Böhm-Bawerk, in his critical history of interest theories, dealt with Ricardo’s and Marx’s theories of ‘profit’ without raising the question whether the returns thus denoted were really the same thing as ‘interest.’ He would have answered this question much as A.Smith or J.S.Mill had answered it. Monetary interest remained for him simply the shadow of the interest that is earned by supplying physical goods—which really were what, though perhaps ‘in the form of money,’ the capitalist owned. This is all the more remarkable because Böhm-Bawerk’s own work was principally instrumental in dissolving this schema. To begin with, it is not recognized sufficiently that Böhm-Bawerk’s criticisms of existing explanations of interest awoke a new awareness of the problem involved in that view of the matter. It is true, more or less, that all the theories of interest survived that had been inherited from the preceding period. Even a theorist of Pareto’s rank felt no compunction in declaring that the fact that (physical) capital bears interest was not more of a problem than is the fact that the cherry tree bears cherries. 1 But the standing of some of the simple theories that used to satisfy a majority of economists rapidly declined. Few writers cared to go on holding that because one can produce more wheat with the help of a harrow than without it, a net return must result from using it: Böhm-Bawerk’s admonition that the physical productivity of capital is not enough to prove its value productivity took the wind out of the sails of the productivity theory of interest even though it was not immediately destroyed. 2 Similarly, Böhm-Bawerk showed successfully that, in themselves, ‘use theories’ of interest (Knies, Menger, Walras) were no good: there is no doubt that the services of durable goods, such as houses or machines, are priced and that their prices times their quantities constitute returns to the owners of these goods; but since these goods have to be insured and amortized, it does not follow, without appeal to some other element in the case, that these returns are net. Disregarding a number of other theories that received their coups de grâce at the hands of Böhm- Bawerk, we may say broadly that the only survivors that 1 Another opinion of Pareto’s deserves comment. He thought that to search for the ‘cause’ of interest was in itself a mistake. The interest rate, being one of the many elements of the general system of equilibrium, was, of course, simultaneously determined with all of them so that there was no point at all in looking for any particular element that ‘caused’ interest. In order to show the error involved in this view of the matter it is sufficient—as it was in the case of Marshall’s objection that is embodied in his simile of the three balls resting against each other in a bowl—to remember that the proposition, ‘interest is determined by all the conditions of the system of general equilibrium,’ fails to prove the existence of a positive rate of interest. Why the system so works as to produce a positive rate remains a distinct question that calls for a distinct answer. It calls for an explanatory principle just as does the position of the balls in Marshall’s bowl. And no such principle is supplied by the mere fact of the general interdependence that subsists between all economic magnitudes. Therefore, something might be said for Böhm-Bawerk’s distinction between the problem of the existence of interest and the problem of the factors that determine its rate, however ridiculous this distinction might seem to be at first sight. 2 [J.A.S. intended to write here a long note mentioning the names of Wieser, Clark, and Knight.] History of economic analysis 892 had any strength left were the Marxist exploitation theory, the abstinence theory, and, on a distinctly lower level, several forms of bargaining-power theories. Of newcomers we shall only notice the theories of Böhm-Bawerk and Irving Fisher. Substantially, Böhm-Bawerk’s criticism of Marx’s theory was successful. Nevertheless the latter survived in the circle of Marxist orthodoxy until it was silently discarded by later socialist theorists, who were not Marxists any longer. Having commented upon it already (ch. 5, sec. 8) we proceed at once to the abstinence theory. Here Böhm-Bawerk’s attack was not successful, not only in the sense that it failed to convince but also in the sense that it was unconvincing. 3 Marshall had no difficulty in formulating an explanation of interest that took account of abstinence 4 without being open to logical objection. In fact, he succeeded in reviving the productivity theory as well by linking it to the element of abstinence. If physical capital is to yield not only returns but also net returns, something must prevent it from being produced up to the point at which its earnings would no more than repay its cost. Abstinence qualifies—logically— for the role of this something. We may, with Senior, call it a cost so that employment of capital yields a return over the other cost elements. Or we may say that that abstinence acts as a brake to the production of capital goods so as to prevent it from reaching that point—which renders Carver’s version. 5 Böhm-Bawerk attacked both versions, as it seems to me, without success. 6 Most writers whose views on interest display more or less affinity to 3 Böhm-Bawerk tried to show that any appeal to abstinence involves ‘double counting.’ He might have held indeed that he who saves makes a choice between present and future enjoyments and that, if the latter be properly discounted for time distance, there is no room for an additional compensation for any abstention involved. But it should not be denied that there is room for it if the future returns upon the sum saved are not discounted. In fact, it may be held that emphasis upon the ‘sacrifice’ of saving was precisely the method by which abstinence theorists introduced the element of time preference, although Böhm-Bawerk refused to admit this. Actually, however, he found double counting in the practice of abstinence theorists of counting abstinence as cost along with the ‘labor’ involved in producing a capital good. This argument I have never been able to understand. These considerations do not salvage the abstinence theory nor is it intended that they should. But they absolve it from the charge of logical error and again bear witness to what we have called the logical strength of the abstinence theory. But a theory may be wrong for reasons other than logical error. 4 As we know, he preferred, without good reason as I think, the term ‘waiting’ that was suggested by S.M.McVane (‘Analysis of Cost of Production,’ Quarterly Journal of Economics, July 1887). 5 See Carver’s Distribution of Wealth (1904), and his earlier paper on ‘The Place of Abstinence in the Theory of Interest,’ Quarterly Journal of Economics, October 1893. 6 Again, this was because he tried to prove them wrong in logic. But this should not induce us to join those critics of Böhm-Bawerk who spoke of misplaced ingenuity, hairsplitting, metaphysics, irrelevant psychology, and what not. Surely if economic theory is to be taken seriously at all, every effort at clarification of this issue should be welcomed. We do not solve problems by tiring of them. General economics 893 Böhm-Bawerk’s—such as Jevons before him and Fetter after him—made no difficulty at all about abstinence, with the exception of Fisher. I have said that the bargaining-power theories moved on a lower level of theoretical analysis. In fact, no first-class theorist ever held one. There is a very good reason for this. Either the bargaining power that is to explain the surplus called interest consists in the possession of some requisite of production. In this case appeal to the bargaining power of the owners of this requisite is otiose, because the real explanation of the resulting net return has still to be sought in the role of this requisite in the economic process. Thus, neither Marx nor Böhm-Bawerk appealed to the bargaining power of the capitalist, though this element might easily be recognized in both their theories. Instead, both tried elaborately to show how the mechanisms of capitalist markets produced the surplus or premium, which the mere term ‘bargaining power’ does nothing to explain. Or else, the bargaining power is held to consist of something distinct from the possession of a requisite. It could consist, for example, in the power to levy taxes for the benefit of capitalists. But in this case, the existence of such a power and its adequacy to explain the phenomenon of interest would have to be proved, a task no theorist who knows his business would undertake. 7 We confine ourselves to a single example of a theory of this type, the mark-up theory of Lexis. Interest exists because businessmen are in a position to charge prices for whatever they sell that are higher than their costs. If by costs we mean expenses, this is of course so but does not prove the existence of a surplus over expenses plus compensations for the services of owned factors evaluated at equilibrium prices. In order to establish the existence of such a surplus, general enough to account for interest, it is no doubt possible to fall back upon imperfections of competition; but this would imply the thesis that there is no interest in perfect equilibrium and perfect competition which in turn would require adequate proof. 8 The outstanding performance of the period that dominated discussion and exerted formative influence even on many of its fiercest critics was Böhm-Bawerk’s. It has been emphasized already (see above, sec. 2c) that this performance centered in a highly simplified picture of the manner in which, given a certain supply of labor and of subsistence, interest and wage rates are simultaneously determined and in turn determine the organic composition of capital. 9 It has also been emphasized that this central schema is in part independ- 7 Thus, the political power of the farming interest in the United States certainly explains, among other things, the processing tax introduced for its benefit in the early days of the Roosevelt administration. This tax may be held to have increased the farmers’ ‘profits’ or ‘rents.’ But it evidently cannot be invoked as a fundamental explanation of either. The same applies to protective duties. 8 It is perhaps unnecessary to re-enter upon a discussion of theories of net returns (whether of interest or rent) that rest on nothing but a misuse of the concept of monopoly and see monopoly gain in every case of a scarce factor on the ground that such a factor is, in capitalist society, not equally accessible to all. 9 This Marxist concept is quite appropriate here. The word Capital, also, is used here in the Marxist sense. I think that this conveys Böhm-Bawerk’s idea better and History of economic analysis 894 ent of, and in part but imperfectly co-ordinated with, Böhm-Bawerk’s causal explanation of interest, a fact that we have ascribed to the unfinished state of his work. Now we are concerned with this causal explanation. It runs in terms of goods: Böhm-Bawerk strongly believed that money does not play any other role in this matter than that of a technical device that occasionally gets out of order. 10 The fundamental proposition is that interest arises from an exchange of present against future consumers’ goods and is essentially a premium (Agio), attaching to the former. Thus defined, the problem consists in indicating the reasons why the market where present consumers’ goods are exchanged for (claims to) future consumers’ goods so works as to produce normally such a premium or, in other words, why people are normally prepared to promise, for the delivery of present goods, delivery of greater quantities of goods of the same kind and quality at some future time. 11 As the reader presumably knows, Böhm-Bawerk adduced three such reasons. First, a man may be prepared to return to a lender more than he received, because he expects to be better off in the future. 12 Second, a man may be prepared to promise to repay more than he receives because most people do not experience future enjoyments with the more briefly than would his own terminology. In addition, it defines both the extent to which there is similarity between the two schemata and the extent to which Böhm-Bawerk surpassed the Marxist schema by treating a problem not explicitly treated by Marx. It should be observed however, first, that a system of relations much more complicated than Böhm-Bawerk’s would be necessary in order to do justice to this problem; and, second, that if we introduce durable plant and equipment explicitly, we realize immediately that Böhm-Bawerk’s schema is essentially a long-run one for, in the short-run, plant and equipment are simply given, as are natural agents, and can be assigned a marginal productivity, not in the Jevons-Böhm-Bawerk sense but in the ordinary sense. 10 More precisely, he held a crude quantity theory: the whole of the money (taking account of velocity) buys the whole of the goods. There is a striking parallelism between this proposition and another: the whole of the subsistence fund buys the whole of the labor supply. Both propositions are reminiscent of ‘classic’ theories (quantity theory and wage-fund theory), not at their best. But the necessary corrections can be inserted without great difficulty. 11 To repeat, whatever else may be objected to in this way of positing the interest problem, there is no point in objecting to it because it involves psychology. If we throw out Böhm-Bawerk’s argument on this ground, we must consistently also throw out Lord Keynes’s and even Marx’s (see, e.g., Marx’s argument on the motives of accumulation). 12 There is much more to this reason than critics are in the habit of conceding. It applies not only to the case of the student who has a well-disposed aunt in delicate health: in a progressive society a majority of people may be correctly expecting larger income streams in the future; whereas, for a retrograde society, Böhm-Bawerk is substantially right in assuming that the correct anticipations of dwindling income streams will not make that premium negative for any normally conditioned person so that the positive premia, which some may still be prepared to pay, will take effect even in this case. General economics 895 same pungent sense of reality as they experience present ones. 13 Individuals, classes, and nations differ greatly in this respect, and the differences in the intensity with which they realize the future is one of the most important of the factors that determine their fate, a truth that cannot be too strongly impressed upon modern economists. But Böhm-Bawerk, like Bentham and Jevons before him, held that some undervaluation of the future in this sense is a general characteristic of normal man. Observation of actual behavior, especially in the public sector, goes far toward supporting this contention. 14 Third, a man may be prepared to pay a premium for present goods because command of present goods may enable him to embark upon physically more productive processes of production that require a ‘longer’ period of production in Böhm-Bawerk’s sense (technological superiority of present consumers’ goods; see above, sec. 2c), so that a present stock of consumers’ goods may mean more consumers’ goods in the future. A generation that has witnessed the Russian Five Year Plans should have little hesitation in placing at least limited confidence in this argument. Of course, it is necessary to emphasize the phrase ‘to embark’ much more than it has been emphasized by Böhm-Bawerk, who in dealing with this ‘third reason’ committed several errors. 15 For unless we do so 13 In the first case—the case of favorable expectations—borrowers undervalue future as compared with present goods, because they expect in the future to be further down on the same curve of marginal utility of income. In the second case—the case of systematic undervaluation of future enjoyments that are expected to give pleasure of the same intensity when they shall have become present enjoyments—borrowers have a different curve of marginal utility of income for the present and for each of the subsequent income periods. 14 This could be established only by an extensive discussion of historical evidence, which space does not permit us to enter upon. For it is quite true that our common impression to the effect that general undervaluation of the future does exist in modern society, may be in part a simple consequence of the existence of interest and that, hence, the task of establishing that there is also independent undervaluation, capable of ‘causing’ interest, is not so easy, especially since apparently contradictory evidence is not lacking. Such a discussion would also have to take issue with the many objections that have been raised. A particularly interesting one must, however, be mentioned. Some writers seem to believe that, if there existed systematic undervaluation of the future, society would have to plan for economic doom or general liquidation. But this is precisely what society actually does, and it is one of the most profound problems of economic analysis to show why capital equipment nevertheless expands instead of dwindling. This problem is obscured by the practice of postulating that the economic engine is being maintained, or is maintaining itself, as a matter of course. 15 Most of them have been straightened out by Wicksell and his disciples (see especially Wicksell’s contribution, ‘Zur Zinstheorie (Böhm-Bawerks dritter Grund)’ to Wirtschaftstheorie der Gegenwart, vol. III, 1927). In general, however, these errors have been allowed to play an unduly great role: unlike the sympathetic critics of Marx or Ricardo or Keynes, the critics of Böhm- Bawerk never took the trouble to distinguish his essential ideas from their ill-tailored garb. I take the opportunity to advert to two difficulties that I experience in trying to present his teaching fairly. The first is lack of space. The second is that I have the strongest reason a theorist can possibly have for disagreeing with Böhm-Bawerk, viz. the reason that I have a different theory of History of economic analysis 896 we are likely to be caught in the gears of the synchronization argument: Böhm-Bawerk’s third reason would, in itself, not account for any persistent surplus from the continued repetition of a process of given ‘length,’ once it has been introduced and the whole economy is adapted to it; it is only the successive ‘extensions’ of the period which would keep interest alive, even if there were no other reason for its survival. 16 As it stood, this explanation of interest was not accepted by any economist of note. Even Wicksell added so many qualifications and developments to it that he cannot be listed as a follower in any strict sense. Nevertheless Böhm-Bawerk’s theory of interest exerted not only the kind of influence that is implied in stirring up discussion and stimulating thought but also a much more direct one. This was due to the fact that it admits of a simplification that one may accept without committing oneself to the details of Böhm-Bawerk’s analytic structure. This simplified version reads like this: interest arises from the interaction of (‘psychological’) time preference with the physical productivity of investment. And in this diluted form, Böhm-Bawerk’s theory became not only one of the interest theories of the period but the most widely accepted one of all, though each author added special features of his own that did not as a rule meet with the approval of any considerable number of other authors. interest of my own. But I wish neither to force my own views upon the reader nor to criticize Böhm-Bawerk from my own standpoint. I therefore accept his ‘version’ of the problem; and speak of ‘error’ only in cases where a statement or analytic arrangement of his can be proved to be wrong or inadequate from his standpoint. [J.A.S. carried on a famous controversy with Böhm-Bawerk on a dynamic theory of interest in the Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, 1913.] 16 An analogous consideration also defends the abstinence theory against objection based on synchronization. However, there are also in both cases more delicate questions to consider into which we cannot enter. But I shall briefly notice one of them which bothered Böhm-Bawerk himself as well as his adherents and critics. They all were not quite sure about the relations of the ‘three reasons’ to one another. At first sight they are all cumulative in the sense that they are all reasons for undervaluing a future loaf of bread as compared with a present one. But this is not all of it. If we formulate the third reason by saying that it leads to undervaluation of the future because command over present consumers’ goods enables a man to be better off in the future, we may assimilate this third reason with the first one, taking account however of the circumstance that possession of present goods is a condition for being better off in the future in the case of the third reason but not in the case of the first. But in both cases we have furthermore to take account of the fact that, if the second reason be operative, the greater future wealth will be ‘psychologically discounted.’ And to the extent to which this happens, the first and third motives for paying a premium are weakened by the second. Again, on the face of it, each of the three reasons, provided of course we believe in them, should be capable of producing a premium even if operating in the absence of the two others. Böhm-Bawerk himself tried to show (a) that the two first reasons will not necessarily produce a premium without the third (see his polemic against Fisher, Exkurs XII in the 3rd ed.) but (b) that the third reason is capable of producing a premium by itself. General economics 897 Many examples could be cited. 17 But by far the most forceful and brilliant performance of this kind was Irving Fisher’s Impatience Theory of Interest. 18 The phrase is self- explanatory. But it points too exclusively toward Böhm-Bawerk’s ‘second reason.’ The third reason is not absent in Fisher: it appears in the garb of Investment Opportunity which, though stripped of certain specifically Böhm-Bawerkian features, expresses, but much more elegantly, essentially the same facts. 19 Also, Fisher brought out more clearly than had Böhm-Bawerk himself an aspect of the latter’s interest analysis that is perhaps the most important of all. We have seen that a majority of the non-Marxist writers of that period continued to look upon interest as an income that stands on the same plane with rent and wages as the payment for the services of a physical requisite of production (plant, equipment, and so on, or else abstinence) that in turn stand, within the sphere of production, on the same plane with the services of natural agents and labor. The ‘agio’ or premium theory of interest involves an entirely different conception. Being a general time discount that applies to the returns from productive services of all kinds, interest as it were preys upon them all, 17 For instance, Marshall’s cautious reference (Principles, p. 142) to the ‘productiveness and prospectiveness’ of capital may be interpreted in this sense. Lord Keynes was therefore quite right when he treated what I have called the simplified version of Böhm-Bawerk’s theory as the one that was being commonly accepted even in 1936 (see General Theory, p. 165). Still more interesting is the fact that he accepted it himself. He did indeed declare it inadequate but only in the sense that it needed to be supplemented by the element of liquidity preference (ibid. p. 166). But, with Keynes himself, though not with all of his followers, this did not amount to renouncing it but only to amending it. 18 Fisher elaborated this theory (without as yet substituting the term impatience for the terms ‘agio’ or time preference) first in the Rate of Interest (1907) and then presented another version in The Theory of Interest (1930). Not without justification, he wrote in the preface to the latter work that his theory was ‘in some degree every one’s theory.’ Still more justified is the dedication to John Rae and Eugen von Böhm-Bawerk, ‘who laid the foundations upon which I have endeavored to build.’ 19 It is, therefore, difficult to understand how, in the same preface, Fisher could have written: ‘So far as I know, no other writer on interest has made use of income streams and their differences, or rates of return over cost per annum.’ If Böhm-Bawerk’s numerical tables are not a clumsy method of representing points in income (product) streams and their differences, I for one fail to see what they do represent. I take this opportunity to touch upon a minor point. Both some critics and some adherents (including Wicksell and Pierson) strove hard to interpret Böhm-Bawerk’s theory of interest as a productivity theory, and Böhm-Bawerk himself, wearied by their insistence, protested in the end but weakly (Geschichte und Kritik, 3rd ed., p. 705n.). But his theory is a productivity theory only in the sense in which all interest theories are, including those of Marx and Keynes. For interest is an element of every price; every price can be represented as the result of a demand and a supply; and however we define capital, productive purposes must always figure among the factors that motivate the demand for it. In any non-trivial sense, however, his theory is not like the productivity theories properly so-called but the very opposite of them as will be shown presently. History of economic analysis 898 upon the returns from the services of physical capital goods not less than upon any others. It is, therefore, something that differs in nature from all productivity returns properly so-called, 20 not only from rents of natural agents and wages of labor but also from the productivity returns of capital goods. Böhm-Bawerk did not bring this out well, though his theory of ‘capitalization’ (of the manner in which the values of land and capital goods are determined) 21 suffices to prove that this was in fact his view. But Fisher’s terminology did. In order to underline the novelty of this view, let us again notice its affinity, in this respect, with the exploitation theory of Marx; given the appropriate ideology—and phraseology—it might have been presented as a novel exploitation theory. A minor consequence of this was that returns from physical capital goods could no longer be diagnosed as interest in the fashion set by Barbon and sanctioned by A.Smith. Several circumstances combined to suggest their assimilation with the rent of natural agents (see below, subsec. b). A much more important consequence was that interest now entered the theories of rent and wages in an entirely new manner. In fact, this is the most important reason why we have once more to take up these subjects instead of resting content with a simple reference to the theory of imputation or of marginal productivity sans phrase. 22 (b) Rent. Disregarding minor issues and various blind alleys, we shall survey developments in this field in three steps. First, we shall consider the theory of rent that was to explain the incomes derived from the ownership of natural agents, no matter whether they are supposed to be ‘indestructible’ or not. Sec- 20 I say ‘productivity returns properly so-called’ because there is an ambiguity in the term ‘productivity’ as there is in the term ‘requisite’ that tends to obscure the point I am trying to make. In a sense, time is a requisite of production, hence productive. So, in capitalist society, is money. And for some purposes the concept of marginal productivity may be applied to both. But neither is a requisite and productive in the same sense as is labor or land or a shovel. Böhm-Bawerk averred that his subsistence fund was productive in the first sense but not in the second, exactly as Marx would have done. But both he himself and his followers and critics confused the two meanings. 21 This theory was developed by Wicksell as well as by Fisher, but it constitutes one of Böhm- Bawerk’s most characteristic contributions. Before him the treatment of this problem was dominated by the cost aspect. Of course, business practice had been familiar with the discounting process as applied to a house or machine long before. But it was Böhm-Bawerk who introduced this practice into economic theory and gave it its theoretical interpretation just as Marshall introduced the concepts of prime and supplementary costs that had been familiar to every businessman and yet constituted novelties in economic analysis. 22 In other words, ‘The Relations between Rent and Interest’ now became a problem that had not existed for J.S.Mill. See, especially, Professor F.A.Fetter’s paper bearing this title in Publications of the American Economic Association, 3rd series, vol. V, February 1904. A.Marshall, by a different route, was led to coining the concept of quasi-rent which takes care of part of that problem. In addition, he recognized that the concept of interest is applicable to new (prospective?) investment only; and that capital already invested in plant and equipment yields quasi-rent and not interest (Principles, pp. 605–6). General economics 899 ond, we shall consider certain generalizations of the concept of rent which that theory suggested. Third, we shall notice a tendency to harness the concept of rent into the service of entirely different purposes. Under each of these three headings we shall observe a struggle between old and new ideas that was an important cause, if not the only one, of waverings, hazinesses, and spurious issues. 23 First, then, as regards the rent of natural agents, it is obvious that the Jevons-Menger- Walras analysis provided a perfectly good explanation of this rent phenomenon and, if adequately complemented by the facts of every concrete case envisaged, also all the ‘laws’ or propositions about it we need. All that had to be done was to take a clue from Say or Cantillon, that is, to recognize that rent is simply a matter of pricing the services of these requisites of production and to apply the marginal principle to the formation of these prices. Account being taken of Böhm-Bawerkian time preference, the result would read: the rent of natural agents tends to equal the discounted values of their marginal products. This theory allows automatically for differences in quality of natural agents of the same kind. And, as thus explained, rent does and does not enter into the prices of products exactly as do wages. In fact, rent in this sense and wages are parallel phenomena. The main purely economic difference between them is that the total supply of any natural agent may, in many cases, be taken as fixed and hence does not react to variations in its price, whereas the total supply of labor is in general less irresponsive. But this difference does not affect the explanatory principle involved, which remains the same for both cases. Moreover, it is irrelevant for the question of allocation of the supply available for any particular use of a natural agent that is capable of serving more than one: how much land, at what rent per unit, is available for the production of cane sugar when the same land could also be used for the production of cotton is merely a matter of opportunity cost. 24 This theory, sponsored by the Austrians and by Walras, was however not as readily or generally accepted as we might expect, considering its simplicity and usefulness. There were two reasons for this and for the consequent survival of the ‘Ricardian’ theory of rent. 25 On the one hand, many economists 23 As far as Marshall’s teaching is concerned, waverings and hazinesses have been trenchantly analyzed by F.A.Fetter, ‘The Passing of the Old Rent Concept,’ Quarterly Journal of Economics, May 1901. Professor Fetter’s argument may be generalized so as to include a large number of economists. 24 It is perhaps unnecessary to explain the treatment of the case of natural agents that admit of only one use and of the cases (such as the case of the vineyard that might also be used as pasture for goats) that raise similar difficulties. 25 Marx’s and Rodbertus’ theories of rent benefited but little by the dislike that many economists displayed for the marginal productivity theory, though the former survived of course in the circle of Marxist orthodoxy. L.von Bortkiewicz’ destructive criticism of both was hardly necessary in order to convince economists of their weaknesses: see his papers on ‘Die Rodbertus’sche Grundrententheorie und die Marx’sche Lehre von der absoluten Grundrente,’ Archiv für die Geschichte des Sozialismus und der Arbeiterbewegung, 1910–11. But the two papers are worth mentioning, neverthe- History of economic analysis 900 experienced an emotional resistance to a theory that seemed to treat the landlord’s ‘unearned incomes’ on the same plane with the workman’s compensation for the sweat of his brow. These sentiments were completely irrational because there is nothing in that theory to prevent an economist from differentiating as much as he pleases between the two on moral or political grounds. 26 But they were effective nevertheless and they told for the ‘Ricardian’ theory, because the latter seemed—though it really is not—much better qualified to support an adverse value judgment on the rent of land. On the other hand, as we have seen, ‘classic’ doctrines kept, throughout the period under survey, a strong hold on the thought of many economists. Of these doctrines none had percolated more widely, or enjoyed a more established fame, than had the ‘Ricardian’ theory of rent. Moreover, it was easier to defend than were other parts of ‘classic’ analysis because, formulated with proper care, it did not assert anything that was positively wrong. Menger’s criticism of it (Grundsätze, pp. 144–5) was justified but only amounted to saying that the necessity of having to construct, for so important a class of phenomena, a separate theoretical apparatus was in itself proof of the defects of the ‘classic’ analysis. 27 Defenders were, therefore, in a relatively favorable position. By far the most eminent of these was A.Marshall, who made the most of this opportunity for fighting a rear-guard action in defense of Ricardo. 28 In any case, the ‘Ricardian’ theory remained in the center of discussion and continued to hold the attention even of its opponents. Not all of these came from the marginal productivity camp. The monopoly theory of rent was bound to lose ground in a time when general price analysis was so greatly improved, less, because they are excellent examples of a type of theoretical work that seems to have gone out of fashion completely. 26 Thus Walras was a strong land reformer in spite of the fact that he sponsored the productivity theory of rent. 27 In other words, the criticism simply averred that for the Jevons-Menger-Walras analysis Ricardo’s theory was superfluous. And so it is (see above, Part III, ch. 6, sec. 6, on the role that the theory of rent played in the Ricardian system). To put it still more bluntly, the ‘revolutionaries’ were in a position to scrap the whole of Ricardo’s second chapter excepting the first sentence of the second paragraph. 28 Marshallians will perhaps condone the slight irritation that some readers of Marshall may possibly feel at the length to which he went in this respect in spite of the fact that (disregarding everything else) his great summary of his theory of distribution proves beyond reasonable doubt that he accepted the marginal productivity theory of rent. But he refused to recognize the break with Ricardo’s general theory which this involved and, e.g., attacked Jevons (who actually was exceptionally gentle on the ‘Ricardian’ theory of rent) for holding that ‘rent does enter into price’ (Principles, p. 483n.), as if, as meant by Jevons, this proposition were definitely false. The reader can easily satisfy himself—this would in fact be a good exercise—that this is not so. Marshall’s corrective formulation (presented in quotes) asserts nothing that is wrong but also nothing that invalidates the Jevonian proposition attacked. Besides, the Jevonian proposition had been anticipated—only without awareness of its importance—by J.S Mill. General economics 901 . History of economic analysis 894 ent of, and in part but imperfectly co-ordinated with, Böhm-Bawerk’s causal explanation of interest, a fact that we have ascribed to the unfinished state of. ( Analysis of Cost of Production,’ Quarterly Journal of Economics, July 1887). 5 See Carver’s Distribution of Wealth (1904), and his earlier paper on ‘The Place of Abstinence in the Theory of. and it is one of the most profound problems of economic analysis to show why capital equipment nevertheless expands instead of dwindling. This problem is obscured by the practice of postulating