criticism. He says that he pleads "not guilty to the charge of neglecting the 'productivity' or 'technique' element." He speaks of "the true way in which the 'technique of production' enters into the determination of the rate of interest;"10 he says, ""the productivity' or 'technique' element, so far from being lacking in my theory, is one of its cardinal features;" and, again, "Productivity has not been neglected in my treatment of interest."

Now it is true that these somewhat general expressions alone merely raise the reader's doubts. For to say that he does not neglect "productivity" or that it is not lacking in his theory does not positively commit Fisher to belief in a productivity explanation of interest as distinct from an essentially psychological explanation. But other expressions deepen the reader's doubts, and suggest strongly that Fisher objects only to certain formulations of a productivity theory, not to productivity theories on principle.

12

He admits that in his book he has criticised "the ordinary11 productivity theories," but says that he then "explained to the reader that later in the book I would rebuild the 'technical' feature which, in the theories of others, I sought to destroy." Again" he speaks of his strictures on "the ordinary productivity theories," implying that some productivity theory or theories may be tenable. Again he reproaches Professor Seager with being "open to the charge of regarding all productivity theories as alike sound in principle" (implying that some are sound?). And he expresses the belief that "every one who has read Böhm-Bawerk should believe that the ordinary, or as Böhm-Bawerk calls them, the "naïve' productivity theories are snares and delusions."915

These passages taken by themselves give the impression that the author is at heart as good a productivity theorist as any one; indeed, he collates them himself, seemingly, for the purpose of producing just this impression. This clearly is out of accord with the spirit and letter of much else that Fisher has said in denying productivity as a causal explanation of interest. The most lenient interpretation is that Fisher is here speaking in the spirit of an earlier statement:16

10 AMERICAN ECONOMIC REVIEW, Sept., 1913, p. 610.

"Idem, p. 610.

12 Idem, p. 611.

13 My italics throughout.

14 Idem, p. 611.

"Idem, p. 617.

The Rate of Interest, p. 251.

If after all has been said and understood, any one still prefers to call such a loan "productive," no objection is offered, provided always that it is made wholly clear what is meant by the term "productive."

Here it seems clear that Fisher did not think the term productive, which he carefully enclosed in quotation marks each time, was a fitting adjective for such loans, made by borrowers for the purpose of gaining a profit. In his reply to Seager, however, Fisher's mood is all for so emphasizing any earlier statement of the tolerant sort as to make it appear that he does not deny the productivity theory of interest. He cites several passages in his earlier writings in which he has used such expressions as "the elements of truth contained in the claims of the productivity theories.”1 He says: "It was through mathematics that I saw the nature and importance of productivity in relation to interest," giving the impression that he at one time disbelieved in productivity as a causal explanation but had come to see his mistake. He says that his book "was written expressly for that purpose (rendering of the technique element).18 Despite his ability to adduce these evidences of his innocence of the charge of disbelief in the productivity interest theory, Fisher is penitent for not having made his position clearer. He declares that he has himself "to blame" "for the mistakes he (Seager) has made." He concludes this recantation:19

I ought, I doubt not, to have put forward the productivity element more prominently and with less avoidance of the term "productivity." I remember consciously avoiding this term so far as possible lest the reader should associate my theory too much with the many false theories of productivity.20

The most clear-cut evidence that he cites from his writings to prove that he never intended to deny the validity of the productivity theory per se is this:21 "Again I specifically stated (The Rate of Interest, p. 186): 'But while the slowness of Nature is a sufficient cause for interest, her productivity is an additional cause." A phrase which might have been deemed an oversight when taken in connection with other earlier statements, is here deliberately reaffirmed, and casts doubt upon the meaning of much of Fisher's previous writings. Just what is his position on the productivity theory? His recent apology, appearing at the same time 17 AMERICAN ECONOMIC REVIEW, Sept., 1913, p. 612.

18 Idem, 613.

19 Idem, p. 617.

20 My italics.

Idem, p. 612.

that his colleague, Dr. H. G. Brown, publishes an elaborate defense of an eclectic productivity theory, is most disappointing to the group of true psychological interest theorists in America who a few years ago welcomed Professor Fisher as an accession to their ranks, and who still cherish the hope that, after he has fed for a time on the husks of the productivity theory, they may greet him again as a returning prodigal.

II. Origin of the capitalization theory.

As a basis for further discussion, a brief review must be given of the origin and main features of "the capitalization theory" of interest as I had developed it several years before the publication of Professor Fisher's theory of interest in 1907. My attention was drawn to the subject repeatedly between the years 1895 and 1900 while I was studying the theory of distribution; and in an article on the capital concept, in 1900, I said:

I would not exaggerate the significance of the change here proposed in the capital concept, yet it would be folly to ignore the consequences its acceptance would involve for economic theory . . . The current theories of land value, of rent, of interest, to a greater or less extent rest on the unsound ideas which have been criticised throughout this paper. On another occasion the writer will attempt to state the outlines of an economic system of thought in harmony with the capital concept here presented.22

Again, in a paper presented the same year at a meeting of the American Economic Association, it was said among other statements pointing in the same direction:

With this change [of the capital concept] must go a change in the whole conception of interest, which likewise is connected in the still current treatment with a factor that has been produced by labor. The multitudinous and naïve inconsistencies of the older treatment became apparent when viewed in the light of the later value theory.

The doctrines of rent and interest as currently taught are hopelessly entangled in these old and illogical distinctions. The two forms of return for material goods must be considered as differing in modes of calculation, not as to kinds of agents and as kinds of return. The object of this paper may now be restated . . . to show the necessity of rewriting the theory of distribution along radically new lines. . . and the acceptance of doctrines, the readjustment of which is shown to be inevitable.28

22 "Recent Discussion of the Capital Concept," Quarterly Journal of Economics, vol. XV (Nov., 1900), p. 45.

23 Proceedings of the Thirteenth Annual Meeting, Dec., 1900, "The Next Decade of Economic Theory," Publications of the American Economic As80ciation, 3d series, vol. 2, pp. 240, 246.

More than a year later, in reviewing some essays by BöhmBawerk,24 I said:

Great as have been the services of our author in stimulating to clearer and deeper thinking in economic theory, his presentation of a Capitalstheorie evidently is not destined to be a finality. Some development it is sure to undergo, and is undergoing. And that development lies along the lines of a value concept as opposed to a cost-of-production concept.

Again in the same year, at the conclusion of a critical article on Böhm-Bawerk's theory:25

Let us venture an opinion as to the nature of the difficulty and the direction that must be taken to reach a correct solution. Let us suggest the view that rent and interest are very dissimilar aspects of the value of goods. Rent20 has to do with "production" of scarce and desirable uses of things. To the interest theorist this is in the nature, one might almost say, of an ultimate fact. The interest theory begins with the valuation of these different rents or incomes, distributed through different periods of time. The 'productiveness' of a material agent is merely its quality of giving a scarce and desirable service to men. To explain this service of goods is the essence of the theory of rent. Given this and a prospective series of future services, however, the problem of interest arises, which is essentially that of explaining the valuation set on the future uses contained in goods. Interest thus expressing the exchange ratio of present and future services or uses is not and cannot be confined to any class of goods; it exists wherever there is a future service. It is not dependent on the roundaboutness of the process; for it exists where there is no process whatever, if there be merely a postponement of the use for the briefest period. A good interest theory must develop the fertile suggestion of Böhm-Bawerk that the interest problem is not one of product, but of the exchange of product,-a suggestion he has not himself heeded. It must give a simple and unified explanation of time value, wherever it is manifest. It must set in their true relation the theory of rent as the income from the use of goods in any given period, and interest as the agio or discount on goods of whatever sort, when compared throughout successive periods.

A year later, in 1903, I outlined the same conception of a thoroughgoing psychological analysis, and for the first time gave

"Einige Strittige Fragen der Capitalstheorie," Political Science Quarterly, vol. 17 (Mar., 1902), p. 173.

Quarterly Journal of Economics, vol. 17 (Nov., 1902), p. 179.

28 The reader will observe that the term rent was there used in the more general sense of the income from the use, or the usance, of agents, not merely in the sense of contractual rent. This particular terminology which was due to the influence of J. B. Clark, has since been modified, not to weaken but to strengthen, the conception involved.

the name of "a theory of capitalization" to the proposed treatment of what usually is called "economic interest."2"

Another solution may be found by combining into a logical system the three typical modes in which goods appeal to wants. First, goods appeal directly as want-gratifiers immediately available. Here is required a theory of wants and enjoyable goods, and the technical analysis of marginal utility. The mental process here examined is chronologically the first stage of evaluation, in the history both of the individual and of the race. Secondly, goods appear as more or less durable, and may be made comparable by being considered, through repairs, to be lasting use-bearers, yielding in a given short period a group of uses. Here is the place for the theory of rents. This is chronologically the second stage of evaluation, when durable goods are thought of and expressed in terms of their usufructs. Thirdly, whenever two non-synchronous gratifications, rents or series of rents, are exchanged, they must be discounted to their present worth to be made comparable. Here is required a theory of capitalization, that is, of economic interest. This is historically as well as logically the latest stage of evaluation, characteristic of a developed money economy and of a "capitalistic" era. These three phases must be observed in every complete analysis of value.

In an elementary textbook published in 1904 (The Principles of Economics) this conception of the interest theory was embodied, not as a thing apart from, but as an integral part of, a general theory of value. This mode of treatment, though new,28 was not labeled with a distinctive name, and, being presented in an elementary text, has doubtless remained unread by many economists, and its true import unrecognized by some who have read it.

As is shown in the passages cited above, my conception long has been that in the analysis of the value problem the value of enjoyable goods must be first considered; that this should be followed by the valuation connected with the physical productivity of agents; and that only after full consideration of income expressed in psychic terms, in physical terms, and in monetary terms, is it in order to take up the theory of time-value, which is then

"Publications of the American Economic Association, 3d series, vol. V, in a paper on "The Relations between Rent and Interest," p. 197.

"Believing this conception to be logically involved in much of BöhmBawerk's argument in his critical volume, "Capital and Interest," I credited him with "the fertile suggestion” (see above, p. 73, quotation from the article, "The Roundabout Process"). But he has not accepted this interpretation; indeed, this would invalidate the greater part of what is distinctive in his positive theory of the roundabout process, to which he adheres without change in the latest edition, 1912.