Natural Value (1889)

by Friedrich von Wieser (1851-1926)

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

Chapter VIII
Interest on the Consumption Loan. House Rent

NV-IV-8.1 The natural principles hitherto laid down for estimating capital value and interest refer only to production. It must now be asked whether there is also a natural interest which corresponds to the interest given on a loan for consumption purposes, or interest derived from letting of dwelling-houses and the like.1
NV-IV-8.2 The motives of a debtor who borrows with the view of spending the loan on himself are different from those of an undertaker who borrows to increase his business capital. The undertaker hopes to obtain both repayment of capital and interest out of the return on the borrowed sum. The mere debtor cannot hope for this, but must trust that it will be possible for him to repay his debt of capital and interest out of some other income. He borrows because he needs goods now, and has not got them, while he expects in the future to have them and not to need them to the same degree – at least he deludes himself with some such hope. Thus in a certain sense interest on production and interest on consumption have a common source. Both of them relate to a difference in the valuation of present and of future goods, only that the causes which produce this difference are distinct. In the case of the productive outlay of capital it is the productivity of capital which causes the difference between present and future; in the case of the consumption loan, it is accidental and personal circumstances, – accidental accumulation of present wants and expenditure, accidental disturbance of income, and so forth. One who finds himself in a situation of urgent necessity is acting quite rationally when he promises – at some future time when he hopes to be more favourably situated – to pay to the person who assists him by an advance of money out of his present difficulty, not only the amount advanced, but an extra, an interest. A sum of £l05 at the end of a year may be worth less to him than £100 is at the present moment; he might even promise £150, £200, or more, and yet not be acting irrationally. But if he is to find a person willing to lend him the money, it is essential that every one should not be in the same circumstances of present need and future affluence as himself. It is essential that there should be people who, at the moment, have means which they can do without. And thus it follows that, in an entirely organic economy, such as would exist in the communistic state, the necessary conditions for consumption interest are wanting, inasmuch as all the citizens together would form only one economic subject, and would participate continually, either in the same condition of want, or in the same improved condition of economic well-being.
NV-IV-8.3 The interest obtained from the letting of dwelling-houses, and such like objects of consumption wealth, amounts, on an average, to a sum which allows the owner to enjoy – during the period for which the building lasts – interest upon the capital expended in building, and, besides, to provide what the Germans conveniently call “amortization” of the same; so that, when the dwelling is worn out, he is in a position to replace it. In short, there is assured him, on the average, a permanent net return corresponding in amount to the general rate of interest upon property of this kind. During all the long period of time when contract interest on loans was forbidden by law, and violently combated by all theorists, no one thought of objecting to the interest on consumption-wealth. This was always held equitable; and an owner who made over his property to another in perpetuity was regarded as having a right to claim in return a permanent remuneration. If, however, we look carefully, it will be seen that the theoretical arguments employed against interest on loans apply equally to interest on house property, in so far as it brings in more than enough to repay the costs of building. If money be “unfruitful,” so are buildings; and to this extent it is impossible to see why they should bring to their owners a net income lasting beyond the physical duration of the house. Were the owner to retain the house for his own use he would, by the time it tumbled to ruins, possess nothing more of it than, possibly, the value of the materials; – is it not rather a hard condition that the person who hires the house must rebuild it for him?
NV-IV-8.4 To justify the usual amount of rent on house property, we must go somewhat further back, viz. to the fact that the objects of use which are let must be produced. But if they are to be produced, there must be the prospect that their value will include the full and permanent maintenance of the undertaker’s capital, along with the customary return to capital, whether this value be realised through selling or through letting the property. No houses would be built for letting if the prospects of this kind of undertaking were poorer than those of any other; the interest of hire or let must, therefore, stand at the usual amount of interest on capital. It is an application of the law of costs (see below, Book V.), according to which the customary interest on capital is reckoned among costs. As in all cases, so in this, does the calculation of costs assure the fullest economic distribution of the employments of goods. The more exactly the net income received from the letting of dwelling-houses corresponds with the rate of interest general over the country, the more exactly will the building of houses, and the satisfaction of the need which this meets, correspond with the general condition of production and of the satisfaction of wants. If people were to be contented, e.g., with an exceptionally low return from houses, it would imply a disproportionately ample satisfaction of the want for dwellings. This would stand out from the general economic plane; and would necessarily be balanced and compensated by limitations in some other direction.
NV-IV-8.5 Even in an entirely organic economy, in which the opposition between owner and tenant was abolished, it would be as needful as it now is to take care that building of houses corresponded with the general position of production and of satisfaction. And to this extent we might draw analogies between the interest of house rent and a calculation, in terms of value, of the satisfaction given by houses, which would result in a control of expenditure quite as complete as that given by house rent.2

NV-IV-8.n1.1 1 A further form of interest will be discussed in Book V. chap. ii.
NV-IV-8.n2.1 2 That is to say: – In the present state the due provision of houses for the people is guaranteed by the consideration that capitalists, investing their money in house property, will get the ordinary return of interest on capital generally. Rent must cover replacement as well as interest. In a communistic state, where the government provided everything, the building of houses would be controlled by considerations of wants and satisfactions which placed the demand for houses very much in the same relative position to other satisfactions as now. No socialist state, for instance, could provide houses in such quantities that their value was reduced to the mere expenses of building, without disturbing the marginal plane, and diminishing the total sum of satisfaction obtainable by the employment of the national capital. – W.S.

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