Capital and Interest: A Critical History of Economical Theory

The Indirect
*26 Productivity theories agree with the Naïve theories in placing the ultimate ground of interest in a productive power of capital. But in the working out of this fundamental idea they show a twofold advance. First, they keep clear of the mysticism of “value-creating powers,” and, remaining on solid ground of fact, they always mean physical productivity when they speak of the “productivity of capital.” Second, they do not consider it to be self-evident that physical productiveness must be accompanied by surplus in value. They therefore insert a characteristic middle term, with the special function of giving reasons why the increased quantity of products must involve a surplus in value.

Of course the scientific value of all such theories depends on whether the middle term will bear investigation or not; and since the writers of this group differ very considerably as regards this middle term, I shall be obliged in this chapter to state and criticise individual doctrines with much more minuteness than was necessary in the case of the almost uniform naïve theories. In doing so I certainly impose on myself and on my readers no small amount of trouble, but it is impossible to do otherwise without sacrificing honest and solid criticism. When a writer has anything particular to say, the honest critic must allow him to say it, and must answer him point by point: the particular must not be dismissed with a general phrase.

The series of the Indirect Productivity theories begins with Lord Lauderdale.
*27

In the theoretical history of interest Lauderdale has rather an important place. He recognises, as none of his predecessors did, that here is a great problem waiting on solution. He first states the problem formally and explicitly by asking, What is the nature of profit, and in what way does it originate? His criticism on the few writers who had expressed themselves on the subject of natural interest before his time is well weighed. And, finally, he is the first to put forward a connected and argued theory in the form of a theory, and not in the form of scattered observations.

He begins by pronouncing capital, in opposition to Adam Smith, to be a third original source of wealth, the others being land and labour (p. 121). Later on he goes very thoroughly into consideration of the method of its working as a source of wealth (pp. 154-206); and here at the very first he recognises the importance and difficulty of the interest problem, and takes occasion, in a remarkable passage, to put the problem formally.
*28

He is not satisfied with the views of his predecessors. He expressly rejects the doctrine of Locke and Adam Smith, who are inclined to derive interest from the increment of value which the worker produces by working with capital. He rejects also Turgot’s doctrine, which, much too superficially, connects interest with the possibility of obtaining rent by the purchase of land.

Lauderdale then formulates his own theory in these words: “In every instance where capital is so employed as to produce a profit it uniformly arises either from its supplanting a portion of labour, which would otherwise be performed by the hand of man, or from its performing a portion of labour, which is beyond the reach of the personal exertion of man to accomplish” (p. 161).

In thus proclaiming the power of capital to supplant labourers as the cause of profit, Lauderdale refers, under a somewhat altered name, to the same thing as we have agreed to call the physical productivity of capital. For as a matter of fact Lauderdale himself, many times and with emphasis, calls capital “productive” and “producing,” as on pp. 172, 177, 205.

Still the chief question remains, In what way does profit originate from the power of capital to supplant labourers? According to Lauderdale it is, that the owner of real capital
*29 is able to secure for himself as his share, either wholly or at least in part, the wages of those workers who are replaced by the capital.

“Supposing, for example,” says Lauderdale, in one of the many illustrations by which he tries to establish the correctness of his theory,
*30 “one man with a loom should be capable of making three pairs of stockings a day, and that it should require six knitters to perform the same work with equal elegance in the same time; it is obvious that the proprietor of the loom might demand for making his three pairs of stockings the wages of five knitters, and that he would receive them; because the consumer, by dealing with him rather than the knitters, would save in the purchase of the stockings the wages of one knitter” (p. 165).

An objection obviously suggests itself which Lauderdale thus tries to weaken: “The small profit which the proprietors of machinery generally acquire, when compared with the wages of labour, which the machine supplants, may perhaps create a suspicion of the rectitude of this opinion. Some fire-engines, for instance, draw more water from a coal pit in one day than could be conveyed on the shoulders of 300 men, even assisted by the machinery of buckets; and a fire-engine undoubtedly performs its labour at a much smaller expense than the amount of the wages of those whose labour it thus supplants. This is, in truth, the case with all machinery.”

This phenomenon, however, Lauderdale explains, should not mislead us. It simply arises from the fact that the profit obtainable for the use of any machine must be regulated by the universal regulator of prices, the relation of supply and demand. “The case of a patent, or exclusive privilege of the use of a machine… will tend further to illustrate this.

“If such a privilege is given for the invention of a machine, which performs, by the labour of one man, a quantity of work that used to take the labour of four; as the possession of the exclusive privilege prevents any competition in doing the work but what proceeds from the labour of the four workmen, their wages, as long as the patent continues, must obviously form the measure of the patentee’s charge—that is, to secure employment he has only to charge a little less than the wages of the labour which the machine supplants. But when the patent expires, other machines of the same nature are brought into competition; and then his charge must be regulated on the same principle as every other, according to the abundance of machines, or (what is the same thing), according to the facility of procuring machines, in proportion to the demand for them.”

In this way Lauderdale thinks he has satisfactorily established that the cause and source of profit lies in a saving of labour, or of the wages of labour.

Has he really succeeded in establishing this? Has Lauderdale in the foregoing passages really explained the origin of interest? A careful examination of his arguments will very soon enable us to answer this question in the negative.

No fault can be found with the starting-point that he takes for his argument. It is—to continue Lauderdale’s own illustration—quite correct to say that one man with a knitting loom may turn out as many stockings in a day as six hand knitters. It is quite correct, also, to say that, where the loom is an object of monopoly, its owner may easily secure for its day’s work the wage of five knitters, or, in the case of unlimited competition, of course a correspondingly less amount; and thus, after deducting the wages of the man who tends the machine, there remains over as the owner’s share four days’ wages of labour—under free competition, correspondingly less, but always something. Here it is shown that a share in value does really go to the capitalist.

But this share, thus proved to go to capital, is not the thing that was to be explained, the Net Interest or profit; but only the gross return to the use of capital. The five wages which the capitalist secures, or the four wages that he retains after paying the man who attends to the machine, are the total income that he makes by the machine. In order to get the net profit contained in that income we must, evidently, deduct the wear and tear of the machine itself. But Lauderdale, who in the whole course of his reasoning is always looking to profit, has either overlooked this—thus confusing gross and net interest—or he considers it quite self-evident that, after deducting from gross interest a proportion for wear and tear, something remains over as net interest. In the first case he has made a distinct blunder; in the second case he has assumed without proof that very point which is the most difficult, indeed the only difficult point to explain,—that, after deduction from the gross return of capital of so much of the real capital as has been consumed, something must remain over as surplus value, and why it should remain over. In other words, he has not touched on the great question of the interest problem.

As everything turns on this point, let me put it in its clearest light by means of figures. Suppose, for convenience, that the labourers get a pound a week, and that the machine lasts a year before it is entirely worn out. Then the gross use of the machine for a year will be represented by 4 × 52 = £208. To ascertain the net interest contained in that we must evidently deduct the whole capital value of the machine now completely worn out by the year’s work. How much will this capital value be? This evidently is the crucial point. If the capital value is less than £208, there is a net interest over. If it is equal to, or higher than £208, there can be no interest or profit over.

Now on this decisive point Lauderdale has given neither proof nor even assumption. No feature of his theory prevents us assuring that the capital value of the machine amounts to fully £208. On the contrary, if, with Lauderdale, we think of the machine as an object of monopoly, there is a certain justification in expecting that its price will be very high. I grant that experience goes to show that machines and real capital in general, be their monopoly price forced up ever so high, never cost quite so much as they turn out. But this is only shown by experience, not by Lauderdale; and by entirely shirking the explanation of that empirical fact he has left the heart of the interest problem untouched.

In that variation of the illustration where Lauderdale assumes that unrestricted competition ensues, it is true that we might consider the value of the machine as fixed (relatively at least) by the amount of its cost of production. But here again we are met by the doubt as regards the other determining factor, the amount of the gross use. Say,
e.g. that the machine has cost £100, and that £100 is presumably its capital value, then whether there is any net interest over or not will depend on whether the daily gross return of the machine exceeds £100/365 or not. Will it exceed that? All that Lauderdale says on this point is that the claim of the capitalist “must be regulated on the same principle as everything else,” the relation of supply and demand. That is, he says nothing at all.

And yet it was very necessary to say something, and, moreover, to prove what was said. For it is not in the least self-evident that the gross use is higher than the capital value of the machine, if that value is pressed down by free competition to the amount of its cost. It is just where unrestricted competition prevails in the use of the machine, that it presses down the value of the products of capital also—in this case, the stockings—and thus presses down the gross return to the machine. Now, so long as the machine produces more than it costs, there remains a profit to the undertaker; and the existence of a profit, one would think, will act as inducement to the further multiplication of the machines till such time as, through the increased competition, the extra profit entirely vanishes. Why should competition call a halt earlier? Why,
e.g. should it call a halt at the time when the gross use of a machine which costs £100 has sunk to £110 or £105, when a net interest of 10 per cent or 5 per cent is thereby assured? This calls for a satisfactory explanation of its own, and Lauderdale has not said a word about it.

His explanation has therefore shot beside the mark. What it actually explains is something that had no need of explanation, viz. the fact that capital gives a gross interest, a gross return. But what had great need of explanation, viz. the remainder of a net return
in the gross return, remains as obscure as before.

The test by which Lauderdale attempts to confirm the accuracy of his theory, and on which he lays great weight, will not do much to change our opinion. He shows that where a machine saves no labour—where,
e.g. the machine takes three days to make a pair of stockings, while the hand-worker does the same in two days—there is no “profit.” This, according to Lauderdale, is an evident proof that profit does come from the power of capital to replace labourers (p. 164).

The reasoning is weak enough. It shows of course that the power of the machine to replace labour is an indispensable condition of the profit—which is tolerably self-evident, since, if the machine had not this property, it would have no use at all, and would not even belong to the class we call “goods.” But it is very far from showing that interest is fully explained by this power. By using a strictly analogous test he might have proved a totally opposite theory, viz. that profit comes from the activity of the workman who tends the machine. If nobody tends the machine it stands still, and if it stands still it never yields any profit. Consequently it is the workman who creates the profit!

I have purposely taken the greater care in examining the blunders into which Lauderdale’s method of explanation leads him, because the criticism applies not to Lauderdale alone, but to all those who, in trying to trace interest to the productivity of capital, have fallen into the same errors. And we shall see that the number of those who have thus been criticised in advance is not small, and embraces many a well-known name.

Lauderdale found his first important follower, though by no means his disciple, in Malthus.
*31

With his usual love of exact definition Malthus has carefully stated the nature of profit. “The profits of capital consist of the difference between the value of the advances necessary to produce a commodity and the value of the commodity when produced” (p. 293; second edition, p. 262).

“The rate of profit,” he continues more exactly than euphoniously, “is the proportion which the difference between the value of the advances and the value of the commodity produced bears to the value of the advances, and it varies with the variations of the value of the advances compared with the value of the product.”

After expressions like these the question would seem to suggest itself, Why must there be this difference between the value of the advances and the value of the product? Unfortunately Malthus does not go on to put this question explicitly. He has given all his care to the inquiry as to the rate of interest, and has left only a few rather inadequate indications as to its origin.

In the most complete of these Malthus, quite in the style of Lauderdale, points to the productive power of capital. “If by means of certain advances to the labourer of machinery, food, and materials previously collected, he can execute eight or ten times as much work as he could without such assistance, the person furnishing them might appear at first to be entitled to the difference between the powers of unassisted labour and the powers of labour so assisted. But the prices of commodities do not depend upon their intrinsic utility, but upon the supply and the demand. The increased powers of labour would naturally produce an increased supply of commodities; their prices would consequently fall, and the remuneration for the capital advanced would soon be reduced to what was necessary, in the existing state of society, to bring the articles, to the production of which they were applied, to market. With regard to the labourers employed, as neither their exertions nor their skill would necessarily be much greater than if they had worked unassisted, their remuneration would be nearly the same as before…. It is not, therefore,” continues Malthus, making his point of view more precise by a polemical remark, “quite correct to represent, as Adam Smith does, the profits of capital as a deduction from the produce of labour. They are only a fair remuneration for that part of the production contributed by the capitalist, estimated exactly in the same way as the contribution of the labourer” (p. 80).

In this analysis the reader will have no difficulty in recognising the principal ideas of Lauderdale’s Productivity theory, only put in a somewhat modified form and with somewhat less precision. There is only one feature that points in another direction; that is, the prominence—if we may use so strong a word—given to the fact that the pressure of competition must always leave over a share to the capitalist—as much as may be “necessary to bring the articles, to the production of which the capital was applied, to market.” Malthus indeed has not said anything in further explanation of this new feature. But the fact of his mentioning it at all shows distinctly his feeling that, in the formation of profit, something besides the productivity of capital must be concerned.

The same idea comes out more forcibly in Malthus’s direct statement that profit is a constituent part of the costs of production.
*32

The formal enunciation of this proposition, to which Adam Smith and Ricardo inclined without explicit mention of it,
*33 was, as things have turned out, a literary event of some importance. It started the stirring controversy which was carried on for some decades with great vigour, first in England, and then in other countries, and this controversy was, indirectly, of great use in developing the interest theory. For when economists were eagerly discussing whether profit should belong to the costs of production or not, they could scarcely avoid making a more thorough investigation into its nature and origin.

The proposition that interest is a constituent portion of the costs of production is likely to be judged in an essentially different way by the theorist, and by the historian of theory. The former will pronounce it a gross mistake, as did Malthus’s contemporary Torrens, and as lately Pierstaff has done in harsh terms—much too harsh, in my opinion.
*34 Profit is not a sacrifice that production requires, but a share in its fruits. To pronounce it a sacrifice was only possible by a somewhat gross confusion of the national economic standpoint with the individual economic standpoint—the standpoint of the individual undertaker who, of course, feels the paying out of interest on borrowed capital as a sacrifice.

But still, even in this unfortunate form, there lies an idea which is full of significance, and which points beyond the inadequate Productivity theory; and this Malthus evidently had in his mind. It is the idea that the sacrifices of production are not exhausted in the labour which is employed in production, whether that labour be directly, or—as embodied in real capital—indirectly employed; that beyond this there is a peculiar sacrifice demanded from the capitalist which equally demands its compensation. Malthus of course was not able to indicate more accurately the nature of this sacrifice. Yet in this somewhat unusual mention of profit as a constituent of costs the historian of theory will recognise an interesting middle course between Adam Smith’s first suggestion,—that the capitalist must have a profit, because otherwise he would have no interest in the accumulation of capital,—and the more precise theories; whether, with Say, these theories pronounce productive services to be a sacrifice demanding compensation and a constituent part of the costs of production, or, with Hermann, pronounce the use of capital to be that sacrifice, or, like Senior, find this sacrifice and cost in the capitalist’s abstinence. In Malthus, indeed, the first notes of these more precise doctrines are yet too lightly sounded to drown the ruder explanation, which, like Lauderdale, he deduced from the productive power of capital.

But that neither the one explanation nor the other really passed into a substantial theory is shown by his remarks on the rate of profit (p. 294). Instead of deriving the current rate of interest, as one would naturally have expected, from the play of those same forces that bring interest into existence, he explains it as determined by influences of a different kind altogether; by the height of wages on the one hand and the price of products on the other.

He calculates in the following manner. Profit is the difference between the value of the costs advanced by the capitalist, and the value of the product. The rate of profit will, accordingly, be greater, the less the value of the costs and the greater the value of the product. But as the greatest and most important portion of the costs consist in wages of labour, we have as the two determinants which influence the rate of profit, the height of wages on the one hand and the price of products on the other.

However logical this way of explanation seems to be, it is easy to show that it does not, at any rate, go to the heart of the matter. To show what I mean, perhaps I may be allowed to make use of a comparison. Suppose we wish to name the cause that determines the distance between the car of a balloon and the balloon itself. It is clear at the first glance that the cause is to be found in the length of the rope that fastens the car to the balloon. What should we say if some one were to conduct the investigation thus: the distance is equal to the difference in the absolute height of the balloon and of the car, and is therefore increased by everything that increases the absolute height of the balloon and diminishes the absolute height of the car; and is diminished by everything that diminishes the absolute height of the balloon and increases the absolute height of the car? And now the explainer would call to the assistance of his explanation everything that could have any possible influence over the absolute elevation of the balloon and of the car—such as density of the atmosphere, weight of the covering of balloon and car, number of persons in the car, tenuity of the gases employed to fill it—only omitting the length of the rope that tied the two!

And just in this way does Malthus act. In page after page of research he inquires why wages are high or low. He is never tired of controverting Ricardo, and proving that the difficulty or ease of production from land is not the only cause of a high or a low wage, but that the abundance of capital which accompanies the demand for labour has also its influence on wage. In the same way he is never tired of asserting that the relation of supply and demand for products, by fixing their price higher or lower, is the cause of a high or a low profit. But he forgets to put the simplest question of all—the question on which everything hinges, What power is it that keeps wage of labour and price of product apart in such a way that, no matter what be their absolute level, they leave a space between them which is filled up by profit?

Only once, and then very faintly—even more faintly than Ricardo on a similar occasion—does Malthus hint at the existence of a power of this sort, when he remarks on p. 303 that the gradual diminution of the rate of profit must, in the long run, bring “the power and the will to accumulate capital” to a standstill. But he does not make any more use of this element to explain the height of profit than did Ricardo.

Finally, Malthus’s explanation loses any force it had through the fact that, to determine the prices of products—price being one of his two standard factors—he cannot bring forward anything more substantial than the relation of supply and demand.
*35 Here the theory finds a conclusion where it is, I grant, incontrovertible, but where at the same time it ceases to say anything. That the rate of interest is influenced by the relation between the demand and the supply of certain goods is, considering the fact that interest is itself a price, or a difference in price, a little too obvious.
*36

After Malthus the theory of the productive power of capital was only handed on in England by Read.
*37 As Read, however, took elements from other theories, we shall have to speak of him again among the eclectics. But very similar views are to be found somewhat later in the writings of certain celebrated American economists, particularly Henry Carey and Peshine Smith.

Carey
*38 offers one of the very worst examples of confused thinking on a subject where there has already been much confusion. What he says on interest is a tissue of incredibly clumsy and wanton mistakes—mistakes of such a nature that it is almost inconceivable how they should ever have received any consideration in the scientific world. I should not express this opinion in such severe terms if it were not that Carey’s interest theory even yet enjoys a reputation which I consider very ill deserved. It is one of those theories which, to my mind, cast discredit not only on their authors, but on the science that lets itself be seduced into credulous acceptance of them; not so much that it errs as for the unpardonably blundering way in which it errs. Whether I speak too harshly of it or not let the reader judge.

Carey has not given any abstract formulation to his views on the source of interest. Following his favourite plan of explaining economical phenomena by introducing simple situations of Robinson Crusoe life, he contents himself, in the present case, with giving a pictorial account of the origin of interest, so that we discover his opinion on its causes only by the characteristic features which he gives to imaginary transactions. It is from such pictures that we have to put together Carey’s theory.

He deals with our subject ostensibly in the forty-first chapter of his
Principles, under the title, “Wages, Profit, and Interest.” After a few introductory words the following picture occurs in the first paragraph:—

“Friday had no canoe, nor had he acquired the mental capital required for producing such an instrument. Had Crusoe owned one, and had Friday desired to borrow it, the former might thus have answered him—

” ‘Fish abound at some little distance from the shore, whereas they are scarce in our immediate neighbourhood. Working without the help of my canoe, you will scarcely, with all your labour, obtain the food required for the preservation of life; whereas, with it, you will, with half your time, take as many fish as will supply us both. Give me three-fourths of all you take, and you shall have the remainder for your services. This will secure you an abundant supply of food, leaving much of your time unoccupied, to be applied to giving yourself better shelter and better clothing.’

“Hard as this might seem, Friday would have accepted the offer, profiting by Crusoe’s capital, though paying dearly for its use.”

Up to this point one can easily see that Carey’s theory is a tolerably faithful copy of Lauderdale’s. Like him Carey starts by making capital the cause of a productive surplus result. This forms the occasion for the capitalist receiving a price for the use of his capital, and this price—as appears from many passages—is without further examination identified by Carey, as it was by Lauderdale, with interest, although obviously it only represents the gross use of the capital. It makes no difference that Carey, unlike Lauderdale, does not look on capital as an independent factor in production, but only as an instrument of production. The essential feature remains that the surplus result from the production, associated with the employment of capital, is put down as the cause of interest.

But while Lauderdale is only open to the charge of having mixed up gross and net use, Carey plays fast and loose with a whole row of conceptions. Not only does he confuse net and gross use, but he confuses these two conceptions again with real capital itself, and that not occasionally but consistently. That is to say, he deliberately identifies the causes of a high or low interest with the causes of a high or low value of real capital, and deduces the height of the interest rate from the height of the value of real capital.

This almost incredible confusion of ideas shows itself in every passage where Carey treats of interest. For statement of his argument I shall use chap. vi. (on Value) and chap. xli. (on Wage, Profit, and Interest), where he expresses himself most connectedly on the subject.

According to Carey’s well-known theory of value, the value of all goods is measured by the amount of the costs required for their reproduction. Progressive economical development, which is simply man’s progressive mastery over nature, enables man to replace the goods he needs at a steadily decreasing cost. This is true, among other things, of those tools that form man’s capital; capital shows, therefore, the tendency to fall steadily in value with the advance of civilisation. “The quantity of labour required for reproducing existing capital and for further extending the quantity of capital diminishes with every stage of progress. Past accumulations tend steadily to decline in value, labour rising not less steadily when compared with them” (iii. p. 130; so also i. chap. i.
passim).

Accompanying this and as result of the decrease in the value of capital comes a fall in the price paid for its use. This proposition is not actually stated by Carey; he evidently thinks it too self-evident to require that,—as indeed, rightly understood, it is,—but it is assumed and referred to in his pictures of Crusoe’s economical development. He relates how the owner of the first axe may have been able to demand for the loan of it more than half the wood that could be cut by it, while later, when better axes can be made at a cheaper price, a lower (relative) price is paid for their use (i. p. 193).

On these preliminary facts, then, Carey builds his great law of interest;—that, with advancing economical civilisation, the rate of profit on capital—that is, the rate of interest—falls, while the absolute quantity of profit rises. The way in which Carey arrives at this law can only be adequately appreciated by reading his own words. The reader may therefore pardon the somewhat lengthy quotation that follows.

“Little as was the work that could be done with the help of an axe of stone, its service to the owner had been very great. It was therefore clear to him that the man to whom he lent it should pay him largely for its use. He could, too, as we readily see, well afford to do so. Cutting with it more wood in a day than without it he could cut in a month, he would profit by its help were he allowed but a tenth of his labour’s products. Being permitted to retain a fourth, he finds his wages much increased, notwithstanding the large proportion claimed as profit by his neighbour capitalist.

“The bronze axe being next obtained, and proving far more useful, its owner—being asked to grant its use—is now, however, required to recollect that not only had the productiveness of labour greatly increased, but the quantity required to be given to the production of an axe had also greatly decreased, capital thus declining in its power over labour, as labour increased in its power for the reproduction of capital. He, therefore, limits himself to demanding two-thirds of the price of the more potent instrument, saying to the woodcutter: ‘You can do twice as much work with this as you now do with our neighbour’s stone axe; and if I permit you to retain a third of the wood that is cut, your wages will still be doubled.’ This arrangement being made, the comparative effects of the earlier and later distributions are as follows:—

	Total Product.	Labourer’s Share.	Capitalist’s Share.
First	4	1	3
Second	8	2.66	5.33

“The reward of labour has more than doubled, as a consequence of the receipt of an increased proportion of an increased quantity. The capitalist’s share has not quite doubled, he receiving a diminished proportion of an increased quantity. The position of the labourer, which had at first stood as only one to three, is now as one to two; with great increase of power to accumulate, and thus to become himself a capitalist. With the substitution of mental for merely physical power, the tendency to equality becomes more and more developed.

“The axe of iron next coming, a new distribution is required, the cost of reproduction having again diminished, while labour has again increased in its proportions as compared with capital. The new instrument cuts twice as much as had been cut by the one of bronze, and yet its owner finds himself compelled to be content with claiming half the product; the following figures now presenting a comparative view of the several modes of distribution:—

	Total.	Labourer.	Capitalist.
First	4	1	3
Second	8	2.66	5.33
Third	16	8	8

“The axe of iron and steel now coming, the product is again doubled, with further diminution in the cost of reproduction; and now the capitalist is obliged to content himself with a less proportion, the distribution being as follows:—

Fourth

32

19.20

12.80

“The labourer’s share has increased, and, the total product having largely increased, the augmentation of his quantity is very great.

“That of the capitalist has diminished in proportion, but, the product having so much increased, this reduction of proportion has been accompanied by a large increase of quantity. Both thus profit greatly by the improvements that have been effected. With every further movement in the same direction the same results continue to be obtained—the proportion of the labourer increasing with every increase in the productiveness of effort—the proportion of the capitalist as steadily diminishing, with constant increase of quantity and equally constant tendency towards equality among the various portions of which society is composed….

“Such is the great law governing the distribution of labour’s products. Of all recorded in the book of science, it is perhaps the most beautiful, being, as it is, that one in virtue of which there is established a perfect harmony of real and true interests among the various classes of mankind” (iii. pp. 131-136).

I beg the reader to stop for a moment at this point of the quotation, and to decide exactly what it is that Carey has up to this point asserted, and, if not strictly speaking proved, has at least made quite clear. The object of Carey’s inquiry was the price paid for the use of the axe—that is, its hire. The amount of this hire was compared with the amount of the
total return which a worker could obtain by the help of the axe. The result of this comparison is the proposition that, with advancing civilisation, the hire paid for capital forms an always decreasing proportion of that total return. This and nothing else is the substance of the law which Carey up till now has expounded and proved, and which he often abridges in the words, “The proportion of the capitalist falls.”

Let us hear Carey further. “That the law here given as regards the return to capital invested in axes is equally true in reference to all other descriptions of capital will be obvious to the reader upon slight reflection.” He demonstrates its efficacy first in the reduction of the rent of old houses, on which there is nothing particular to remark, and then goes on. “So, too, with money. Brutus charged almost 50 per cent interest for its use, and in the days of Henry VIII the proportion allotted by law to the lender was 10. Since then it has steadily declined, 4 per cent having become so much the established rate in England that property is uniformly estimated at twenty-five years’ purchase of the rent; so large, nevertheless, having been the increase in the powers of man that the present receiver of a twenty-fifth can command an amount of convenience and of comfort twice greater than could have been obtained by his predecessors who received a tenth. In this decline in the proportion charged for the use of capital we find the highest proof of man’s improved condition” (iii. p. 135).

In these words Carey has suddenly performed a bold
volteface. He speaks as if the proof adduced in the foregoing passages referred to the
rate of interest, and thenceforth treats it as an established fact that the depreciation of the
value of capital brings about a depreciation of the
rate of interest!*39

This change of front rests on as gross a piece of juggling as can well be imagined. In the whole course of the preceding argument Carey has never once mentioned the rate of interest, much less made it the subject of any proof. To apply the argument to the rate of interest Carey has now to make a double perversion of his conceptions—first, of the conception of “use”; second, of the conception of “proportion.”

In the course of his argument he has always employed the phrase “use of capital” in the sense of “gross use.” He who hires out an axe sells its gross use; the price which he receives for it is a hire or gross interest. But now all at once he employs the word use in the sense of
net use, the use to which the net (money) interest corresponds. While the argument therefore, was that gross interest has a tendency to fall (relatively), the conclusion drawn by Carey from his argument is that net use has this tendency.

But the second perversion is even more gross.

In the course of the argument the word “proportion” had always referred to the relation between the amount of the interest and the total return to the labour done by the help of capital. But now, in his application of the argument, Carey interprets the word proportion as expressing a relation between the amount of the use and the value of the parent capital—in other words, the rate of interest. He speaks of a “proportion of 10 per cent,” by which he does not mean as formerly 10 per cent of the
return obtained by the assistance of the capital lent, but 10 per cent on the parent
capital. And in the fall of the interest rate from 10 per cent to 4 per cent—”the decline in the proportion charged for the use of capital”—he sees a simple application of the law just proved, without a suspicion that the proportion spoken of earlier means something quite different from that now referred to.

In case the reader may think that this criticism is mere hair-splitting, I would ask him to consider the following concrete illustration, which I adapt as closely as possible to Carey’s line of argument.

Suppose that with a steel axe a worker, in a year’s time, can cut down 1000 trees. If only one such axe is to be had, and no other of the same kind can be made, its owner may ask and receive for the transference of its use a large part of the total return—say one-half. Thanks to the monopoly, the capital value which the single axe obtains in these circumstances will also be high; it may,
e.g. amount to the value of as many trunks as a man can fell with it in two years—that is, 2000 trunks. The price of 500 trees which is paid for the year’s use of the axe represents in this case a proportion of 50 per cent of the total yearly return, but a proportion of 25 per cent only of the value of the capital. This by itself proves that the two proportions are not identical; but let us look further.

Later on people learn to manufacture steel axes in any quantity desired. The capital value of the axes falls to the amount of the costs of reproduction at the time. Say that these costs are equal to eighteen days of labour; then a steel axe will be worth about as much as fifty trees, since the felling of fifty trees also costs eighteen days’ labour. Naturally if the owner lend the axe he will now be content to take a much smaller proportion of the 1000 trees that represent the year’s work; instead of receiving the half, as before, he now gets no more than a twentieth—that is, fifty trees. These fifty trees represent, on the one hand, 5 per cent of the total return, and, on the other hand, 100 per cent of the capital value of the axe.

What does this prove? The one proportion, 50 per cent of the gross return, represented only 25 per cent of the capital value of the axe; the smaller proportion, 5 per cent of the total return, represents 100 per cent of the capital value. In other words, while the proportion of the total return fell to a tenth part of what it was at first, the rate of interest represented by this proportion rose fourfold. So little necessity is there that the proportions which Carey lightly confuses with one another should run parallel; and so little does Carey’s law of the “falling of the capitalist’s proportion” show what he intended to show—the course pursued by the rate of interest.

It scarcely needs further proof that Carey’s contributions to the explanation of interest are entirely worthless. The peculiar problem of interest, the explanation why it is that the return falling to the share of capital is worth more than the capital consumed in obtaining it, is not even touched. That this sham-solution has, nevertheless, found admission into the writings of many most respectable economists of our own and other nations is a proof of the very small degree of thoroughness and discrimination with which, unfortunately, our most difficult subject is usually treated.