Natural Value (1889)

by Friedrich von Wieser (1851-1926)

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

Chapter III
The Value of Capital and the Interest on Capital (continued). II. – The Rate of Interest

NV-IV-3.1 Interest is the return to capital when that return, with its value, is considered in relation to capital value. The relation existing between capital value and interest, when considered in the individual case, may be described as the percentage of increment; it becomes the “rate of interest” only when it obtains in a large number of connected cases. The rate of interest is the general percentage of increment to all the capital in the market.
NV-IV-3.2 The fact that, in one and the same sphere of production, there emerges a general percentage of increment, or at least a constant tendency toward it, arises from the many-sided connections between various kinds of production. In consequence of the comparatively great freedom of choice in the destination of most capital, land, and labour, it is almost always possible to extend any single production at the cost of some other, or to limit it in favour of some other. Of this possibility people will avail themselves whenever, and according as, any one production shows a particularly favourable or particularly unfavourable percentage of increment. In seeking for the most favourable percentage of increment, and in striving towards the equalising of all differences, a general percentage of increment will be created, or at all events will be aimed at, so far as there is competition between the various productions.
NV-IV-3.3 The organisations which at present contribute most to the equalisation of the interest rate are the money markets, where the principal amounts of capital in the shape of money are lent. In the money markets it is, of course, in the first instance only interest on loans that is determined, but the state of the loan market in the last instance affects also the return to production, inasmuch as it influences the extending of industries carried on with borrowed capital. Not only loan capital, however, but also that capital which is the personal property of undertakers, moves perpetually in the direction of the highest percentage of increment. Under a communistic regime all capital would belong to the one single undertaker, the state; capital would no longer be lent for production; and the interest on loans would cease to influence the percentage of increment in production. But this would simply leave capital still more free to shift from one production to another; it would no longer be hindered by those barriers which the circumstances of private ownership at present oppose.
NV-IV-3.4 Every one knows that the rate of interest, in spite of the tendencies to equalise it, is never really the same all over. This is chiefly caused by the fact that the unity or organisation of production is by no means perfect. There is no such thing as a united money market, and much less is there any thing like a united way of conducting productive business. The individualism of the present economic order distributes production among individual undertakings. These, of course, under the influence of competition and the desire for gain, are built into one coherent structure, which to some extent realises the economic order that an ideal plan of production would present. Yet at how many points do we find great gaps; how many dislocations through excessive accumulation of means of production at the wrong places; how often things go too quickly, how often not fast enough! And mistakes like these are all the greater the more distant the groups compared are from one another. The separate branches of agricultural production may be, relatively speaking, more in harmony with each other, than, for example, agriculture as a whole with manufacture as a whole. The transferences from agriculture to manufacturing, and vice versâ, take place too seldom to allow of the proper balance between them being maintained.
NV-IV-3.5 This results, as we have said, in differences of percentage of increment among the individual productive groups. It is scarcely necessary to emphasise the fact that every difference in rate of interest, arising from this cause, is a misfortune. Every such difference implies a violation of the very first principle of employing goods; that they shall first be used in the most favourable employments, and that the less favourable shall be allowed only in so far as there is not enough of the more favourable. In one group people are content with a less percentage of increment, while in others they may be obtaining higher percentages. The hurtful consequences of this are by no means confined to the use of capital; they go further, and misdirect the production of capital. Capitals which yield a trifling interest are produced far more largely, and capitals which might yield a high interest, to a much less extent than they ought to be.
NV-IV-3.6 On the other hand, uniformity in the percentages of increment, and a uniform rate of interest, are, where they exist, proofs, economically speaking, of a well-balanced distribution and disposal of capital. They are proofs that the economically indicated limits of the employment of capital are everywhere equally respected; that nowhere is there any falling short, and nowhere any overstepping of them. In the principle which demands that the employment of capital shall be guided by the rate of interest, and that all employments which fail to return the customary interest be left alone, we find the marginal law brought into one common expression as regards all the different forms of capital. The net return is a definite quota of the gross return, and where the quota of net return is controlled, the direction of capital generally is controlled.
NV-IV-3.7 In the communistic state, when production is directed from one point and to one end, the differences in percentage of increment, so far as these are occasioned by the inorganic nature of our system of production, would disappear. Of course, even there, certain differences would still remain; all those, namely, which could not be further equalised by transferences from one production to another. In the nature of things, by reason of the variety in the properties of things, no production can be increased at the cost of others beyond a certain point, and, on similar grounds, no production can be limited in favour of others below a certain point. Agricultural capital could never be completely transferred to trade, nor trade capital all transferred to agriculture. But what does observation here show? It shows that those very differences, which it seems quite impossible to remove, are always removed, and that through an instrumentality which is permissible even where transferences of capital are not permissible; by means, that is to say, of calculation.
NV-IV-3.8 How this happens and what it means, we shall now try to show.

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