History of Economic Analysis part 66 pdf

by Marx, as a special case that belonged in a separate compartment and was never organically assimilated by the body of theory. And then and only then—that is, by virtue of a hypothesis forced upon the ‘classics’ by the primitivity of their technique—it does become true that ‘demand for labor,’ meaning demand for ‘productive’ labor as distinguished from labor paid out of revenue, or the means destined for the maintenance of such labor, given a certain level of social productivity, can increase and decrease only through saving and dissaving, 45 which in fact become synonymous with ‘destining’ more or less means for this purpose. Or, to put it differently, the wage fund is a fund or aggregate sui generis because its size and variations are determined by a proximate cause sui generis, namely, past and present savings; everything else acts upon it only through the rate of saving. Of course, the ‘classics’ would not have denied that the rate of savings itself and therefore total wage payments are determined by many factors, some of which are in turn reacted upon by the rate of savings. In addition, they would not have denied that the kinds and quantities of wage goods the workmen actually get depend upon many other circumstances that are not uniquely determined by the rate of savings. But they would have replied that those factors, such as the rate of profit, act upon the wage fund only at one remove, so that their doctrine was formally still valid; and that the circumstances that do directly affect what goods the workmen get, such as the level of social productivity, were simply taken as given. The reader will observe, however, that this means little more than teasing the opponent. It is, of course, always possible to say: ‘given A, B, C…, then Y depends upon X’—the practice revived by Keynesian economics and dubbed ‘implicit reasoning’ by Professor Leontief. Simplification may amount to caricature. Caricature may be ideologically biased, though there is no reason to suspect this in Mill’s case. Mill’s third proposition need not detain us. It is to the effect that saving does not decrease consumption. Here again Mill upholds the Turgot-Smith tradition; in fact he does so with increased emphasis: the saver saves and hands over what he would have consumed or its equivalent to some productive worker so that what is saved is spent on consumers’ goods ‘quite as rapidly’ [my italics; Smith went slightly less far. J.A.S.] as what is not saved. 46 But Mill’s ‘fourth fundamental theorem respecting Capital’ does call for comment. It runs: ‘Demand for commodities is not demand for labour’ ( 9). Let us first discard a surface meaning that might be attributed to this proposition. Of course, the derived demand for labor that may be said to be implied in the demand for a commodity is never demand for labor alone, whereas the demand for personal services is. But this is not what Mill meant. What he did mean is enshrined in a confused and embarrassed discussion that has puzzled 45 I do not again repeat the other assumptions that have to be made which have been indicated already. 46 It cannot be emphasized too often that unrealistic neglect of intermediate steps is all that can be charged against this theory. At worst, it may be wrong. But it does not involve any logical mistake as some Böhm-Bawerkians seem to have believed. Of course, not every act of saving needs to issue in a net increase of technological capital. History of economic analysis 612 followers not less than opponents. For brevity I shall simply state what I conceive to be the core of the matter. The industrial employer’s demand for labor no doubt derives from the expected demand of consumers for the commodities that are being produced. On a high level of abstraction, on which only fundamental meanings count, it is perfectly proper to emphasize this nexus before any other. This conforms not only to the view that was naturally taken by the theorists of the last decades of the nineteenth century—particularly by those who emphasized ‘imputation’—but also to the view of the economists of that period, such as Say, who taught the doctrine that, ultimately, production and distribution reduce to an exchange of services. There is no great harm, from this standpoint, in using such turns of phrase as that demand for commodities is demand for labor (and other productive services) or, as Hermann put it, that the true wage fund or source of wage payments is consumers’ income. But the reasoning should never have been used—as it has been—for an attack upon Mill’s position. For on a lower level of abstraction, the fact should be taken into account that the consumer’s payment for a commodity does not in general pay for the labor that entered into the latter’s production. At most, the consumer’s payment enables the manufacturer to replenish his capital, normally with an addition. For this actually to come about, a distinct decision must intervene in the process, namely, the manufacturer’s decision to save or at least not to dissave. It is this decision—and it should not be taken for granted—which may be said to ‘benefit’ labor at the next turn of the wheel and not simply the consumer’s decision to buy. So far, then, we have before us a piece of sequence analysis, that is, an analysis of successive steps in a process that is kept continuously running, at an increasing, decreasing, or constant rate, only by a sequence of appropriate decisions. There is something else, however. If we do assume that consumers’ savings are being turned into labor-employing capital promptly, it follows, as we know, that the labor interest would be further benefited, and demand for labor increased, if income receivers also saved, instead of buying consumers’ goods. For, barring the disturbances that result from the necessity of industry’s changing over from the production of goods consumed by capitalists and landlords to the production of wage goods, this would, on the one hand, increase the amount ‘destined’ for the maintenance of productive labor and, on the other hand, cause no deficiency of demand for products. We may, then, imagine the saving to take place by the income receiver’s handing over to productive workers goods instead of money: the goods will then be produced and find purchasers as before, and the working class would, in addition, receive part of the saver’s income goods. If instead of saving, the income receiver had merely shifted his consumer’s demand from commodities to personal services, this addition would last so long as he continues this practice. But if the income receiver saves, this addition will last until he decides to dissave to a corresponding amount. There is nothing ununderstandable or illogical in all this. The usefulness or realism of this model is, of course, another question, but it should not be forgotten that, even if we vote that the argument of this paragraph is inadmissible, the argument of the preceding paragraph still stands. General economics 613 6. THE DISTRIBUTIVE SHARES From Section 5, Chapter 5, we know that there was indeed a large group of writers who, partly anticipating the dominant tendency of the next period, conceived the problems of income formation as problems in the evaluation or pricing of productive services—thus unifying the phenomena of value, cost (production), and distribution. But we also know that this view, though to some extent sponsored by A.Smith and reasserted by J.S.Mill, was not generally accepted and that even those French, German, and Italian economists who did more or less accept it—and even Say himself or Ferrara—did not go through with the program that this view implied. For the rest, Professor Cannan 1 was right in stating that distribution remained a semi-independent department of economic analysis; and that what people meant by Theory of Distribution, especially in England, was a compound of separate theories of profits, rent, and wages, each of which was based on a distinct principle of its own. 2 We adopt the same schema for the following survey. (a) Profits. By this term, the ‘classics’ simply meant the sum total of the gains of the business class, the theoretical type of which, with the Ricardians, was the farmer. 3 The analytic work on these profits during the stretch of time that was bounded by the books of A.Smith and J.S.Mill did much to clarify issues and to lay the bases of later analysis, though it can hardly be described as either brilliant or profound. We shall look at it from two points of view, which we respectively denote as the entrepreneurial and the interest point of view. We have seen in the preceding chapter both that some progress was made in the analysis of the entrepreneur’s function in the capitalist process—progress chiefly due to Say—and that, for the time being, this progress did not go very far. One thing, however, did come of it: economic theory acquired at least a fourth agent, the agent that hires or ‘combines’ the others and this could have led—more than it actually did lead—to a clearer perception of the role of the ‘capitalist,’ who might have been ousted from his position in the center of capitalist industry and put into a more appropriate place among the 1 Theories of Production and Distribution, 3rd ed., p. 188. Cannan’s detailed discussion of the leading English writers’ analyses of distribution is again recommended, both for study on its own account and for comparison with the argument of this book. 2 Such statements are never quite true and must be taken cum grano salis. Nevertheless, in this statement, truth greatly prevails over error, so far as England is concerned. 3 This may seem surprising. But it is really natural enough since the farmer’s case displays the three divisions of national income and the ‘rentless margin’ better than does any other. Also it must be borne in mind that for West and Ricardo the farm held a key position, owing to the relation of marginal cost of food to wages and hence to profit. History of economic analysis 614 owners of factors that are being hired. 4 Though neither Ricardo nor Senior followed suit, we have in J.S.Mill’s Principles a fair presentation of the point of view that the profession at large actually reached in the period. His analysis of business incomes in particular became the standard, in all countries, for more than half a century to come. The businessman received, first, what Marshall was to call Wages of Management, the importance of which was underlined by von Mangoldt’s notion of Rent of Ability, the germ of which is already to be found in Mill. He further received a premium for risk- bearing; nobody that I know of took the trouble to investigate why this item should be necessarily positive. Cantillon’s ‘buying productive services at certain prices in order to produce a product whose price is not certain’ did not, however, come quite into its own until the publication of Professor Knight’s work, 5 that is, not within the period. Third, the businessman received interest on the owned part of the capital he employed. But it should be observed that, occasionally, both Ricardo and Marx recognized a fourth type of return, of an essentially temporary nature, that accrues to the businessman, namely, the return he derives for a time from the first introduction into the economic process of a novel improvement such as a new machine. 6 They thus discovered a special case of what is really the most typical of all entrepreneurial gains. Mill made nothing of the latter item. His analysis strongly suggests that, like everybody else and in spite of his emphasis upon the wages of management, he looked upon interest as the most important element in the total net receipts of the business class. Now, this interest was not a monetary phenomenon. So far as the ‘classics,’ within the precincts of fundamental analysis, spoke of monetary interest at all, they did not mean a return on money loans per se, as did the scholastic writers and as do some of us, but only a monetary expression for a return on physical capital that, moreover, was expressed in terms of money solely for the sake of convenience. 7 Actually, as we 4 I must, however, not be understood to mean that I consider this place as the ideally correct one. 5 F.H.Knight, Risk, Uncertainty and Profit (1921). But von Thünen was in full possession of the principle involved. 6 See, e.g., Ricardo’s Chapter 31 On Machinery (first page). Both he and Marx not only recognized the existence of this gain but made it an essential part of their analytic structure. With Marx it is particularly clear that it was indispensable for him because it motivated the process of mechanization which, as he saw, does not benefit the ‘capitalist’ class permanently. 7 I use this opportunity to clarify a point that has given rise to a criticism of ‘classic’ theory that is only in part justified. Many writers of that and even a later time spoke glibly of wages per hour, rent per acre, and profit per cent as if these were comparable magnitudes. It is quite true that, in very many cases, this practice indicates haziness of thinking, to say the least. But it is not always true. Ricardo in particular expressed his real (or absolute labor-quantity) values in terms of a money that also embodied a constant quantity of labor and was invariant in this Ricardian value. Capital goods embodying 100 labor days were therefore capable of yielding, say, ‘5 per cent’—since this only means that they were capable of yielding a net product embodying 5 labor days—without reference to any discounting process. That is to say, this phrase was really quite General economics 615 know, their capital was goods. The businessman’s profits were, in substance, ‘profits of stock,’ net returns on a stock of capital goods, all of them or some of them. And interest, being simply that part of a business’s net receipts which its owner-manager hands over to a lender whom he saves the trouble and risk of doing business, also remained a (pure) ‘profit of stock.’ This is so with all the economists of that period—Marx not less than Say—and with nearly all of the next period. The point of view is important. A great part of our picture of the capitalist process hinges upon it. Let us therefore make sure of its implications. In the first place, since pure interest, if we neglect the interest on consumers’ loans, was nothing but the bulk of business profits, the fundamental problem was the explanation of those business profits: there was no separate problem of interest at all. With the possible exception of Senior’s abstinence theory—to be discussed presently— all the theories of interest throughout the nineteenth century are based upon acceptance of this view, including Ricardo’s, Marx’s, and later on, Böhm-Bawerk’s. This was one of the results of the habit of identifying the roles of the industrialist and the capitalist, which subtly influenced the thought even of those who occasionally recognized the essential difference between them, and is the cornerstone of that period’s theory of distribution. In the second place, since business profit itself was conceived as being, essentially, a return on capital goods, it followed that interest was identical with (not determined by) the net yield of capital goods. The first to state this theory explicitly, so far as I know, was Nicholas Barbon. Sanctioned by A. Smith, it prevailed throughout the nineteenth century. Of course, it was particularly agreeable to the adherents of the triad schema— though, in a particular form, we also find it in Marx. Barbon had already attempted to explain interest by analogy with the rent of land. 8 Adherents of the triad schema would have had no difficulty in going a step farther and in extending the analogy to wages, thus rounding off their triad of factors by a triad of incomes. The first to show definitively that the yield of capital goods, whatever else it may be, is not interest was Irving Fisher. 9 (b) Marx’s Exploitation Theory of Interest. Having removed any danger of confusion, we shall henceforth use the term interest for (the bulk of) what Smith, Ricardo, Senior, and Marx called profit. And having put the problem analogous to the wages per hour or the rent per acre and no circular reasoning was involved in it: the 100 labor days were an ‘objective’ quantity like the land; and it is only because ‘interest per cent’ with us refers to a capital value of a different kind—namely, to a capital value that is derived from the returns—that critics objected to Ricardo’s language. 8 This line of thought, later on, bore interesting fruit in Marshall’s quasi-rent. But the latter concept really points in the opposite direction: its emergence was one of the earliest signs of dawning recognition of the fact that yield of capital goods per se is not interest and should be distinguished from it. 9 Rate of Interest (1907); see below, Part IV, chs. 5 and 6, where this argument will be taken up again. For the moment the pointer above must suffice. History of economic analysis 616 of interest in its proper setting within the analytic thought of that period, we can now make short work of the solutions offered and of the related ‘proofs’ of the secular tendency of the rate of interest to fall. The reader will realize, of course, that the doctrinal tendency we have traced to Barbon—that is, the tendency to identify interest with the net yield of capital goods— does not in itself furnish a solution of the problem of the nature of interest or a definite answer to the question what it is that interest is paid for. For that net yield itself needs explanation. But the economists of the period under survey were slow to realize this. Having lost contact with the thought of the scholastic doctors, they were at first inclined to take the solution of this problem for granted and to be content with the vaguest ideas about it. Thus, A.Smith may be credited with two different ‘theories’ of interest, and Ricardo, as we shall see, with three or even four. But it is more realistic to say that they had no definite theory at all. They simply did not worry about the matter. After all, one of the methods of dealing with a problem—and not always the worst one—is to ignore it. The first to recognize its existence—if we except Turgot—was Lauderdale; and the second was James Mill. The elements of a genuine theory of interest—true or false— were then contributed by Longfield, Rae, Scrope, and Thünen, none of whom made much of a hit at the time. The man who did was Senior. But before following up developments on the Barbon line, we shall deal with the Exploitation Theory. The essential thing to understand about the exploitation theory of interest is that it is a rationalization of the age-old slogan that expresses the feeling of manual laborers and philosophers about the upper strata’s living on the fruits of manual labor. The social psychology of this and the question when and why this became synonymous with exploiting manual labor cannot be analyzed here: it must be enough for us to realize the presence of this problem and to recall that this idea entered the Wealth of Nations through the philosophy of natural law. There it took the form of the proposition that rent and interest are deductions from a total produce that, in its entirety, should be considered as the produce of manual labor. In this sense, A.Smith gave a lead for the numerous writers who were to work out exploitation theories of one kind or another. More important for us, however, is the fact that turns of phrase, suggestive of the idea that the relation between industrial employers and their workmen necessarily involved 10 exploitation, occur quite frequently in the literature of that time even outside of its specifically laborist or socialist branch. These turns of phrase derived quite naturally from the view 10 It is essential to keep this notion strictly separate from the general observation or impression that labor very often got a raw deal that shocked moral feelings, or from the still more obvious observation that the masses lived in misery whereas other people rolled in wealth that shocked humanitarian sentiment. All this, of course, created an atmosphere favorable to the reception of exploitation theories but forms no part of these theories: for these it is essential that the wage contract implies exploitation; it is not enough that it is—often or always—associated with exploitation or, simply, with a low standard of living of the wage earner. General economics 617 of the function of the industrial employer as described by A.Smith. The industrial employer, being simply a capitalist who furnished the workers with tools, materials, and means of subsistence and for the rest did very little, received these ‘advances’ back with a profit that was evidently part of the result of the workers’ ‘industry.’ This highly unrealistic picture of the role of labor we find, for example, in Mrs. Jane Marcet’s Conversations on Political Economy (1816), and it is conveyed by Ricardo’s naïve sentence: ‘…the capitalist begins his operations by having food and necessaries in his possession of the value of £13,000…: at the end of the year’ the workmen ‘replace in his possession food and necessaries of the value of £15,000’ (ch. 31). Not more than this was necessary for the Ricardian socialists to take the hint; and not more than this is necessary for us to trace Marx’s exploitation theory—the particular form, that is, which Marx gave to the exploitation idea—to his study of Ricardo. 11 This is not to deny the possibility that he may also have derived inspiration from the Ricardian socialists, especially from W. Thompson. Besides, there were plenty of other forerunners, for example, Sismondi. But Ricardo’s suggestion, together with his theory of value, would have sufficed. Marx’s exploitation theory may be put like this. Labor (the ‘labor power’ of the workman, not his services) is in capitalist society a commodity. Therefore, its value 12 is equal to the number of labor hours which are embodied in it. How many labor hours are embodied in the laborer? Well, the ‘socially necessary’ amount of labor hours it takes to rear, train, feed, house him, and so on. Suppose that this labor quantity, referred to the labor days of his active span of life, figures out at four hours per day. But the ‘capitalist’ who bought his ‘labor power’—Marx did not go quite so far as to say that the ‘capitalist’ buys laborers as he could buy shares, though this is the implication—makes him work six hours a day. Four of these six being enough to replace the value of all the goods that went to the laborer, or the variable capital advanced to him (v), the two additional hours produce Surplus Value (s), the Mehrwert. For these two hours the ‘capitalist’ has not given any compensation. They constitute ‘unpaid labor.’ To the extent that the laborer works hours that are unpaid in this sense, he is exploited at the rate s/v. This rate of surplus value is not, of course, the rate of interest. The latter equals the ratio between surplus value and total (constant plus variable) capital, that is, If we suppose that s/v is equal for all sectors of the economy and all firms—that is to say, 11 This defines the sense in which an exploitation theory of interest may be attributed to Ricardo. Let me recall the three other interest theories that may be attributed to him, which have been mentioned already and will be mentioned again (subsec. c. below); the abstinence theory; the residual theory; and, possibly, even a productivity theory; V.Edelberg (‘The Ricardian Theory of Profits,’ Economica, 1933), makes Ricardo a productivity theorist, who would have had nothing to learn from Wicksell. Perhaps he is right. In a sense, Newton had nothing to learn from Einstein. But to say so would not make for a realistic history of mechanics. 12 Strictly we ought to say: its equilibrium value under perfect competition. History of economic analysis 618 that all workmen are equally exploited—and further suppose that the rate of interest, must also be equal for all concerns, we run up against the difficulty that has been mentioned already, namely, the necessity of redistributing the total surplus among firms in such a way as to make equal for all. But in order to avoid going over this ground again, we merely note here that this difficulty constitutes a possible objection to the Marxist type of exploitation theory. 13 For the rest we assume that this difficulty does not prevent us from accepting the ratio as the expression of the Marxist rate of interest when we interpret s, c, and v simply as national aggregates, the values of which are proportional to their ‘prices,’ though we know that this does not hold for the individual commodities. We may then interpret Marx’s exploitation theory as an application of his theory of value to labor: according to it, labor receives not less than its full value and consumers do not pay more for the products than their full value. 14 Therefore, it is exposed not only to all the general objections that may be raised against Marx’s labor-quantity theory of value but also to the special objection that may be raised to its application to ‘labor power.’ For so far as the labor-quantity theory of value is valid at all, it is valid only by virtue of rational cost calculation: only economically applied (socially necessary) labor quantities create value. But evidently human beings are not produced, according to the rules of capitalist rationality, with a view to cost-covering returns. The situation of the exploitation theory could be improved somewhat by inserting into it the Malthusian law in a very strict form or by some other contrivance that would keep wages on a level of the cost of bare subsistence. This was done by Lassalle (iron law of wages, loi d’airain, ehernes Lohngesetz). But Marx, wisely perhaps, refused to do this. Malthus’ law of population was anathema to him; moreover he recognized both cyclical increases of wage rates beyond the value of labor and a tendency, of longer span, for the degree of exploitation to fall through reduction in daily hours brought about by trade-union action, legislation, and so on. Thus he reduced his exploitation to the rank of an ‘absolute law’— an abstract tendency—that need 13 The nature of this objection will become clear when we consider Marx’s relation to the abstinence theory. 14 This feature constitutes a claim to superiority of Marxist exploitation as against all other attempts to rationalize this meaningless phrase. All the others (this does not apply to the meanings attached to that phrase in our own time by Professor Pigou and Mrs. Robinson) must rely on laborers’ being somehow cheated or robbed, either as participants in production or as consumers, and then they have a hard time trying to prove why this should be so always and necessarily. But there is no cheating or robbing involved in Marx’s theory. The exploitation there results, irrespective of anyone’s misbehavior, from the very logic of the capitalist law of value, and therefore is ingrained in the system much more irradicably than any other exploitation theory can show it to be. General economics 619 not prevail in real life. Another objection, however, is less serious than it seems. According to Marx, surplus value is a costless gain of the capitalist. Moreover it is not defined as an intramarginal gain, like Ricardian rent. It might be thought that such a gain would induce individual capitalists—whose individual contributions to the total output of their industries is too small to influence prices—to expand output until the surplus falls to zero. This conclusion is indeed inescapable so long as we keep to the schema of a stationary process; such a process could not be in equilibrium until the surplus is eliminated. But we may save the situation by taking account of the fact that Marx thought primarily of an evolutionary process in which the surplus, though it has a tendency to vanish at any given time, is being incessantly recreated. 15 Or else we might drop the assumption of perfect competition though the surplus we may salvage in this way will be quite different from Marx’s. Without going further into the matter, 16 we turn to Marx’s explanation of the Tendency of the Rate of Profit to Fall, in which both Marx himself and some of his followers took great pride. If we do grant, first, that there is such a tendency and, second, that Marx’s theory of surplus value is all right, then this pride was not unjustified. Few, if any, experiences of an analyst are more gratifying than is the discovery that a theory (say, gravitation) will explain a fact (say, the tides) which the author of the theory had not had in mind in constructing this theory. (c) Marx, West, and Ricardo on the Falling Rate of Profit. The first remark to be made applies not only to Marx, West, and Ricardo but to all the economists who busied themselves in finding an explanation for the secular fall in the rate of interest: it never occurred to any of them to ask whether there was such a secular fall. They simply took it for granted and, in doing so, displayed an almost unbelievable degree of scientific carelessness. For the only thing that is so obvious is that medieval princes promised their creditors 80 per cent and more, whereas in 1800 governments were thought to be paying a high rate if they paid about 5 per cent and in 1900 when they paid 3 per cent—and similarly, of course, businessmen. But this was due, obviously, to the very high premium of risk that attached to loans to princes who, mostly, did not even repay the capital; to the primitive organization of money markets; and to the anticipation of inflation. Where none of these factors was present—for example, in the Netherlands in the second half of the seventeenth century—interest was not obviously higher than it was under similar conditions two hundred years later. Since it was the rate of pure interest, the 15 An analogous argument from the incessant displacement of labor in the process of accumulation may serve, instead of the Malthusian law of population, to motivate a tendency in wages to seek the level indicated by the Marxist ‘value of labor.’ This, too, would not work in the process of simple reproduction, but it could be inserted on the consideration mentioned above. 16 Marx’s economic theory did not attract attention and come in for professional criticism before the next period, when a critical Marx literature developed. The most important performances, especially Böhm-Bawerk’s criticism, are mentioned by P.M. Sweezy, op. cit. History of economic analysis 620 fall of which was to be explained, and not the conditions that produced greater or smaller premia of risk or other costs of borrowing, those economists would have been better advised if they had bestowed some trouble on finding out what there really was to explain. Second, Marx’s explanation rested on two propositions. The one was that, in the course of economic development, the Marxist value of constant capital increases faster than does the Marxist value of variable capital because production becomes increasingly mechanized. The other was that only variable capital (wage capital) produces surplus value whereas constant capital, as we have said before, only transmits its own value 17 to the product. Accepting, for the sake of argument, both these propositions and further assuming that the rate of surplus value remains constant and that the Marxist value of capital goods does not fall, we have no difficulty in reaching the conclusion that must fall (Das Kapital, vol. III, ch. 13). Objections that were raised against this conclusion by Marxists either arose from failure to take account of all these restrictions or else from unwillingness to admit their realism. In fact, we have here another ‘absolute law’ and, if we look at all that these restrictions exclude, 18 we may well sympathize with those disciples of Marx who feel that, even from the standpoint of the Marxist theories of value and exploitation, no great confidence can be placed in this abstract tendency. But, within the general framework of Marx’s theoretical system and the additional assumptions indicated above, it is not logically wrong. Third, though emphasizing the abstractness of his law, Marx trusted it sufficiently to make it the ‘barrier,’ inherent in capitalist production, that will eventually prevent the capitalist process from going on beyond a certain limit—which is not indeed the whole of the Breakdown Theory but an important element of it. By way of contrast I shall now present the West-Ricardian explanation of the historical fall in the rate of interest that, like everyone else, they took to be an indisputable fact. It links up with what may be described as Ricardo’s second theory of interest. We have seen above that Ricardo’s theoretical set-up really makes ‘profit’ a residual and simply equates it to what remains to the farmer on rentless land when he has paid his laborers. The origin of this way of viewing ‘profit’ is obviously in the practical businessman’s mode of think- 17 It should not be forgotten, however, that the value of constant capital includes surplus value. 18 Marx spoke of ‘counteracting forces’ that ‘inhibit and annul’ the operation of his absolute law. The list of these could have been copied from J.S.Mill (counteracting circumstances, Book IV, ch. 4, 5), whose ‘tendency of profits to a minimum’ was in similar case. It should be observed, however, that the latter phrase permits an interpretation that brings the falling rate of profits more definitely within the range of the theorist than, in the nature of things, it is possible to bring any historical tendency: within a given setting (including a given technological horizon), it can in fact be proved that the rate of interest tends to the minimum—and the wage rate to the maximum—that is compatible with that setting and its given investment opportunities. General economics 621 . History of economic analysis 616 of interest in its proper setting within the analytic thought of that period, we can now make short work of the solutions offered and of the related ‘proofs’. The businessman’s profits were, in substance, ‘profits of stock,’ net returns on a stock of capital goods, all of them or some of them. And interest, being simply that part of a business’s net. Böhm-Bawerkians seem to have believed. Of course, not every act of saving needs to issue in a net increase of technological capital. History of economic analysis 612 followers not less than