Professor Giddings on the Theory of Capital

This short correspondence is a concentrated intervention in the late nineteenth-century debate over capital and interest. Bonar’s prefatory close frames Professor Giddings’s position as a disguised return to abstinence theory: if the “extra-labor” that allegedly produces capital is done for capitalists rather than by them, and if laborers do not receive interest, then the explanation has merely shifted from labor pain to postponed consumption.

we are still dealing with a theory weighed and found wanting in the same book,—the “Abstinence” theory.

Boehm-Bawerk’s reply develops this objection more systematically. He grants Giddings a narrow “element of truth”: because human laboring powers are finite, capital cannot be unlimited.

the imperfection of our laboring powers is the reason why there is always only a “limited supply” of capital.

But this concession is immediately narrowed. The painfulness of overtime labor may help intensify scarcity, yet it cannot be the root explanation of interest. Interest would still exist even if labor did not become sharply more burdensome at the margin. By analogy, differences in land fertility affect rent, but do not supply its ultimate ground; scarcity of land services does. Likewise, overtime pain may affect the amount of capital available, but it is not the cause of capital’s net return.

The second section is the analytical center of the reply. Boehm-Bawerk accepts that capital must be limited if it is to bear interest, but insists that scarcity explains only why capital goods have value, not why they yield a surplus beyond their own value.

“Limited supply” of capital is certainly a condition of the existence of interest; but interest is a long way from being explained by it.

This distinction defines the real problem: tools, machines, materials, and other capital goods may command value because they are scarce, but why should they bring in more value than they themselves cost? Giddings answers by invoking the higher cost of the overtime labor supposedly required to produce capital. Boehm-Bawerk rejects this as a reversal of the logic of capitalistic production. Roundabout methods are normally adopted because they are more productive and cheaper per unit, not because they are dearer: nets economize the labor of catching fish, and machines economize the labor of making stockings.

Even if capital goods did cost more to produce, the point would not explain interest. Higher cost would raise the value of the capital goods themselves and thus increase the capitalist’s outlay. It would not explain the residual surplus after that outlay is deducted.

Can a circumstance which increases their outlay be the cause of their gain?

Here Boehm-Bawerk separates the value of capital from the interest earned through it. A theory that accounts only for the size of the “subtrahend” cannot explain why a positive remainder appears. He then charges Giddings with inconsistency: when the cost explanation fails, Giddings appears to import a different productivity doctrine, treating capital as if it possessed a power to reproduce itself with an increment. Boehm-Bawerk refuses to let cost, productivity, and scarcity be interchanged as though they solved the same problem.

The final section identifies a further confusion between unlike costs: the exceptional expense of rapidly converting capital goods into ready consumption goods, and the ordinary cost of producing through longer, circuitous methods.

abnormal cost of an extraordinary shortening of a process of production

The piece’s significance lies in its compressed method. Boehm-Bawerk isolates the precise explanandum, distinguishes conditions from causes, separates scarcity-value from surplus-value, and exposes equivocations between labor cost, productive power, and time-structure. Interest is not explained by overtime pain, limited capital supply, higher production cost, or emergency acceleration; those considerations may affect circumstances of production, but they do not account for the emergence of a net return on capital.