Chapter 6. Time is Money. The Austrian Theory of Capital and Interest.
The up-and-coming Austrian school received support from abroad even during the Metodenstreit.
Leon Walras mentioned already well-known supporters of the new value theory from among the Romance
countries in the preface to his Théorie de la Monnaie, 1886. In English publications
as the subjectivist theory of value was gaining increased acceptance as well. The fact alone
that it had been discovered at almost the same time by three authors, Walras, Menger
and Jevons, was considered by Boehm-Bawerk to be substantive evidence of its veracity.
In contrast, Gustav Korn, 1840-1919, an advocate of the historical school, interpreted this
This brisk publishing activity to mean that the discovery of the marginal utility constituted
a meagre morsel that would have to be shared by a number of like-minded discoverers. Yet
within months the derisive phrase meagre morsel was impressively refuted. In 1889 alone, members
of the Austrian School published a notable number of monographs offering productive suggestions
for Further Development, Boehm-Bawerk, Positive Theory des Kapitals, Positive Theory of Capital,
Zuckerkandel, Zur Theorie des Preises on the Theory of Price, Wieser, der Natürliche Wert,
Natural Value, Schulen zu Schattenhofen, Untersuchungen über Begriff und Wesen der Grundrente, Analyses
of the Concept and the Essence of the Ground Rent, Sachs, Neuester Fortschritte in der
The Nationalökonomische Theorie, Recent Advancements in the Theory of Economics, and Kommerzinski,
Der Wert in der Isolierten Wirtschaft, The Value in the Isolated Economy, Boehm-Bawerk
achieved the most lasting impact by far. With his positive theory, he not only laid the foundations
for an Austrian theory of capital and interest, but made a critical contribution to the international
During a seminar led by Carl Gustav Adolf Knies, 1821-1898, at the University of Heidelberg,
Boehm-Bawerk, as a scholarship recipient, had already thoroughly considered the relationship
between the present and the future by posing the question, why is a debtor prepared to
Pay the creditor interest for a loan on top of paying back the amount of the loan itself.
He answered this by explaining that future goods have a lower value than present goods,
and the result is a difference in value between the present and the future, between loan and
repayment. Payment and return are deemed equivalent when the difference in value has been balanced
by a quantitative plus, namely interest. Without specifying further, he argued that a self-induced
creation of capital value would make repayment of such amounts economically feasible for
a debtor. The publication of Positive Theory was preceded by a wide-ranging, virtually
complete collection and appraisal of all the established theories of capital and interest.
Boehm-Bawerk dealt with more than 150 authors and laid out an exemplary history of dogma
whose structure suggests that he had already put together a complete draft of positive theory.
Die Geschichte und Kritik der Kapitalzinstheorien, History and Critique of Theories of Interest,
1884, would give the further development of the Austrian School direction in two ways
in particular. First, Boehm-Bawerk subjected the socialist labour theories of value by
by Johann Karl Robertus 1805-1875 and Karl Marx 1818-1883 to a detailed and consistently
deprecatory criticism, thus laying the foundation for the critique of Marxism in the Austrian
School's tradition. Second, he dismissed Carl Menger's utility theory, according to
which capital rent is the remuneration for the hired use of capital. Boehm-Bawerk's objection
was that Menger considered a good and the disposal over goods to be two separate value
repositories and would lead to an incorrect double count. This was simply the logical
outcome of his definition of the term good which differed from Menger's and which Boehm-Bawerk
had already presented in his revised postdoctoral thesis. This divergence and its consequences
resulted in the founder of the Austrian schools taking a detached view of its definitive theory
Theory of Capital and Interest Throughout His Life
In his Positive Theory, the publication of which was held up for years, Boehm-Bawerk defined
capital as a group of products destined to serve to its further production or as a group
of intermediate products.
Based on this notion of capital, three kinds of capital yield were conceivable – revenue
from a loan, revenue from renting out a durable good, or revenue from a production process.
All three types of revenue could ultimately be explained by the subjectivist value theory.
The starting point had been the observation that in general, present goods were valued
more highly than future goods of equal kind and number.
Two reasons can be cited first. The ratio between demand and supply varies at different
points in time, because personal circumstances and future expectations are constantly changing.
Second, we systematically underrate our future needs, as well as the means to meet them.
The causes of this misjudgment are our hazy picture of the future, our weakness of will,
and our consideration of the brevity and incertitude of life.
Boehm-Bawerk concluded from all this that we look at the marginal utility of future
goods diminished, as it were, in perspective, and that thus the aegio on present goods moves
There is a third reason for the upward pressure on this Arjo premium, however, which does
not reside in the sphere of the consumer but in that of the producer. According to Boehm-Bawerk,
it is in the nature of capitalist production that the elementary economic productive forces
– labour and land use, possibly also in combination with natural forces – are combined
in such a way that consumer goods are created either directly or indirectly. As a general
School, such indirect production would also lead to a greater result in output. Thus,
one could use nothing but one's hands to break stones out of a rock face, or one could
first extract iron, then use it to make hammer and chisel, and then get to work. An even
greater and more time-consuming form of indirect production would be to take sulphur and sodium
nitrate to manufacture gunpowder, fill it into drilled holes and thus blast out the
Books. An operation like this would increase the result in output many times over. However,
this rule would only apply for a wisely chosen capitalist process. With increasing diversity
in production, the additional revenue would then decrease again after a certain point.
Boehm-Bawerk borrowed the concept of productive diversion and its additional revenue from
a number of predecessors whose ideas he developed and formulated more stringently. Later it
It would turn out that John Ray, 1796-1872, a Scotsman who had emigrated to Canada and
fallen into oblivion, had already preempted the positive theory on key points in 1834.
Interest according to Boehm-Bawerk thus had psychological and productive technical causes.
It also exists independently of the prevailing economic and social system. A difference in
Human value would exist between present and future goods even in a socialist state. The
interest principle can therefore in no way be conceived as exploitation because it is
not a historico-legal category but an economic category which springs from elementary economic
causes. Boehm-Bawerk, who considered the basic principles of his theory of capital and interest
to be unusually simple and natural. Had to supplement and expand his work considerably
in order to combine the subjectivist value theory with his capital theory. He thus made
a clear distinction between the reasons for the origin of interest and those which were
responsible for this specific interest rate. Furthermore, as he had combined heterogeneous
intermediate products and their variously long indirect production paths under the term
The Theory of Money and Credit
Production Costs. These and other additions meant that the basically elegant theoretical
structure appeared more and more contrived and overburdened. Nevertheless, Boehm-Bawerk's
positive theory had an enormous impact internationally. It was translated into English as early as
1891, and into French soon afterward. In 1892, Swedish economist Knut Wichsel, 1851-1926,
saw to its mathematical reformulation.
By the turn of the century, Boehm-Bawerk was counted among the world's most famous and
talked about economists.
A second edition was published in 1900, and it contained a heftily expanded criticism
of Marx.
A third was published in 1913.
Both editions included excursuses in which responses were given to objections that had
been raised.
Finally, Friedrich von Mises arranged for a fourth publication in 1921, a complete edition
in three volumes that was to be published under the title Kapital und Kapitalzins, Capital
and Interest. Menger, whose notion of capital fundamentally differed from Boehm-Bawerk's,
took up an extremely critical stance. In small circles he even went so far as to call Boehm-Bawerk's
Theory, one of the greatest errors ever committed. There has been much speculation as to what
might have led to Menger's stern rejection. It could hardly have been Boehm-Bawerk's
insufficiently consistent subjectivism, as even Menger's definitions of value theory
contained some residual objectivism. A distinctive dividing line, however, were their differing
methodological approaches. Menger took Boehm-Bawerk to task for the obvious artificiality of
Of some of his theories, Boehm-Bawerk did indeed demonstrate an almost unconcerned pragmatic
eclectic attitude when it came to methodological questions. Characteristic of this attitude
was his rejection of the use of mathematics in economics. This was not for fundamental
epistemological reasons, as was the case with Menger, but because he, along with most of
his faculty colleagues, utterly lacked the necessary mathematical skills. Furthermore,
The theory seems in some respects to point in the direction of modern macroeconomics.
Unlike other key works of the Austrians, it contains an unmistakable tendency to create
highly abstract aggregates, and demonstrates a hearty propensity to quantify, albeit in
the modest guise of simple forms of calculation.
Boehm-Bawerk's theory was also met with reservation or even rejection by the successive
of Generations of the Austrian School, the 28-year-old Josef R. Schumpeter, 1883-1953,
developed his own dynamic theory of interest, which must have appeared to Boehm-Bawerk as
a defamation of middle-class economic morality and a heralding of inflationist daredevil
policies. Boehm-Bawerk rejected it with rare forcefulness. Schumpeter's response was accordingly
In the context of Boehm-Bawerk's seminars, Ludwig von Mises, 1881-1973, also made the criticism that his theory of capital and interest had proceeded on the assumption of a neutrality of money. According to Mises, Boehm-Bawerk moved far beyond his published theories by the end of his life.
It was finally Emil Sachs who in Der Kapitalzins, 1916, Interest on Capital, presented the first
comprehensive critique of Boehm-Bawerk and compiled all of the arguments that future authors would
raise against him. Boehm-Bawerk's theory of capital and interest was a chain of thought
too elaborately spun out and owing to its unevenness unable to withstand a tensile test.
Above all Sachs believed he could prove that each of the three reasons for a value difference
The difference between present and future goods was questionable. The durable goods, fixed capital, as such, could not yield any interest, but the term average roundabout production process,
durchschnittlicher Produktionsumweg, was too indeterminate, and that the positive theory did not account for compound interest.
Thus, der Kapitalzins documented just another step in the drifting apart of the Austrian School at the height of its international eminence.
external events, such as Menger's permanent withdrawal from university activity, Boehm-Bawerk's death in 1914, and the outbreak of the war, however, scarcely allowed this internal split to come to the surface.
In the last analysis, no economist of note agreed with Boehm-Bawerk on every point, but for decades his work continued to have an unusually inspiring and fruitful impact.
Act.
Among the representatives of the Austrian School, Boehm-Bawerk was always revered as
one of the greats.
The generation of academics who came after the First World War felt compelled to qualify
his work and make manifold changes or other shifts in emphasis, but this did little or
no harm to the remarkable fascination with which Boehm-Bawerk's theory of capital and
interest is treated to this very day.
This undiminished appeal might be due to the fact that Boehm-Bawerk's monumental theory
reveals a glimpse of the hidden logic or the grammar of economic phenomena.