Positive Theory of Capital - Bohm Bawerk
“...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.” pg.12
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. pg.22
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 shall 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 "intermediate 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 " intermediate products" which come into existence in the course of this roundabout production. pg.38
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, it is most convenient to keep land quite distinct from the other kinds of productive wealth. pg. 55
Social Capital, as an aggregate of products destined to serve for further production, covers-
1. Productive improvements, arrangements and dispositions 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. Productive buildings of all sorts-workshops, factories, sheds, steadings, shops, streets, railways, and so on. Dwelling- 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 production.
5. The raw and auxiliary materials of production.
6. Finished consumption goods in the hands of producers and merchants as (warehouse) stock.
7. Money
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.
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 ...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. pg83
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. pg91
For the stock of capital in hand (which, essentially, is nothing else than an aggregate of consumption goods in a transition state) 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. pg93
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. pg.96
It is, first, " productive " because it finds its destination 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. p.99
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...The essential thing is that the current endowment of 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. ..Man saves consumption goods, his means of enjoyment; he thus saves productive powers, and with these finally he can produce
capital. pg.101-103
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 contains 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. pg.112
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 available 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 reasonably employed in providing under the concrete economical conditions. ..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. pg.146
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. Pg151
Marginal utility itself depends...on the relation between Wants and their Provision. ...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. pg159
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. pg.22
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 shall 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 "intermediate 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 " intermediate products" which come into existence in the course of this roundabout production. pg.38
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, it is most convenient to keep land quite distinct from the other kinds of productive wealth. pg. 55
Social Capital, as an aggregate of products destined to serve for further production, covers-
1. Productive improvements, arrangements and dispositions 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. Productive buildings of all sorts-workshops, factories, sheds, steadings, shops, streets, railways, and so on. Dwelling- 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 production.
5. The raw and auxiliary materials of production.
6. Finished consumption goods in the hands of producers and merchants as (warehouse) stock.
7. Money
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.
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 ...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. pg83
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. pg91
For the stock of capital in hand (which, essentially, is nothing else than an aggregate of consumption goods in a transition state) 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. pg93
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. pg.96
It is, first, " productive " because it finds its destination 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. p.99
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...The essential thing is that the current endowment of 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. ..Man saves consumption goods, his means of enjoyment; he thus saves productive powers, and with these finally he can produce
capital. pg.101-103
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 contains 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. pg.112
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 available 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 reasonably employed in providing under the concrete economical conditions. ..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. pg.146
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. Pg151
Marginal utility itself depends...on the relation between Wants and their Provision. ...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. pg159