History of Economic Analysis part 67 doc

ing as reflected in his profit-and-loss account (income statement): his profit is ‘what is left’—the item that balances his account. Since, on the rentless margin of production, the whole of the net product, measured in ‘labor embodied,’ is divided between labor and capital, both shares also measured in ‘labor embodied,’ 19 and since labor’s share is explained separately, we easily get the two propositions which are, when this point has been reached, really not more than trivial. 20 The one is that ‘profits depend upon wages’—what else could they depend upon in this schema? The other is that, under the influence of increase in population and of the law of decreasing returns on land, more and more labor has to be embodied in each additional unit of food and that the value of labor’s share must rise—though the per capita amount of wage goods need not rise or may even decrease somewhat—leaving less and less value for capital. This and nothing else, as West and after him Ricardo laboriously explained, accounts for the phenomenon that we are supposed to observe in the guise of the falling rate of interest. But there was no need for elaboration. For according to this wonderful theory, it is logically 19 Observe how neatly this fits the Marxist schema: all that we need to obtain the latter is to measure, in addition to labor’s share, also labor itself (the labor power, that is) in ‘labor embodied.’ There is in fact no incompatibility between what we call Ricardo’s first and second theories of interest: in both, the amount and rate of profit are determined by (the ‘real’ value of) wages. This follows from the set-up discussed above, after elimination of total output and of rent. The notion of exploitation (no matter whether we call it so or not) simply adds a particular interpretation. But this seems no longer to be so if we attribute to Ricardo an abstinence theory (the same would hold for a productivity theory, which we do not attribute to him, however). In order not to have to return to this point, which is not without theoretical interest, I shall settle the matter in this footnote. We have then ‘profit’ determined by ‘wages’ (in general, uniquely). If thereupon we declare, as Ricardo did, that the same profits are a ‘just compensation’ (i.e., obviously, a price) of waiting, his system seems to become overdetermined: a quantity that is determined already is being subject to an additional condition. This, however, is so only in this system and need not be so in a wider system that may be behind the former. The reader should always be careful to scrutinize arguments from overdeterminateness of a system (which are today so popular) before he accepts them. Suppose ‘wages’ have determined ‘profit’ at a certain figure. Further suppose that this figure does not ‘justly compensate’ the ‘capitalists’ for their waiting. If this state of things is not expected to mend, the ‘capitalists’ will reduce their investment (within that schema, they have no opportunity of doing anything else). Capital or at least variable capital, the wage fund, will accordingly be reduced. And, through a series of rearrangements throughout the system that play ‘at one remove’ or ‘behind the scenes’—I leave it to the reader to carry this out—we arrive eventually at a situation in which wages still ‘determine’ profit but at a level that will satisfy the ‘capitalist.’ From this, the reader may also learn an important lesson as regards the meaning of the phrase ‘determined by’—a lesson which it is indispensable to learn if he is ever to understand economic theory and its tricks and some of its critics and their tricks. 20 And an excellent example they are of that Art of Triviality that, intimately connected with the Ricardian Vice, leads the victim, step by step, into a situation where he has got either to surrender or allow himself to be laughed at for denying what, by the time that situation is reached, is really a triviality. History of economic analysis 622 impossible that the rate of interest (excepting short-run ‘market’ fluctuations) should ever fall for any other reason. In fact, Ricardo (ch. 21) asserted that unless wages rise (in his sense) no amount of accumulation can possibly reduce the rate of profit; and he not only took to task A.Smith for explaining the falling rate of profit by accumulation but also boldly charged J.B.Say with having forgotten his own Law of Markets when he stated that ‘the more disposable capitals are abundant’ in relation to the extent of investment opportunity, the more will the rate of interest fall. 21 Two things are clear: first that, in the sense meant and within Say’s conceptual arrangement, Say’s proposition is correct, also that it does not conflict in the least with his Law of Markets; but second that, in the sense meant and within Ricardo’s conceptual arrangement, Ricardo’s proposition is not wrong either. J.S.Mill’s position is nothing short of pathetic to behold. He had a wide understanding of all the phenomena relevant to interest. In particular, he understood the theoretical problems of monetary interest and of the capitalization of returns more deeply than any other theorist of his time: in Chapter 23 of Book III (Principles) he anticipated some of the developments in this field that were forty or fifty years ahead. In addition, he had learned from Say, Rae, and Senior. He was fairly in possession of a value theory that was greatly superior to Ricardo’s. Thus he was, as he proved himself to be in Chapter 4 of Book IV, in a position to build up an analysis that would have fitted all known facts. But, God knows why, he had to uphold Ricardian doctrine. And so, from Chapter 15 of Book II on, he dealt with these matters in an unnatural and cramped manner so as to force them in a surface conformity with Ricardian doctrine. It would be extremely interesting to analyze this and, by so doing, to arrive at a fuller understanding of how economic analysis moves along, over self-built barriers. But I am afraid that, even as it is, readers will not share my regret at my inability to do so in the available space. 22 21 On A.Smith’s argument, see below, subsec. e. He went exactly as far in stating the antagonistic tendency of wages and rate of profit as facts and common sense (but not the Ricardian conceptualization) will warrant: accumulation, so far as it means additional demand for labor (and services of land), will ceteris paribus depress the rate of interest and raise wages (and rents). But Ricardo, entirely neglecting the inapplicability of his conceptual apparatus to this mechanism, would not hear of it. 22 Nevertheless, I shall in this footnote give an example of the methods by which conformity was in part secured and offer a comment that applies to many theories. some of today or yesterday included. The example: even if rent be excluded, the capitalists’ advances, for an adherent of the abstinence theory like Mill, cannot possibly consist of wages alone; yet this is precisely what Mill averred in 6 (Book II, ch. 15). How was this possible? Nothing simpler: ‘profits’ too are being advanced, of course, but these advances are no advances but a sort of payment on account of the profits that are expected to be earned. The comment: under appropriate assumptions, in particular if frictions, rigidities, and sequences be neglected, all economic quantities, and especially the usual social aggregates, hang together in a definite way; and any process of change that runs through them will affect them all. No proposition to the effect that one of them has General economics 623 (d) The Productivity Theories of Interest. For the votaries of the triad schema and of the theory that incomes are essentially prices (times quantities) of productive services, the natural thing to do was to interpret the yield of capital goods—which they, like all the writers of that period, identified with the rate of interest—as a price for the productive services of those capital goods. 23 This again may be done in several ways, though, unfortunately, all of them meet with this fatal objection: nothing is easier than to show that capital goods or their services, being both requisite and scarce, will have value and fetch prices; nor is it difficult to show that their ownership will often yield temporary net returns; but all the more difficult is it to show that—and, if so, why—these values and prices are normally higher than is necessary in order to enable their owners to replace them, in other words, why there should be a permanent net return attached to their ownership. This point was not fully brought home to the profession at large until the publication of Böhm-Bawerk’s history of interest theories in the first volume of his Kapital und Kapitalzins (1884). Until that time (perhaps in some cases even now) particular causal importance and that others depend upon it, however absurd it may be, is ever likely to be contradicted by facts. Thus, in Book IV, ch. 4 of the Principles, Mill discussed the tendency of profits to a minimum and the ‘counter-agencies’ such as capital export, technological improvement, and so on in a perfectly reasonable manner on the lines of Say. But home investment, foreign investment, and technological change all have their effects—though in different degree and direction—on the national wage bill. And so there was no difficulty in making that theory conform to the Ricardian schema. All Mill had to do was to single out the wage link in the chain and to allocate to it the role of ultimate cause: the misuse of the word ‘cause’ (or of equivalents) is really the only exception we have a logical right to take. Yet a theory that has no other logical fault than this may still be a rotten theory, which is good for nothing except for lending sham support to some pet tenet of its author. For instance, what if high rates of profit and high cost of labor go together, as they undoubtedly did in the United States? Mill worried about this, as we know from his letters to Cairnes that have been published by G.O’Brien (‘J.S.Mill and J.E.Cairnes,’ Economica, November 1943, pp. 279–82). Either the fact had to be challenged or else it had to be explained away. To be sure, this can always be done: for any theory can be made to fit any facts by means of appropriate additional assumptions. But it would have been much more simple and straightforward to adopt another analytic schema that recognizes the important fact that high rates of profit and high wages normally go together, without making a difficult problem of it, the more so because such a simple schema had been clearly outlined by A.Smith. 23 This applies to technological capital only, though the exponents of the productivity theory of interest did not in general restrict their capital concept correspondingly. In fact, as we know, there was a tendency to resolve the stock of technological capital goods into the subsistence fund. But this spells a move away from what we call pure productivity theories, i.e. theories that invoke nothing but the productive service of plant and equipment. Since the total non-wage capital, which according to these theories is the source of interest, is Marx’s constant capital that does not generate any surplus at all, we may consider the pure productivity theories as the antipodes of the exploitation theories. History of economic analysis 624 people thought (or think) that the easy proof of the proposition that capital goods must yield a return establishes ipso facto that they must yield an income to their owners. This confusion of two different things vitiates all the pure productivity theories of interest (as Böhm-Bawerk called them), both the primitive ones (Böhm-Bawerk’s naïve productivity theories) and the more elaborate ones (Böhm-Bawerk’s motivated productivity theories). The same confusion vitiates also what Böhm-Bawerk called the use theories, which do not essentially differ from the productivity theories. 24 Lauderdale, the first exponent of an explicit productivity theory, was also the first to set the example of explicit commission of the logical error pointed out above. But this error was veiled if not mended by his peculiar definition of the productive role of capital, which according to him consists not in ‘assisting’ but in ‘supplanting’ labor. The owner of capital receives what the supplanted labor would have received (Inquiry into the Nature and Origin of Public Wealth, 1804, p. 165). This is interesting as a pointer toward the relation of substitutability that exists between technological capital and labor, and as a first step in the analysis of the true relation between wages and interest But it would solve the problem of the net yield of capital goods, as Böhm-Bawerk was to observe, only if machines did not wear out: if they do, Lauderdale’s theory explains why they earn their depreciation quota, but it does not explain why they earn more—if indeed they do 25 — which is not so certain after all. This example suffices. We should not get more light by discussing, for example, Malthus’ version, which issues into the statement that ‘profits’ are ‘a fair remuneration for that part of the production contributed by the capitalist’ (Principles, 1st ed., p. 81). The reader finds in Böhm-Bawerk’s pages a list of writers who adhered to the productivity theory of interest throughout 24 The self-explanatory term Use Theory is not without suggestiveness. The return on durable goods, monetary or imputed, has certainly something to do with the prevailing rate of interest, and it is, in some respects, an improvement if this notion be extended to durable consumers’ goods. But ‘use’ evidently reduces to ‘service.’ The use theory is usually associated with the name of Hermann (1832) and continued to enjoy for a long time considerable popularity in Germany, Knies and Menger were among its adherents. 25 Longfield and von Thünen had indeed the great merit of introducing marginal analysis into the productivity theory of interest and of carrying on the investigation into the relations between interest and wages. But on the fundamental point, they are in no better case than other productivity theorists. Longfield, however, improved his situation by calling to his aid the proposition that capital formation requires saving, hence the willingness of savers to ‘sacrifice the present to the future’—that is, abstinence. But von Thünen, who was immeasurably superior to him in technique, did not get beyond the formula that interest is determined by the use (or productive effect) of the ‘last element of capital applied.’ This must not, of course, be understood in the West Ricardo sense. It must be understood in the sense in which, in our own day, Professor D.H.Robertson seems to wish to uphold it (see his article in the Economic Journal, September 1937, one of three rejoinders to an article by Keynes entitled ‘Alternative Theories of the Rate of Interest’). General economics 625 the nineteenth century. They were much more numerous on the Continent than in England. Since they made no serious effort to establish the existence of a permanent positive yield of physical capital goods, they a fortiori never asked the question whether this yield was interest. Another type of interest theory will be mentioned here, though our right to range it under the heading of productivity theories may perhaps seem doubtful. It is associated with the names of James Mill and McCulloch and was, to some extent, their joint product 26 and may be rendered by the latter’s statement that ‘the profits of stock are only another name for the wages of accumulated labour’: capital goods themselves are accumulated or hoarded labor; the labor they embody simply goes on to earn wages; if wine, as deposited in the cellar, embodies a certain amount of labor, then, this labor or else ‘nature’ goes on working while this wine matures; payment for this additional work is interest. The obvious interpretation is that James Mill and McCulloch were grimly resolved to extend their master’s theory of value to the cases, which Ricardo himself recognized as being beyond the range of his labor-quantity law, in order to make the latter perfectly general—as Marx tried to do by means of another construction. Critic after critic has held that they achieved this generality by what was nothing but a verbal trick and a very silly one to boot. 27 Also, it may be urged against this theory of interest, that in addition to being a failure as an attempt to peg the labor-quantity theory of value, it is exposed to the same objection that is fatal to pure productivity theories: even if we grant that capital goods are hoarded labor and that the ‘capitalist’ reimburses himself for the wages of this hoarded labor from his receipts, the theory is, without an appeal to other circumstances, powerless to show why he should get something for that imaginary labor. But precisely this consideration, though it certainly prevents us from accepting this theory of permanent net yield, permits us to put a slightly more favorable construction on it, especially in the version of the unfortunate McCulloch. That is, it permits us to see, in his version, at least a clumsy and roundabout way of recognizing, from the standpoint of the labor-quantity theory of value, the requisiteness of physical capital. His verbal trick, thus interpreted, amounts to using ‘labor’ as a term for what is more properly called ‘productive service’ and wages as a term for what is more properly called price of productive service. Or, to put it differently, his trick amounts to recognizing that hoarded labor is a peculiar kind of labor that may render services that are also of a peculiar kind as compared with the services of ‘live’ or ‘liquid’ labor. This is why—certainly not in the intention to defend it—I have subsumed this theory with the pure productivity theories: it is the pure productivity theory of the labor-quantity men. 26 We must confine ourselves to the essential point. But there are several things of interest in the details that we have no choice but to neglect. Among them is the role played by Torrens (Essay on the Production of Wealth, 1821) in the discussion that issued in the theory to be mentioned. Torrens held what we shall later describe as a mark-up theory of interest, according to which ‘profits’ do not enter into what he called the natural price of commodities. This natural price he equated to costs. Profits enter only into a market price that therefore means something quite different from A.Smith’s and Ricardo’s market price. In the first edition of his Elements (1821), James Mill argued mainly against this, and betrayed hardly any sign of wishing to adopt the theory, which he did adopt in the second edition (1824) after McCulloch’s Encyclopaedia Britannica article History of economic analysis 626 (Supplement, 1823) had been published. This article contains the statement quoted in the text that he elaborated in his Principles (1825). 27 Many critics, including Cannan (op. cit. p. 206), charged in addition that the trick was perpetrated in the service of apologetics. What a lovely justification of ‘profits’—to call them wages! Ideology no doubt entered into McCulloch’s argument as much as it did into Marx’s; and McCulloch may have wished to defend profits as much as Marx may have wished to attack them. But this is beside the point. The pure productivity theories have an easy explanation to offer for the secular fall of the rate of interest. They need only postulate that technological capital increases more rapidly than does the population available for industrial employment, and a fall of its yield per unit—not necessarily its relative, let alone, absolute share—would in general follow ceteris paribus. Since these cetera include a given technological horizon (production function), the reader may think that this explanation is not much good. Certainly it is not. Yet there is an advantage in this: whenever correctly formulated, 28 this explanation should have brought out automatically the most important qualifications that are inherent in any proposition about the secular behavior of the rate of pure interest and, in doing so, should have raised doubt about the validity of the ‘law’ of secular fall. A.Smith had no productivity theory of ‘profit.’ But all the same he offered an explanation of what he, like everybody else, took to be the indubitable tendency of interest to fall that most naturally follows from a productivity theory, namely, that the rate of profits tends to fall as increasing capitals enter into competition with one another. From the standpoint of West and Ricardo, this was bound to appear as a logical error, for the relative values from which they derived the rate of interest could not possibly be affected by an increase per se of the quantities of goods that form capital. 29 28 It can be formulated in different ways. Longfield, e.g., made ‘profits’ fall because the most profitable investment opportunities are operated first so that, as time goes on, only less and less profitable ones remain available. This meets with the objection that investment opportunity is incessantly widened by technological progress and that there is no reason why opportunities that turn up later should be less profitable than those that turned up before (see last but one sentence in the text). Longfield’s formulation is simply a consequence of his marginal-productivity theory of interest: the rate of profit, which ‘is equal to the assistance which is given to labour by that portion of capital which is employed with the least efficiency, which I shall call the last portion of capital brought into operation’ (Lectures on Political Economy, p. 194), will in general decrease when capital increases more than does labor, but this decrease must be distinguished from the secular decrease to be explained, of which the former is only a component. 29 Sir Edward West’s ingenious argument to that effect merits perusal. It affords an excellent instance of the way in which a theoretical structure, once accepted, may hide from the analyst the most obvious truths. This argument is mainly responsible for Ricardo’s view that no increase in capital, unless accompanied by an increase in (the General economics 627 (e) The Abstinence Theory of Interest. So long as physical capital is recognized as a requisite of production or even of exploitation only, it must be a service, within the meaning this term carries in economic analysis, to provide it, though, if we do accept the exploitation theory, this service is rendered only to the exploiter and not to society at large. Instead of emphasizing the productive or exploitative service of capital itself, we may therefore just as well emphasize the service of providing it. And so long as we keep to the Smithian theory that capital goods are the result of saving—as J.S.Mill put it—we may further say that any net yield of these capital goods is in the nature of a payment for the service rendered by saving either to the producing organism or to the exploiter alone. If we do say this, we are adopting the Scrope-Senior Abstinence Theory of Interest. I have introduced the subject in this way to bring into relief the following historically important facts. First, it will be seen that there is no essential difference, let alone incompatibility, between the productivity and the abstinence theories. Senior, witness his Third Postulate (see above, subsec. 5c) was evidently aware of this. But he did not clearly explain—this was to be done later by A.Marshall and T.N.Carver—precisely what it is that the abstinence theory adds to the productivity theory and what its relation is to the latter. This something is the brake that will prevent the process of creating additional capital goods right up to the limit at which their net yield would fall to zero. 30 But because he failed to make this sufficiently clear, both adherents (such as J.S. Mill, who was content with the formula that interest is the price of saving) and opponents (Böhm-Bawerk in particular) consider it in the light of an explanation of the interest phenomenon that is alternative to the productivity explanation and has to stand on the element of sacrifice alone, which is or may be associated with saving. Second, it will be seen that attacks upon the abstinence theory should not be directed against its logic. For instance, Böhm-Bawerk’s attack was based upon a charge of double counting. The saver who lends chooses between the fund he is to give away 31 and the stream of returns he is to receive. There is no room for counting in addition any sacrifice he may be making. Even Ricardian value of) wages, can ever decrease the rate of profit or cause any hitches in the economic process. 30 As perhaps some readers know, I am not an exponent of the abstinence theory myself. I am merely trying to expound its rationale, as it appears from the standpoint of abstinence theorists, in a manner which I hope will make the reader understand its emergence as well as the fact that it proved so hardy a plant. 31 Even if lent for short periods only and periodically reinvested, the fund is normally withdrawn from the saver’s consumption for good. There is normally no question of putting off the enjoyment of the fund: normally this enjoyment is surrendered defini tively in consideration of the quite different enjoyments expected from the flow of the interest payments. This is why the term Abstinence should be retained and why the term Waiting should not, indeed, be discarded but reserved for a different phenomenon or, at least, for a different aspect of the same phenomenon, which it is worth while to distinguish from the one denoted by abstinence as has been explained above. History of economic analysis 628 granting that there would be something in this argument if the phrase ‘compensation for sacrifice’ exhausted the contents of the abstinence theory, 32 this would not imply that this theory is inconsistent when properly developed and put into its proper setting. There is no paradox at all in holding that a theory is logically unimpeachable and at the same time that it is wrong or at least inadequate. For a cause that may be invoked without logical error for the purpose of explaining a phenomenon need not be the one that actually produces this phenomenon. Third, in addition to its sound logic, it was its common-sense appeal which recommended the abstinence theory to a long line of authorities, mainly English, headed by J.S.Mill. He handed to Marshall ready-made the doctrine of the two factors of ‘real cost’—the disutility (irksomeness) experienced by the laborer and abstinence experienced by the saver. 33 But we have little choice but to attribute a less explicit form of the same doctrine to both A.Smith and Ricardo. However ready the former was to offer pointers toward an exploitation theory, parsimony is what remains if we look in the Wealth of Nations for an attempt at a real explanation of pure interest. And however lightly the latter took the problem, the observation that turnover periods of different lengths cannot coexist unless there is a rate of interest to equalize the yields of capitals that turn over in periods of different length, points clearly toward recognition of an element of abstinence or rather of ‘waiting.’ This interpretation is, on the one hand, reinforced by Ricardo’s turn of phrase that interest is a ‘just compensation’ 34 for this waiting; but it is, on the other hand, weakened by Ricardo’s refusal to adopt the explanation of the falling rate of interest which would logically follow from it. Fourth, with competent economists the case for the abstinence theory was only strengthened by the weakness, both logical and factual, of the attacks upon it, which contrasted so strangely with their vehemence. Here was a piece of apologetics which sent socialists ranting. In their wrath they entirely neglected to work out serious arguments against it, which are indeed not lacking, but instead resorted to insipid gibes about the millionaires who are being paid for their abstemiousness (Lassalle) or about the capitalists who are being paid for abstaining from devouring manure (Marx). Even the ‘classics’ had enough inkling of marginal analysis to remain unimpressed by the former and it would hardly have occurred to them to take the trouble of rebutting the latter. 32 The chief difficulty in admitting this is that Jevons and Böhm-Bawerk in introducing their ‘psychological discount of future satisfactions’ went pretty far toward offering a substitute for abstinence. Böhm-Bawerk’s argument against the latter was, however, reinforced by Irving Fisher (Theory of Interest, 1930, ch. 20, 7, especially pp. 486–7, and appendix thereto), who made an effective case against considering waiting or abstinence as independent items of real cost. 33 I have difficulty in understanding how Cairnes could have claimed this merit for himself. But he did. 34 This phrase can, of course, be easily divested of the value judgment it conveys, and then reads simply: price of waiting. General economics 629 However, since Marx’s ineptitude was repeated not long ago by an eminent economist of our time, and also because many economists of that epoch have in fact used phrases that lend themselves to misinterpretation (see, e.g., Marx’s quotation from de Molinari and Courcelle-Seneuil in Das Kapital, vol. I, ch. 24, sec. 3), explanation may be indicated. The capitalist, as we have said above, exchanges a fund against a flow. The ‘abstinence’ for which, according to the theory under discussion, he is being paid enters into the accumulation of the fund. There is no additional payment for refraining from consuming it even in the cases in which this would be physically possible. But since he receives his compensation in the form of a flow of payments, it may seem as if he were being paid over and over again for abstaining from ‘devouring’ the capital goods that are emerging and being used up in the course of the employment of his capital. This impression is strengthened by the fact that the promised or, in the case of the employment of capital by its owner, the expected compensation must be actually delivered, in the normal case, if people are to enter into such bargains at all. If the lender or employing owner of the capital be disappointed in this expectation, he will indeed try to recover his loan or to go out of business—which then looks as if he had to be paid again and again in order to leave his capital where it is. But the sophomore who is unable to interpret these facts correctly or, let us add, to understand what these authors meant when they spoke of capitalists who ‘lend their instruments of production to laborers,’ must indeed be a very unpromising sophomore. This sort of thing in part accounts for, and to some extent excuses, the inability of many good economists to see the deeper things in Marx: they see at first sight so many pieces of nonsense that they cannot get themselves to believe that the man responsible for them could occasionally rise far above the level of his judges. But the student who is prepared to salute Marx at his best will inevitably ask himself: how is it possible for a man to fall to a level so low as that of Section 3—a man who was capable of rising to heights that are trodden by few and who, occasionally, proved himself an extremely competent analyst also in many minor matters? The needs of the agitator will not suffice by themselves to account for this, especially as most of the rhetoric could have been wound around a sounder support. Hence the suspicion suggests itself that this rhetoric covers something. And it is in fact not difficult to see what it is: it is the presence in the logic of his structure both of the element of abstinence in the strict sense and of the element of waiting. We have already seen that Marx’s theory belongs to the family we have called Advance Economics and this implies the recognition of a distinct element—no matter whether you call it a distinct service or a distinct crime—in the economic process which may be the vehicle of exploitation but in itself is not exploitation. We have also seen that the dangerous iceberg of abstinence may be seen in uncomfortable proximity to his argument on accumulation, which may just as well be called an argument on saving. 35 We now add that waiting is no 35 Compare the famous, if slightly vulgar, passage that also occurs in the unfortunate sec. 3 of ch. 24: ‘Accumulate, accumulate! That is Moses and the prophets…save, History of economic analysis 630 more absent from Marx’s structure than is abstinence in the strict sense. This may be shown in the following way. Marx’s constant capital merely transmits its value to the products without adding anything beyond its own value. But, being itself the product of exploited labor, it embodies not only the value of the wage goods consumed by the labor that produced it but in addition surplus value at the prevailing rate. Now, there should be no difficulty in adding this surplus value that is embodied in constant capital to the surplus value that results from the employment of the labor in producing the final product with the help of constant capital. If this could be done, there would be no reason why actual prices should not be proportional to the total labor embodied in them, that is, the labor embodied in the constant capital plus the labor added until the final product emerges, and there would be no problem of turning values into prices. Nevertheless, Marx did not do this but preferred to struggle through hundreds of pages with this very problem. Why? Obviously because he thought that time distance was not a matter of indifference. But this amounts to recognizing—though not to admitting—that waiting is after all an element of Marx’s structure (value theory), which is what we wished to show. The abstinence theory of interest is in a particularly favorable position for dealing with any secular decline of the rate of interest. If we look upon abstinence as one of several requisites of production, we have no difficulty at all in stating the conditions under which its relative increase will produce that phenomenon. Tools that were unknown to the period under survey are necessary to do this satisfactorily. But the main propositions could have been derived, semi-intuitively as it were, even on the level of that period’s technique. It is but an additional advantage that the historical interpretation and, especially, any prediction of a falling interest rate would follow from this analysis only conditionally and not absolutely. Of course, the same conditions that will cause a fall in the relative price of abstinence will (in general) cause a rise in the relative price of labor. Thus, there is no paradox in saying that J.S.Mill should in good logic have adopted this explanation of the ‘tendency of profit to a minimum’ or even that he actually did adopt it (Book IV, ch. 3, 2) but that he easily reconciled it with his lingering Ricardianism, though the ‘effective desire of accumulation’ which he analyzed so carefully has much more title to being considered as a ‘cause’ than has the rise in wages. (f) The Wage-Fund Doctrine, Precursor of Modern Aggregative Analysis. Our report on the wage analysis of the period is presented under this heading because everything else that pertains to the subject has been noticed already on various turns of our way. 36 In particular, we know that A.Smith—under the influence of natural-law philosophy—gave a lead toward a residual theory save, i.e., reconvert the greatest possible portion of surplus-value…into capital!’ We need not trouble either Moses or the prophets in order to see that capitalists ‘abstain’ with Marx quite as much as they do with Senior. 36 Among other things, I have adverted to the misunderstandings that were caused by the special meanings which the phrases ‘rising’ and ‘falling’ wages carry within Ricardo’s theory of value. General economics 631 . productivity theories as the antipodes of the exploitation theories. History of economic analysis 624 people thought (or think) that the easy proof of the proposition that capital goods. theories of interest: in both, the amount and rate of profit are determined by (the ‘real’ value of) wages. This follows from the set-up discussed above, after elimination of total output and of. secular behavior of the rate of pure interest and, in doing so, should have raised doubt about the validity of the ‘law’ of secular fall. A.Smith had no productivity theory of ‘profit.’ But all