Not only is interest not explained; it is absolutely excluded. And, if we consider that means of production renew themselves again and again indefinitely, and yield results indefinitely, we come across another contradiction of experience, for experience shows that the value of capital is not infinite but always finite and limited.
NV-IV-2.2 These are the problems which lie before us for solution when we now go on to examine the value of capital and the interest on capital.
NV-IV-2.3 For their solution we may avail ourselves of the results of our analysis of the physical productivity of capital. All capital transforms itself in the last resort into gross return. In this gross return the capital reproduces itself with a physical surplus, the net return. These two facts, which we have already established, will suffice us to deduce the value-productivity of capital, and to solve all the contradictions with experience.
NV-IV-2.4 First: all capital transforms itself in the last resort into gross return; it follows from this that the value of the capital can never exceed the value of the gross return. The value of capital is thus a limited finite amount, although the working of the ever-renewed production extends away into an illimitable future. The materials and apparatus out of which, and with whose help, bread is produced, cannot possibly be worth more than the bread itself. And those things from which the materials and apparatus themselves are produced, and which, consequently, are the producers of bread one stage removed, have, in the prospective gross return – the perishable bread – a maximum limit of value. So with all capitals, however far their primary products may be removed from direct employment in the satisfaction of want. To put it into figures: – if a capital transforms itself sooner or later into a gross return of the value of 105, its own value cannot be put at anything above 105.
NV-IV-2.5 Second: in the gross return capital reproduces itself with a physical surplus, the net return. It follows that the capital value cannot be credited with the whole value of the gross return. In the reproduction capital represents only a portion of its own gross return, and can therefore absorb only a portion of the value of that gross return. If, from the value of 105, 5 are set aside as fruits which may be consumed without preventing the full replacement of the capital, only the remainder of 100 can be reckoned as capital value. The prospect of having this residual value of 100 transformed once more, at the close of the next period of production, into the gross return of 105 – by again employing it productively – cannot make any change on this valuation; since the expected return of 105 is always divided in the same way, assuming the same conditions; viz. 100 goes to capital and 5 to the increment on capital.
NV-IV-2.6 Gross return and net return are thus the two given amounts from which capital gets its value. The whole difficulty of the problem lies essentially in the recognition of the fact that those two amounts are given. For proof of this we refer to our former disquisition upon imputation in general, and the imputation in the case of capital in particular. If physical productivity of capital involves, as we have maintained, the imputation of gross return and the imputation of net return, we have at once a clear and simple principle for the valuation of capital.
NV-IV-2.7 There is in common use a definite name for the method of calculating value required by this principle. To fix the present value of a money claim, carrying no interest, which falls due at a future date, we make use, as every one knows, of the method known as “discounting.” That is, we deduct the usual interest from the future sum. Now every capital value, – not alone the value of a sum of money but of every perishable productive instrument – is calculated by discounting;1 that is to say, from the value of the future expected sum of products into which the capital will be transformed, the corresponding net return is deducted. Only that, practically, in discounting money claims, a fixed rate of interest – i.e. a definite relation between capital value and net return – is always assumed, and always emerges, while we are explaining the formation of this relation by first discovering the principle for estimating capital value.
NV-IV-2.8 Böhm-Bawerk, arguing against Thünen’s explanation of interest – which has much in common with that just given – asks with what right it can be assumed that the value of the gross return never raises the value of capital to its level, or, inversely, that capital value never depresses that of the gross return to its level? If a return of 105 can be obtained with an outlay of 100, will there not be competition in production, or levelling of the valuations, until either the outlay come to be valued at 105 or the return at 100, or both settle at some figure half-way between the two? Böhm-Bawerk is right in raising the question, seeing that he does not start, as we do, with a physical net return to capital. But assuming this physical net return the question is at once answered and settled. So long as the gross return remains large enough to replace the capital and yield a net return, the value of gross return and the value of capital can never be assimilated: there will always be a difference – viz. the value of the net return. This difference could only disappear with the disappearance of physical productivity. So long as it exists, so long does physical-productivity guarantee value-productivity to capital, and so long does capital also create more in value than itself; – to apply again the words of Böhm-Bawerk, it creates “more value.” And if, in order to calculate the amount of capital consumed, the capital value be deducted from the gross return, it is not the whole amount of gross return that is deducted; the subtrahend is somewhat less than the minuend, and the required residue of interest must be the result.
NV-IV-2.9 If this be so, then, in the communistic state also, capital value must be estimated in such wise that it absorbs only a portion of the gross return to capital; so long at least as capital retains the same efficiency, as an auxiliary of production, which general experience from time immemorial has shown it to do. And for so long, consequently, must it, even in the communistic state, bear interest. Calculation of the net return to capital, and deduction or discount of the same from the gross return, in order to find the value of capital; – these are natural economic calculations, indispensable in every economy so long as the fundamental conditions of production known to general experience remain in force.
NV-IV-2.10 A capital which, in twelve months from the date of possession, yields the same gross return (say 105) and the same net return (say 5), is valued at the date of possession at the same amount (say 100). It is, nevertheless, not a matter of indifference whether the capital comes into our possession now or only at the end of the twelve months, inasmuch as possession now guarantees a return of interest besides. It would, therefore, be incorrect if we were to take the equivalence of valuation put upon capitals in the present and in the future, and argue from that to the full economic equivalence of the present and the future possession. A present sum is always worth more than the same sum at a future date, or, as we may say, the future sum is always worth less, and that in proportion to the futurity of the time when it will come into our possession. If in the course of a year I can make 105 out of 100, the sum of 100 which I shall obtain only at the end of a year, is, to-day, worth only about 95. To reduce future capital values to present value, they must be discounted, just as the values of future gross returns are.
NV-IV-2.11 The reader will remember that, in chapter vi. of Book I., we defended the proposition that present and future wants, coming into competition with each other, are, as a rule, to be regarded as equal; that is to say, the difference in time does not necessitate any difference in valuation. To this proposition we have now to add a second: – that, within the sphere of production, the difference in time does necessitate a difference in valuation of the goods employed in production. The two propositions are in perfect accord, and mutually supplement one another. If wants are continuously to find the same satisfaction, equal amounts of return must continuously be produced. And if equal amounts of return are continuously produced, capital must remain continuously the same in substance. But if capital is actually to remain the same in substance, and so is able to yield continuously the same returns, this must find expression in a valuation which ascribes to capital a higher value, the earlier the point of time it comes into our possession. For the earlier the point of time, the earlier, and consequently the greater, the return that may be expected.
NV-IV-2.12 The business man who takes note of his own calculations, who tests his recollections and impressions, and asks himself why he calculates interest, and on what principle he graduates the value of his capital, will arrive substantially at the same conclusions as those to which we have just come. The value of goods is derived from their utility; the value of capital goods from their useful returns; interest represents a net increment to or fruit of capital: – these are the axioms of practical life so much contradicted, even libelled, by theorists. They are axioms which every layman recognises, in his own way, as the motives by which he believes himself guided in his economic operations. A theory which should succeed in vindicating these axioms of ripened experience, which should give a distinct form to the vague impression, and a good and necessary content to opinions not quite conscious of their own raison d’être, could have no better testimony to its correctness.

NV-IV-2.n1.1 1 Compare Menger, p. 135.

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