Modernizing Böhm-Bawerk's Theory of Interest

Abstract

In 1690, John Locke proclaimed, “Whatsoever [anyone]; removes out of the State that Nature hath provided … hath mixed his Labour with, and joyned to it something that is his own, and thereby makes it his Property.” Ever since this dictum was pronounced philosophers, economists, and, especially, capital theorists have been embarrassed by the virtually universal disregard of it in practice. At the very inception of economic theorizing, Ricardo declared that explaining the division of the national income into wages, rents, and interest was “the principal problem in Political Economy.” He proposed an ingenious explanation, but was far from settling the matter. Some fifty years later, Marx, building on Ricardo's concept of value, brought the debate to a sharp focus; after him, it became largely an argument between Marxists and everyone else. Put starkly, Marx defined the value of any good or service to be the amount of labor required to produce it. Since a worker and his family can be supported for a year by the product of a good deal less than a full year's labor, this definition implies a gap between the value of a year's labor and the value of its products. Owners of land and capital are only too glad to close the gap by claiming the “surplus value.” Marx's diagnosis of the nature and origin of surplus value became the focus of discussions of the distribution of income for most of the following century.