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a greater value than the goods which would have been obtained without the capital. Hence, Seager concludes:

Admitting the physical-productivity of capital . . . the value-productivity. ... or more accurately an increase in the total value-product as a consequence of the assistance which capital renders to production seems to me to follow as a logically necessary consequence.

Here, where Seager would expect dissent, I readily agree; but hasten to add that this value-productivity is not at all that of which the productivity theorist speaks in his interest theory. Here we are saying merely: If agents used at this moment produce more, the products (speaking of the general and usual result) have more value here and now than the products that could have been obtained without the help of the productive agents. But the value-productivity which furnishes the motive to the enterpriser to borrow and gives him the power, regularly, to pay contract interest, is due, not to the fact that these products will have value when they come into existence, but to the fact that their expected value is discounted in the price of the agents bought at an earlier point of time. The two relations are in different planes. It is a problem of two dimensions which may be represented as follows:

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The modern productivity theorist assumes as quite obvious the value-productivity B, as derived synchronously from the physical productivity A, but he ignores the problem of the discount relation in time between B and C. The pseudo-value-productivity assumed in the productivity theory of interest is all, however, involved in the unexplained discount relation between B and C, not in the identity relation between A and B. This is the petitio principii of the theory.

The value-surplus referred to is that part, imputable to, and varying with, the time element, and not that due to the peculiar commercial skill, or to the luck, of the enterpriser, in finding unusually low valued agents in one place, or unusually high valued products in another. If one did not bear in mind the complex

character of the gross income "profits," one might be tempted to exclaim: If the enterpriser must pay as interest the whole amount involved in time-discount, he never would have a motive to borrow. It is just here that appears so plainly the middleman's character of the productive borrower. The rate of interest is a market price at which (security, etc., equalized) the individual borrows; but those with superior knowledge and superior foresight are able to buy in one economic group and to sell their products in another, to buy "underestimated" goods and to find a favorable market for highly esteemed products. They are merchants, buying when they can in a cheaper and selling in a dearer capitalization market," acting as the equalizers of rates and prices. It is the mercantile function everywhere to do this. So we must dissent again when Seager says:58

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And it is this demand for capital growing out of the important role capital plays as a factor in production, that is the positive, active influence determining interest, in the same sense that utility may be said to be the positive, active influence determining value.

Rather, this demand for capital determines interest in the same sense that the merchant's demand determines the wholesale price of merchandise, he merely judging and transmitting to the wholesaler and manufacturer the ultimate consumer's demand for various goods. In this case, the middleman's demand for capital (that is, for loans) is a reflection of the time-valuation of consumers as embodied in the prices prevailing in the markets for goods.

Professor Seager seems so near at times to abandoning the costof-production theory of prices with which the productivity theory of interest is related, and has contributed such valuable and needed criticism to the present discussion, that it is to be hoped that he may yet bring his powerful aid to the capitalization camp.

VI. The capital concept in the interest theory.

The difficulty of seeing the capitalization problem in a broad way, as something touching all sources and groups of income, is, however, insurmountable so long as one adheres to the old concept of capital. Seager uses capital57 "in the sense of the produced means of further production," and distinguishes land and capital as two groups of concrete objects, one of which owes its value to

55 See above, pp. 77, 83-84.

56 AMERICAN ECONOMIC REVIEW, Dec., 1912, p. 848. "Idem, p. 844.

nature, and the other to labor. It is, of course, futile to attempt here a restatement of the reasons, negative and positive, against this view. They have been pretty fully stated elsewhere. Seager seems still to conceive of the interest problem as connected only with produced means of production, as did the older English economists, and as all productivity theorists incline to do. This inclination is found along with a treatment limited mainly, if not entirely, to contract interest.

But how can the "economic interest" aspect of the problem be limited to the income yielded by tools and machines? Why is not this problem presented in the case of incomes from land (or from an orchard, to which example Seager objects as not being typical of all forms of capital)? How account for the capitalization of this land and of this orchard? By applying a rate of interest derived from the money market as Fisher would seem to do, or a rate taken from the market for the loan of purely "produced" capital goods (whatever that may mean)? Cannot unproduced agents be capitalized unless the rate of discount is first discovered by making produced goods? Is not a capitalization rate conceivable in a community where land is the only form of wealth that is bought and sold? If so, then the thought is not avoidable that a rate of interest on contract loans to purchase land may prevail, reflecting this implied rate of capitalization-the chance for profit operating as a motive for the loan just as it does in manufacturing and commerce. Is interest not connected with a loan of money to buy "natural" agents as fully as with that to buy "artificial" agents? An answer to these questions inevitably carries one into the atmosphere of the capitalization theory, where the arbitrary limitation of the interest problem to loans made to buy "produced" agents becomes unthinkable.

But there is still the old question, how account for the tendency of profits (in the old broad sense of the term, including interest) toward equality; how explain the fact that on the average, though with many exceptions and fluctuations, the rates of profit to be had by productive borrowers in the various industries do not get so very far apart? There is the old explanation of cost-of-production of capital, upon which the latest productivity theorists still rely, and there is the capitalization theory. Both of these concede a place to the enterpriser. In the older view, the place is worthy to be called causal, in that, when any agent yields an abnormal return, he produces more agents, by incurring "costs” (which are

either assumed to be fixed or are left quite unexplained), putting the price of more labor and materials into them and thus bringing their price into conformity with other agents of the same cost. The citadel where the productivity theorist feels his position to be impregnable is just here, in the thought that the amount and the value of "capital" (produced agents) is “brought into conformity with the expense of producing them," thus regulating the interest rate. Seager is on familiar ground when he says:

Since there is nothing in the assumption that the productivity of all instruments is doubled that involves any serious change in the expense of producing the instruments.58

We must dissent. The doubling of the productivity of all agents alike would have very diverse effects upon the prices of the various enjoyable goods, and these prices would be reflected in the valuation process to the prices of the different natural sources and of all other agents, thus altering greatly the whole scale of costs in "producing" more agents.

But is this not a recognition that technical productivity has some influence upon the comparison of present and future gratifications, and hence upon the rate of interest? Surely, some influence it has, but the causal order of explanation is very different from that of the productivity theory. Technical productivity is one of the facts, physical, moral, intellectual, which go to make up the whole economic situation in which time-preference is exercised. That this, however, is not going over to the productivity theory of interest is shown by the fact that it points to an opposite conclusion as regards the resulting rate. The greater provision for present desires thus made possible leads us to expect a reduction of the preference for present goods and a lowering of their valuation in terms of future goods. This (other things being equal) would be reflected in a lower rate of time discount and a lower, not a higher, rate of interest, as the productivity theorist believes."

May we not then conclude that the cost-of-production-of-capital explanation of interest is a partial glimpse of an intermediate and subordinate process of the adjustment of prices, in part a mistaking of effect for cause? It assumes a dual theory of investment prices; some prices are explained as due to demand and others as due to cost. The prices of the factors (materials, tools, labor)

58 AMERICAN ECONOMIC REVIEW, Dec., 1912, p. 847.

"On this Fisher has taken a position in accordance with the capitalization theory. See AMERICAN ECONOMIC REVIEW, Sept., 1913, p. 614.

are taken as a basis from which to calculate the rate of interest, a sort of turtle's-back (as in the ancient theory of the universe) on which the giant, Entrepreneur, stands while carrying on his back the burden of interest.

The capitalization theory views the causal order very differently. First, time-valuation being embodied in durable agents with incomes extending over a period of time, becomes the capitalization of agents containing future uses, this involving a rate of timediscount. This, in a market with exchange, becomes price, which is cost to the enterpriser seeking a profit by buying these factors, combining them more or less with his own services, and selling them. This process is constantly levelling down inequalities in capitalization as between different commodities and markets. All men together are helping to evaluate all of the economic goods in the community. Within this larger circle of explanation, the part of the enterpriser is secondary and intermediate. He does not represent any additional "technical productivity" cause, coming in alongside of the psychological explanation of interest. The chance of income for himself exists before he makes a move, partly because the future incomes have already been discounted (the pure capital-income aspect), and partly because all agents are not discounted at any moment at exactly the same, or exactly the right, rate (the commercial profit aspect). It is because of the chance of private profit already inherent in the situation that the producer is led to act in his intermediary capacity.

VII. The same difficulties again.

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The article by Professor H. G. Brown, a former pupil and present colleague of Fisher, appeared almost simultaneously with Fisher's concessions to the productivity theory. Professor Brown, agreeing almost completely with Seager, formulates an eclectic theory.

The position taken by the present writer is, that productivity and impatience are coördinate determinants, i.e., that productivity is as direct a determinant of interest as is impatience, and that productivity may be, in a modern community, the more important determinant.o1

Cited above, p. 68.

Here impatience

61 Quarterly Journal of Economics, Aug., 1913, p. 634. and productivity are said to be coördinate determinants, though productivity may be the more important; and again, page 645, impatience is said “to enter into the chain of cause and effect" in a certain connection "as effect rather

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