Bohm-Bawerk, arguing against Thunen's explanation of interest -- which has much in common with that just given -- asks with what right it can be assumed that the value of the gross return never raises the value of capital to its level, or, inversely, that capital value never depresses that of the gross return to its level? If a return of 105 can be obtained with an outlay of 100, will there not be competition in production, or levelling of the valuations, until either the outlay come to be valued at 105or the return at 100, or both settle at some figure half-way between the two? Bohm-Bawerk is right in raising the question, seeing that he does not start, as we do, with a physical net return to capital. But assuming this physical net return the question is at once answered and settled. So long as the gross return remains large enough to replace the capital and yield a net return, the value of gross return and the value of capital can never be assimilated: there will always be a difference --viz. the value of the net return. This difference could only disappear with the disappearance of physical productivity. So long as it exists, so long does physical-productivity guarantee value-productivity to capital, and so long does capital also create more in value than itself; -- to apply again the words of Bohm-Bawerk, it creates "more value." And if, in order to calculate the amount of capital consumed, the capital value be deducted from the gross return, it is not the whole amount of gross return that is deducted; the subtrahend is somewhat less than the minuend, and the required residue of interest must be the result.
If this be so, then, in the communistic state also, capital value must be estimated in such wise that it absorbs only a portion of the gross return to capital; so long at least as capital retains the same efficiency, as an auxiliary of production, which general experience from time immemorial has shown it to do. And for so long, consequently, must it, even in the communistic state, bear interest. Calculation of the net return to capital, and deduction or discount of the same from the gross return, in order to find the value of capital; -- these are natural economic calculations, indispensable in every economy so long as the fundamental conditions of production known to general experience remain in force.
A capital which, in twelve months from the date of possession. yields the same gross return (say 105) and the same net return (say 5), is valued at the date of possession at the same amount (say 100). It is, nevertheless, not a matter of indifference whether the capital comes into our possession now or only at the end of the twelve months, inasmuch as possession now guarantees a return of interest besides. It would, therefore, be incorrect if we were to take the equivalence of valuation put upon capitals in the present and in the future, and argue from that to the full economic equivalence of the present and the future possession. A present sum is always worth more than the same sum at a future date, or, as we may say, the future sum is always worth less, and that in proportion to the futurity of the time when it will come into our possession. If in the course of a year I can make 105 out of 100, the sum of 100 which I shall obtain only at the end of a year, is, to-day, worth only about 95. To reduce future capital values to present value, they must be discounted, just as the values of future gross returns are.
The reader will remember that, in chapter vi of Book I, we defended the proposition that present and future wants, coming into competition with each other, are, as a rule, to be regarded as equal; that is to say, the difference in time does not necessitate any difference in valuation. To this proposition we have now to add a second: -- that, within the sphere of production, the difference in time does necessitate a difference in valuation of the goods employed in production. The two propositions are in perfect accord, and mutually supplement one another. If wants are continuously to find the same satisfaction, equal amounts of return must continuously be produced. And if equal amounts of return are continuously produced, capital must remain continuously the same in substance. But if capital is actually to remain the same in substance, and so is able to yield continuously the same returns, this must find expression in a valuation which ascribes to capital a higher value, the earlier the point of time it comes into our possession. For the earlier the point of time, the earlier, and consequently the greater, the return that may be expected.
The business man who takes note of his own calculations, who tests his recollections and impressions, and asks himself why he calculates interest, and on what principle he graduates the value of his capital, will arrive substantially at the same conclusions as those to which we have just come. The value of goods is derived from their utility; the value of capital goods from their useful returns; interest represents a net increment to or fruit of capital: -- these are the axioms of practical life so much contradicted, even libelled, by theorists. They are axioms which every layman recognises, in his own way, as the motives by which he believes himself guided in his economic operations. A theory which should succeed in vindicating these axioms of ripened experience, which should give a distinct form to the vague impression, and a good and necessary content to opinions not quite conscious of their own raison d'etre, could have no better testimony to its correctness.
NOTES:
1. Compare Menger, p. 135.
