EUGEN VON BOHM-BAWERK AND THE AUSTRIAN SCHOOL
Between 1870 and the outbreak of the First World War, Vienna was the site of one of the most flourishing schools of neo-classical teaching. Though this tradition of neoclassicism was launched by Carl Menger - who was among the first to bring marginal concepts to bear on the analysis of market equilibrium - the towering figure of this period was Eugen von Bohm-Bawerk (1851-1914).
In his professional career Bohm-Bawerk combined academic and official duties. He was first called from a university post to the Ministry of Finance in 1889 to work out a projected currency reform and rose to serve three appointments as the Austrian Minister of Finance. From this position he fought effectively for balanced budgets and a stable currency linked to the gold standard. Meanwhile, he maintained contact with university life, though he was able to devote substantial time to teaching and research only after resigning his ministerial post in 1904.
Bohm-Bawerk's theoretical writings were concentrated on the nature of capital and interest. At first glance, these problems, though important, might appear to be limited in range. In fact, as he treated them, they were all-embracing. He held that the analysis of capital and interest constituted 'the focal point about which attack and defence rally in the war in which the issue is the system under which human society shall be organized'.9 Indeed, as his ablest pupil has observed, the scale of the canvas on which Bohm-Bawerk painted justified describing him as a ‘bourgeois Marx'.10
Bohm-Bawerk's procedure was heavily formal and deductive. Consistent with his view of economics as an exact science, he claimed to offer a correct and comprehensive view of the nature of capital and its role in the productive process. From his perspective, earlier traditions had provided only a partial account. The Physiocratic interpretation of the productive process, for example, had regarded only one factor of production - land - as crucial.
The classical tradition, while eliminating this error, had bred another by holding that labour was the basic productive factor. Only in neo-classical thought was capital given an autonomous status. Even so, the existence of capital was not independent of other factors of production. In his view', it could arise only through the earlier cooperation of the two original factors, labour and land.Nevertheless, in Bohm-Bawerk's scheme of things, all forms of production (with the exception of the most primitive in which no implements whatsoever were used) involved indirect and roundabout methods. They were thus 'capitalistic' in nature. In his terms the 'method of production which wisely follows an indirect course is nothing more nor less than what the economist calls capitalist production.... Capital is nothing but the sum total of intermediate products which come into existence at the individual stages of the roundabout course of production.'!! Roundabout methods were used for the obvious reason that production assisted by capital instruments could produce more than could land and labour unaided. The effects of capital on output, however, were delayed; capital goods took time to construct and to be absorbed into the productive process. But no less important to an understanding of the nature of capital was the fact that the community was obliged to save before the capital stock could be enlarged. The basic problem in the analysis of production was thus one of reconciling two opposing considerations: the disadvantages of restraining consumption, on the one hand, against the advantages of future expansions in output, on the other. How was a solution to this problem to be reached?
Part of Bohm-Bawerk's explanation rested on the premisses of Austrian subjective value theory. It was assumed that economic man was motivated by the desire to maximize utility. But in this case the maximization problem had to be viewed over a span of time in which present and future satisfactions were weighed against one another.
Bohm-Bawerk maintained that most men were likely to prefer the bird in the hand to the one in the bush - i.e. to over-value the present relative to the future and to underestimate the strength of future wants. For these reasons people had to be rewarded - through the payment of a rate of interest - for saving and parting with present satisfactions.The other side of this coin was the willingness of those who purchased capital goods to pay for the means to acquire them. From the producer's point of view the desirability of additional capital goods was self-evident because of the additions to output their use permitted. For this reason borrowers were enabled - and prepared - to pay an interest charge. At the same time the existence of a positive rate of interest meant that the roundaboutness of the productive process would not be extended to infinity because additions to the capital stock were subject to diminishing returns. The existence of a rate of interest thus assured an equilibrium between saving and investment.
Bohm-Bawerk's analysis was clearly at one with the general neo-classical conviction that thrift and the productivity of capital determined the rate of interest and regulated decisions to save and to invest. In his hands, however, the argument did more: it became a powerful weapon in ideological combat. If his definitions were accepted, it was both pointless and an abuse of language to differentiate - as Marx had done - between various historical stages in which different rules for the conduct of economic life applied. Any tool-using society was, by definition, 'capitalistic' and subject to the same universal and timeless principles. Bohm-Bawerk, in fact, wrote a lengthy critique of Marxian analysis in which he maintained that Marx's basic error stemmed from a misguided labour theory of value that blinded him to a 'correct' view of the nature of capital. Though the assault on Marx took precedence, Bohm- Bawerk's vigorous assertion of the validity and value of universal, formal categories was also aimed at another group of intellectual adversaries - i.e. those members of the German historical school who had maintained that abstract reasoning had little to contribute to an understanding of the economic process and distracted attention from 'the facts'.
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