The German Group

The idea that in France afforded material for a very artificial and elaborate theory of interest has been made use of—of course on freer lines—by a prominent school of German economists, the Katheder Socialists, to use a term which has been acclimatised. The Labour theory of the German Katheder Socialists is, however, only loosely connected with the French theory in having the same fundamental idea. Both in origin and in manner of development it is entirely independent.

The origin of the German Labour theory may be found in a somewhat incidental remark that occurs in one of the writings of Rodbertus-Jagetzow. There he speaks of a conceivable state of society where there should be private property, but no rent-bearing private property; in which, therefore, all existing income would be income from labour in the shape of salary or wages. Such would be the state of things if the means of production, land and capital, were the common property of the whole society, private rights of property being still recognised over the income which each one would receive—in goods only—in proportion to his labour.

On this Rodbertus remarks in a note that, in economical respects, property in the means of production must be looked upon in an essentially different light from property in an income that accrues only in the shape of goods. As regards income-goods, all that is required is that the owner consume them economically. But property in land and capital is, besides, a kind of office that carries national economic functions with it,—functions which consist in directing the economical labour and the economical means of the nation in consonance with the national need, and therefore in exerting those functions which, in the ideal state of collective ownership, would be exerted through national officers. The most favourable view then that one can take of rent from this standpoint—land-rent and capital rent alike—is that it represents the salaries of such officers; that it represents a form of salary where the officer is strongly, even pecuniarily interested in the proper use of his functions.

Everything points to the belief that Rodbertus in no way intended in these words to put forward a formal theory of interest. But the idea latent in them was seized on and developed by some of the prominent Katheder Socialists.

It was first taken up by Schäffle. As early as the third edition of his older work, the Gesellschaftliche System, 1873, he embodied the idea, that interest is a remuneration for services rendered by the capitalist, in his formal definition of interest. "Profit," he says, "is to be looked upon as the remuneration that the undertaker may claim for a national economic function inasmuch as, independently of any national organisation, he binds together the productive powers economically by means of the speculative use of capital." This conception turns up repeatedly in different connections in the same book, and as a rule it occurs in those passages where interest is looked at from a broader point of view. Schäffle even defends it in one place as the only warrantable theory, and rejects in its favour the other interest theories in a body. But, singularly enough, when he deals with the nicer details of the doctrine, the height of the interest rate and so on, he does not avail himself of this fundamental idea, but makes use of the technical machinery of the Use theory; although it must be admitted that he brings the Use theory very near to the Labour theory by the subjective colouring he gives to the conception of Use.

In his later work, the Bau und Leben, the conception of interest as the compensation for a "functional performance" on the part of the capitalist comes out more distinctly. This conception makes it possible for Schäffle to justify interest at least in the present day, and in so far as we are not able to replace the costly services of private capital by a more suitable organisation. But even here the details of the phenomena of interest are not explained by means of this conception, and we still find reminiscences of the Use theory, although the conception of Use has now become objective. Thus Schäffle, as it were, struck the key-note, but only the key-note, of a Labour theory. he has not carried it out in detail like Courcelle-Seneuil.

Wagner goes a little farther, but still only a little farther. With him too the capitalists are "functionaries of the whole community for the accumulation and employment of that national fund which consists of the instruments of production," and profit is an income they draw for this function, or, at least, in this function (p. 594). But the work of the capitalist, as consisting in the "accumulation and employment of private capitals," in "disposing activities and saving activities," he characterises more distinctly than Schäffle as "labours" (iii. pp. 592, 630) which form a part of the total costs expended in the production of goods, and in so far form a "constitutive element of value" (p. 630). In what way this element contributes to the formation of value in goods; how, from its efficacy, are derived the proportion between interest and sums of capital, the height of interest, and so on, Wagner tells us as little as Schäffle. He too has only struck the keynote of the Labour theory, though perhaps a little more distinctly.

This being the case, I should not venture to say positively whether the Katheder Socialists by this line of thought intended to give a theoretical explanation of interest, or only a justification of interest from the social-political side. In favour of the first view, there is (1) the embodying of the labour motive in the formal definition of interest; (2) the circumstance that Wagner at least has declared himself so positively against all other interest theories that, if he has not adopted the Labour theory, he has left interest, theoretically, quite unexplained; (3) that Wagner expressly pronounces the "labour of the capitalist" to be a constituent of the costs of production, and a "constitutive element of value"—a phrase which it is difficult to interpret otherwise than as meaning that the theoretical cause of the phenomenon of "surplus value" is the compensation demanded as return for the labour expended by the capitalist.

In favour of the second view, that the Katheder Socialists have pointed to the "capitalists' services" only as a ground for justifying the present existence of interest without meaning thereby to explain its existence, there is (1) the absence of any theoretical detail; (2) the circumstance that Schäffle, at least so far as he gives any explanation of details, makes use of another theory of interest; and (3) the great proponderance which, in the writings of the Katheder Socialists, is generally laid on the political element as against the theoretical.

In the circumstances it may be best to put my criticism hypothetically.

If it is the case that the Katheder Socialists, in pointing to the capitalists' "labours," wished to justify the existence of interest only from the social-political side, what they have said is, in the highest degree, worthy of attention. To go farther into this side of the question, however, is beyond my present task.

If it is the case, however, that the Katheder Socialists, in pointing to the capitalists' "labours," intended to explain interest theoretically, I should have to pass the same judgment on them that I passed on the French version of the Labour theory, viz. that the explanation is entirely inadequate.

It has so often been the case in the historical development of dogma that justification of interest from the social-political side is confused with theoretical explanations of interest, that it may be worth while to bring out very clearly and once for all the difference between the two. For this purpose let me put a parallel case which may at the same time give me an opportunity of showing at a glance the inadequacy of the Labour theory.

With the first acquisition of land there is generally connected a certain exertion or labour of the acquirer. Either it is that he must first make the ground productive, or that he must take a certain amount of trouble to gain possession of it; and this latter, in certain circumstances, may not be trifling, as, e.g. when it is preceded by a prolonged search for a locality suitable for settlement. The land now bears to its acquirer a rent. Can the existence of rent be explained by the fact of the labour originally expended? With the exception of Carey, and some few writers who share his perverse views, no one has ventured to maintain this. No one can maintain it who is not entirely blind to the connection of things. It is perfectly clear that, when a fruitful carse bears rent, it is not because its occupation has at one time or other cost labour. It is perfectly clear that if a rocky hillside bears no rent it is not because it has been occupied without trouble. It is, again, beyond doubt that two equally fruitful and equally well-situated pieces of land bear equal rents, even if the one that is fruitful by nature is simply taken occupation of at a trifling expenditure of labour, while the other has to be made productive by a great expenditure of labour. Further, it is clear that, if 200 acres bear twice as much rent as 100 acres, it is not because their first occupation was twice as troublesome. And finally, every one can see that, if rent rises with increasing population, the rising rent has nothing in the world to do with the original expenditure of labour. In short, it is clear that the emergence and the amount of rent do not in the least correspond with the emergence and amount of the labour originally expended in the occupation. It is impossible, then, that the principle which will explain the phenomenon of rent can be found in the original expenditure of labour.

Essentially different, however, is the question whether the existence of rent cannot be justified by this expenditure of labour. In this case one may quite well take up the position that he who makes a piece of ground productive, or even does no more than occupy it as the first pioneer of civilisation, has merited a wage as lasting as the advantage that thereby accrues to human society; that it is just and reasonable that he who has put a piece of ground under cultivation for all time should for all time receive a part of its productiveness in the shape of rent. I shall not maintain that this way of looking at the institution of private property in land, and of private land-rents based on that institution, must be conclusive in all circumstances, but it certainly may be so in some circumstances. It is, e.g. very probable indeed that a colonial government, anxious to expedite the settling of its territory, does wisely when it offers, as premium for the labour of cultivation and of first occupation, the ownership of lands brought into cultivation, and with that the right to a permanent rent. In this way the consideration of the labour put forth by the first occupant may furnish quite a plausible justification, and a conclusive social-political motive for the introduction and retention of rent, while none the less it is an entirely insufficient explanation of it.

It is exactly the same with the relation in which the capitalists' "saving and disposing activities" stand to interest. In so far as, in those activities, we see the most effectual means to the accumulation and proper employment of a sufficient national capital, and in so far as we could not expect that these activities would be forthcoming from private persons in sufficient amount, if such persons were not led to expect permanent advantages, these services may furnish a very substantial justification and a conclusive legislative reason for the introduction and maintenance of interest. But it is an entirely different question whether the existence of interest can also be theoretically explained by pointing to that "labour." If it can be so explained, then there must be shown some normal relation between the alleged result, the interest of capital, and the asserted cause, the expenditure of labour on the part of the capitalist. But in the actual world we should look for any such relation in vain. A million bears £50,000 of interest, whether the saving and employment of the million has cost its owner much, little, or no trouble. A million bears ten thousand times as much interest as a hundred, even if there should be infinitely more anxiety and vexation in the saving of the hundred than in the saving of the million. The borrower who guards another man's capital and employs it, notwithstanding this "expenditure of labour," receives no interest; the owner receives it although his labour be nil. Schäffle himself once was fain to confess: "A distribution of wealth according to amount and desert of work, obtains neither among the capitalists as compared with each other, nor among the workers as compared with the capitalists. The distribution is neither guided by any such principles nor yet does it harmonise with them accidentally."

But if experience shows that interest stands outside of any relation to the labour performed by the capitalist, how in reason can the principle of its explanation be found there? I believe the truth is too plainly told in the facts to need any long demonstration. Just as surely as interest bears no proportion to the labour put forth by the capitalist, does it stand in exact proportion to the fact of possession and to the amount of possession. Interest on capital, to repeat my former words, is not an income from labour, but an income from ownership.

Thus the Labour theory of interest in all its varieties is seen to be incapable of giving a theoretical explanation that will stand examination. No unbiassed person indeed could expect any other result. No one but a person who takes particular delight in far-fetched explanations could for a moment doubt that the economic power of capital has some other ground behind it than a "capacity for labour" on the part of the capitalist. It is impossible to doubt that interest, not in name only but in reality, is something different from a wage of labour.

That economists should fall into various kinds of Labour theories can only be explained by the custom prevalent ever since Adam Smith and Ricardo of tracing all value to labour. To enable them to force interest also into the unity of this theory, and ascribe to it the origin which they supposed to be the only legitimate one, they did not hesitate at the most far-fetched and artificial explanations.