Bortkiewicz on Bohm-Bawerk
In his criticism of “the cardinal error” of Eugen von Bohm-Bawerk’s theory of capital and interest (profits), Bortkiewicz criticized the “Three Grounds” put forward by the Austrian in favour of a positive rate: (1) the differences between wants and provision in different periods of time; (2) the systematic underestimation of future wants and the means available to satisfy them; and (3) the technical superiority of present compared with future goods of the same quality and quantity.
Bortkiewicz focused attention on the third ground - according to Bohm-Bawerk (1889 [1902]: 286) the “main pillar” of his theory - which referred allegedly to a “purely objective factor” (Bortkiewicz 1906: 945).Bortkiewicz distinguished between three types of approaches to the theory of interest, only one of which met what he called the “touchstone” of the theory of profits:
I believe that this can be regarded as the touchstone of such a theory: whether it is able to show the general cause of interest also for the case in which not only no technical progress, of whichever type, takes place, but also the length of the periods of production appears to be technically predetermined, so that no choice is possible between different methods. (Bortkiewicz 1906: 970-71; emphases added)
In other words, interest ought to be explained in conditions of a given system of production and neither in the context of a choice of technique problem nor as a fruit of technical progress. As Bortkiewicz made clear, two of the most popular theories of profits at the time did not meet these criteria: John Bates Clark’s marginal productivity theory of capital and Eugen von Bohm-Bawerk’s “Austrian” theory of capital and interest. The former explained profits in terms of the marginal productivity of capital and thus did not start from a given technical system of production, and the latter presupposed a variable length of the average period of production and thus a dynamic element.
Elsewhere Bortkiewicz expounded the implications of his postulate with regard to the theory of value:Now my opinion is that in general the value of goods can only depend upon such technical knowledge as is applied in practice. But the value of goods remains unaffected by knowledge, which, on whatever grounds, is not utilized. The result thus obtained can be summed up in the following brief formula: for [the determination of] the value of goods there come into consideration only actual methods of production, and not merely potential ones. (Bortkiewicz 1907b: 1299; emphases added)
As regards Bohm-Bawerk’s third ground, Bortkiewicz turned to a numerical example in the Positive Theory of Capital meant to illustrate the superiority of “more roundabout” processes of production. The example, Bortkiewicz maintained, was misleading because Bohm-Bawerk had given only an incomplete picture of the case under consideration. The example concerns production processes started in consecutive years. Alas, Bohm-Bawerk had assumed without any justification that all processes stop at the end of the process started first. If each process was instead taken to break off after the same number of years as the first one, we arrive at a uniformly staggered system of production. Now the process started first is no longer superior to all other processes with regard to all future time periods, because after its truncation the other processes still generate outputs, whereas the first one no longer does. Bortkiewicz (1906: 958) concluded that, “seen from a purely formal point of view, [Bohm-Bawerk] did not reason correctly. His argumentation, on which he puts the main weight, suffers from an internal mistake.”
Bortkiewicz was also critical of the other two grounds and particularly of Bohm- Bawerk’s argument in favour of a positive rate of time preference. He insisted that one ought to be “extremely cautious” with any sort of “psychological reasoning” and (as Friedrich von Wieser, Bohm-Bawerk’s brother-in-law, had argued before him) that it would have to be shown that a positive time preference exists independently of the phenomenon of interest, because if the latter is positive, the former must necessarily be positive too: a positive time preference would have to be shown to be the “prius” relative to the phenomenon of interest (Bortkiewicz 1906: 948).
He also attacked the view that a positive time preference follows from the fact that all future possessions are more or less uncertain. Since Bohm-Bawerk was concerned with explaining interest proper, that is, net interest as opposed to gross interest, which includes a risk premium designed to take account of the element of uncertainty just mentioned, myopic behaviour due to uncertainty can play no role in his argument. “Taken all together”, Bortkiewicz concluded, “the purely subjective foundation of Bohm-Bawerk’s doctrine turns out to be uncertain and precarious” (Bortkiewicz 1906: 950).Which theory, if any, met the touchstone criteria? According to Bortkiewicz it was the theory of the classical economists in the form David Ricardo gave it. Bortkiewicz drew attention to this fact especially in his essay “Wertrechnung und Preisrechnung im Marxschen System” (“Value and price in the Marxian system”), published in three instalments in 1906-07 (only parts 2 and 3 have been translated into English; see Bortkiewicz 1952).