Eugen von Bohm-Bawerk (1851-1914)

The radical subjectivists among the Austrian economists do not consider Bohm-Bawerk as belonging to the same stable. They instead see in him essentially a Ricardian, con­cerned with Ricardian problems and using Ricardian tools.

Here we focus attention on Bohm-Bawerk’s theory of profits. He adopted essentially the long-period framework of the classical economists revolving around positions of the economic system characterised by a uniform general rate of profits, or interest, as Bohm-Bawerk preferred to call it, uniform rates of remuneration for all primary factors of production, that is, the services of labour and land, and what the classical economists called “natural” or “normal” prices.

Bohm-Bawerk rejected the then existing theories of interest, which he grouped under six headings: “colourless theories” (Smith and Ricardo); “productivity theories” (from Jean-Baptiste Say via Johanna Heinrich von Thunen to J.B. Clark); “utilisation theories” (from Friedrich Benedict Wilhelm von Hermann to Carl Menger); “absti­nence theories” (Nassau William Senior); “labour theories” (Jean-Baptiste Say); and “exploitation theories” (Karl Rodbertus and Karl Marx) (see Kurz 1994). The first five groups are said to be “favourable” to interest, whereas the last one is “inimical” to it. In Bohm-Bawerk’s view, Smith’s Wealth of Nations contains the germs of almost all later theories, especially those tracing interest back to the productivity enhancing power of capital, to exploitation and to abstinence. Bohm-Bawerk was particularly keen to ward off the socialist attack on capitalism and profits, which earned him Schumpeter’s label “the bourgeois Marx”.

Bohm-Bawerk elaborated a particular version of the scarcity theory of income distri­bution, advocated by the marginalists, focusing attention on the time element in produc­tion and consumption. As regards the latter he singled out Jeremy Bentham (1748-1832), John Rae (1796-1872) and William Stanley Jevons (1835-1882) as precursors. His expla­nation revolved around the famous “three grounds”:

1. The higher estimation of present needs and wants compared with future ones, that is, a positive rate of time preference.

2. The superiority of more roundabout processes of production, that is, the higher labour productivity of more capital-intensive processes of production.

3. The difference of provision of goods in the present and future.

Here we focus attention on the first two grounds. According to Bohm-Bawerk, inter­est is an intertemporal price, an “agio” on present goods relative to future goods. Only production by labour (and nature) that is unassisted by any human-made means of production Bohm-Bawerk considered to be “noncapitalist”, whereas according to him the defining feature of capitalism is the use of capital goods or intermediate products. Bohm-Bawerk’s definition of capitalism was meant to be innocuous and devoid of any ideological contamination. However, by construction he deliberately reduced the set of non-capitalist economies to the empty set. The production of each commodity he con­ceived of as a one-way avenue of finite length leading from the expenditure of certain amounts of labour (and the services of nature) across time to the maturing of the final product.

The central concept of his theory of interest is the “average period of production” designed to provide a measure of the “capitalistic” character of production of single goods, but also of an economy’s output as a whole. It is the weighted average of the periods of time over which the amounts of labour remain invested until one unit of the (single or composite) commodity is obtained, with the respective amounts of labour serving as weights.

Bohm-Bawerk was convinced that with his temporal theory of capital and interest he had spoken the “salvational word” on this hotly debated topic and had proved inter­est to be present in all societies that use produced means of production. Attempts at suppressing it were necessarily bound to fail. The “right to the full product of labour”, called for by the socialists, cannot be denied, Bohm-Bawerk conceded, but what does it mean? “The crux of the matter”, he insisted, “is the time difference between the payment of wages and the completion of the product.” He added: “It is not the full merit of the labourers working today, of their industry and diligence alone, that many years later a certain larger product obtains; a part of the causation and merit belongs to a group of people having acted ahead of time and having provided for the formation and preserva­tion of the saved-up stocks of goods [capital]” (1884 [1921]: 410).

Bohm-Bawerk’s hope and expectation to have once and for all settled the issues at hand did not come true.