NOTES:
1。Intheexchangesnecessarytoprocurethegoodswhicharetoreplacethecapital，inlieuofthedirectlyobtainedgoodswhichformthegrossreturn，goodsare，ofcourse，estimatedaccordingtotheirvalue。Capitalgoods，are，therefore，estimatedattheircapitalvalue。Tothisextentitappearsthattheknowledgeofthevalueofcapitalandofthelawswhichregulateit，mustprecedetheimputationofnetreturn。OnlyinsuchasimpleinstanceasthatgivenbyThunencananimputationofnetreturnbemadewithoutapreviousknowledgeofthevalueofcapital，andthisdestroysourproofthattheimputationofnetreturnisfundamentallyindependentofthevaluationofcapital。Itis，ofcourse，practicallyimpossibletoemploythisfundamentalprinciplesosoonasproductionbecomescomplicated。Butwheneverproductionbecomescomplicatedeverynewcalculationmustpracticallybelaidonthelinesoftheoldones；otherwisenoconclusioncouldbecometo。EverynewdeterminationofvaluepracticallypresupposesoldonescompareBookIII。chap。v。atend。Aslittle，then，astheconclusioncanbedrainfromthis，thattheoryrequiresvalueinordertoexplainvalue，solittlecanitbeconcludedthat，theoretically，thevalueofcapitalconditionstheimputationofnetreturn。
NaturalValuebyFriedrichWieserBook4:TheNaturalValueofLand，Capital，andLabourChapter1
IntroductionWehavenowtoretraceoursteps。Havingmadecleartheprinciplesaccordingtowhichthereturn，jointlyobtained，maybeimputedtotheseparateproductivefactors，wehavenowtoreturntothequestionastothevalueofthesefactors。Thegenerallawwearealreadyacquaintedwith:thevalueoftheproductdeterminesthevalueoftheproductiongood。Thepointwhichwemustnowtakeupistheapplicationofthispropositiontothespecialcircumstancesofland，capital，andlabour。
Inthisbyfarthegreatestdifficultiesmeetusinthecaseofcapital。Itseemsasifourexplanationofitsvaluecameintodirectcollisionwiththefactsofexperience。Assumethatacapital，employedforoneyearandtherebycompletelyusedup，yields，attheendoftheyear，areturnofthevalueof105；
experiencetellsusthatthevalueofthecapitalwillnotbeestimatedat105，butatasomewhatlessamountaccordingtothecurrentrateofinterest。Ata5%rate，e。g。，thecapitalwillbeestimatedat100。Theremainderofthereturnwillberegardedasnetreturnofinterest。Howdoesthisgowithourexplanation？Onwhatgroundisthisdeductionmade？Oughtnotratherthefullvalueofthegrossreturntogointothecapitalvaluewithoutanydeductionwhatever？Butifthatwereso，howshouldweexplainthecontradictionofexperiencewhichinterestpresents？
Howistheinteresttobeexplained？Ordoesnaturalvaluationexcludeinterest？Isit，perhaps，merelyaphenomenonofpresent-dayexchangeandprice，whichwouldnotre-emergeinthecommunisticstate？
OneofthemostconclusiveandbrilliantamongBohm-Bawerk\'scriticalexaminationsisthatdirectedtowardstheattemptstodeduceinterestfromtheproductivityofcapital。Bohm-Bawerkhimselfinfactarrivesattheconclusionthattheattemptishopeless。Toquotehisownwords:“ItwasnotsimplyanunfortunatechancethatnoonefoundtheOpenSesamewhichhadthepowertodiscoverthemysteriousoriginationofinterestintheproductivityofcapital。Itwasratherthatontheroadtothetruthawrongturninghadbeentaken。Fromthefirstitwasahopelessendeavourtoexplaininterestwhollyandentirelyfromaproductivepowerofcapital。Itwouldbedifferentiftherewereapowerthatcouldmakevaluegrowdirectlyaswheatgrowsfromthefield。Butthereisnosuchpower。Whattheproductivepowercandoisonlytocreateaquantityofproducts，andperhapsatthesametimetocreateaquantityofvalue，butnevertocreatesurplusvalue。Interestisasurplus，aremainderleftwhenproductofcapitalistheminuendandvalueofconsumedcapitalisthesubtrahend。Theproductivepowerofcapitalmayfinditsresultinincreasingtheminuend。Butsofarasthatgoesitcannotincreasetheminuendwithoutatthesametineincreasingthesubtrahendinthesameproportion。Fortheproductivepowerisundeniablythegroundandmeasureofthevalueofthecapitalinwhichitresides。Ifwithaparticularformofcapitalonecanproducenothing，thatformofcapitalisworthnothing。Ifonecanproducelittlewithit，itisworthlittle；ifonecanproducemuchwithit，itisworthmuch，andsoon；——alwaysincreasinginvalueasthevaluethatcanbeproducedbyitshelpincreases，i。e。asthevalueofitsproductincreases。Andso，howevergreattheproductivepowerofcapitalmaybe，andhowevergreatlyitmayincreasetheminuend，yetsofarasitdoesso，thesubtrahendisincreasedinthesameproportion，andthereisnoremainder，nosurplusofvalue“CapitalandInterest，translatedbyWilliamSmart，page179。
Whenweturntolandwefindalsoastrikingcontrastbetweentheapparentdemandsofourtheoryandexperience。Landyieldsreturnsthatstretchawayintothefarthestfuture。Thevalueofland，then，shouldsurelybenotmerelytwentyorthirtytimestheannualrent，asexperiencetellsusitis，butratheranindefiniteandincalculablenumberoftimestheannualrent；
perhapsitshouldbeestimatedasaninfiniteamountseealsoonthispointCapitalandInterest，page67。Butthesamelineofargumentmaybeappliedtocapital。Capitalalso，whenwellemployed，promisestoyielditsnetreturnonintotheindefinitefuture，soperhapsitsvaluealsooughttobeestimatedasaninfiniteamount。
Itwillbeseenthatthedifficultieswhichmeetusarenottrifling。If，nevertheless，Ibelievethattheycanbeovercome，itisbecauseItrusttothesupportgivenbytheresultsofourinvestigationintotheimputationofreturn。Noneofthewriterswhotriedtoderiveinterestfromtheproductivityofcapitalhadthissupport，andeveninBohm-Bawerk\'scritiqueitisnotforeseen。Havewenotinfactfoundaproductivepower，which，althoughnotcapable，asBohm-Bawerkclaims，ofcreating“morevalue，“cananddoescreatewhatamountstothesamething，“morereturn“；inotherwords，asurplus？
Weshallbeginwiththemostdifficult，thetheoryofthevalueofcapital。Afterwhathasbeensaiditisclearthatitcannotbetakenupwithouttakingupthetheoryofinterest。
Almosteverythinginthisbookwillfinditscomplementinthediscussionuponcostswhichistofollow。
Chapter2
TheValueofCapitalandtheInterestonCapital。I——
DiscountingCapitalreceivesitsvaluefromitsfruits。If，then，wearecalculatingthefinalreturnofanyproduction，and，forthatpurpose，deductfromthevalueofthesefruitsthecapitalconsumed，withitsvalue，theresultwillbezero，inasmuchas，soonerorlater，allcapitalisconsumedinproduction。Thedeductionmademustalwaysamounttothevalueofthefruits，——
indeed，thatvaluemeasuresthededuction——andconsequentlythevaluecalculationleavesnonetreturnwhatever。Notonlyisinterestnotexplained；itisabsolutelyexcluded。And，ifweconsiderthatmeansofproductionrenewthemselvesagainandagainindefinitely，andyieldresultsindefinitely，wecomeacrossanothercontradictionofexperience，forexperienceshowsthatthevalueofcapitalisnotinfinitebutalwaysfiniteandlimited。
Thesearetheproblemswhichliebeforeusforsolutionwhenwenowgoontoexaminethevalueofcapitalandtheinterestoncapital。
Fortheirsolutionwemayavailourselvesoftheresultsofouranalysisofthephysicalproductivityofcapital。Allcapitaltransformsitselfinthelastresortintogrossreturn。Inthisgrossreturnthecapitalreproducesitselfwithaphysicalsurplus，thenetreturn。Thesetwofacts，whichwehavealreadyestablished，willsufficeustodeducethevalue-productivityofcapital，andtosolveallthecontradictionswithexperience。
First:allcapitaltransformsitselfinthelastresortintogrossreturn；itfollowsfromthisthatthevalueofthecapitalcanneverexceedthevalueofthegrossreturn。Thevalueofcapitalisthusalimitedfiniteamount，althoughtheworkingoftheever-renewedproductionextendsawayintoanillimitablefuture。Thematerialsandapparatusoutofwhich，andwithwhosehelp，breadisproduced，cannotpossiblybeworthmorethanthebreaditself。Andthosethingsfromwhichthematerialsandapparatusthemselvesareproduced，andwhich，consequently，aretheproducersofbreadonestageremoved，have，intheprospectivegrossreturn——theperishablebread——amaximumlimitofvalue。Sowithallcapitals，howeverfartheirprimaryproductsmayberemovedfromdirectemploymentinthesatisfactionofwant。Toputitintofigures，——ifacapitaltransformsitselfsoonerorlaterintoagrossreturnofthevalueof105，itsownvaluecannotbeputatanythingabove105。
Second:inthegrossreturncapitalreproducesitselfwithaphysicalsurplus，thenetreturn。Itfollowsthatthecapitalvaluecannotbecreditedwiththewholevalueofthegrossreturn。Inthereproductioncapitalrepresentsonlyaportionofitsowngrossreturn，andcanthereforeabsorbonlyaportionofthevalueofthatgrossreturn。If，fromthevalueof105，5aresetasideasfruitswhichmaybeconsumedwithoutpreventingthefullreplacementofthecapital，onlytheremainderof100canbereckonedascapitalvalue。Theprospectofhavingthisresidualvalueof100transformedoncemore，atthecloseofthenextperiodofproduction，intothegrossreturnof105——byagainemployingitproductivelycannotmakeanychangeonthisvaluation；sincetheexpectedreturnof105isalwaysdividedinthesameway，assumingthesameconditions；viz。100goestocapitaland5totheincrementoncapital。
Grossreturnandnetreturnarethusthetwogivenamountsfromwhichcapitalgetsitsvalue。Thewholedifficultyoftheproblemliesessentiallyintherecognitionofthefactthatthosetwoamountsaregiven。Forproofofthiswerefertoourformerdisquisitionuponimputationingeneral，andtheimputationinthecaseofcapitalinparticular。Ifphysicalproductivityofcapitalinvolves，aswehavemaintained，theimputationofgrossreturnandtheimputationofnetreturn，wehaveatonceaclearandsimpleprincipleforthevaluationofcapital。
Thereisincommonuseadefinitenameforthemethodofcalculatingvaluerequiredbythisprinciple。Tofixthepresentvalueofamoneyclaim，carryingnointerest，whichfallsdueatafuturedate，wemakeuse，aseveryoneknows，ofthemethodknownas“discounting。“Thatis，wededucttheusualinterestfromthefuturesum。Noweverycapitalvalue，——notalonethevalueofasumofmoneybutofeveryperishableproductiveinstrument——iscalculatedbydiscounting；thatistosay，fromthevalueofthefutureexpectedsumofproductsintowhichthecapitalwillbetransformed，thecorrespondingnetreturnisdeducted。Onlythat，practically，indiscountingmoneyclaims，afixedrateofinterest——i。e。adefiniterelationbetweencapitalvalueandnetreturn——isalwaysassumed，andalwaysemerges，whileweareexplainingtheformationofthisrelationbyfirstdiscoveringtheprincipleforestimatingcapitalvalue。
Bohm-Bawerk，arguingagainstThunen\'sexplanationofinterest——whichhasmuchincommonwiththatjustgiven——askswithwhatrightitcanbeassumedthatthevalueofthegrossreturnneverraisesthevalueofcapitaltoitslevel，or，inversely，thatcapitalvalueneverdepressesthatofthegrossreturntoitslevel？Ifareturnof105canbeobtainedwithanoutlayof100，willtherenotbecompetitioninproduction，orlevellingofthevaluations，untileithertheoutlaycometobevaluedat105
orthereturnat100，orbothsettleatsomefigurehalf-waybetweenthetwo？Bohm-Bawerkisrightinraisingthequestion，seeingthathedoesnotstart，aswedo，withaphysicalnetreturntocapital。Butassumingthisphysicalnetreturnthequestionisatonceansweredandsettled。Solongasthegrossreturnremainslargeenoughtoreplacethecapitalandyieldanetreturn，thevalueofgrossreturnandthevalueofcapitalcanneverbeassimilated:therewillalwaysbeadifference——
viz。thevalueofthenetreturn。Thisdifferencecouldonlydisappearwiththedisappearanceofphysicalproductivity。Solongasitexists，solongdoesphysical-productivityguaranteevalue-productivitytocapital，andsolongdoescapitalalsocreatemoreinvaluethanitself；——toapplyagainthewordsofBohm-Bawerk，itcreates“morevalue。“Andif，inordertocalculatetheamountofcapitalconsumed，thecapitalvaluebedeductedfromthegrossreturn，itisnotthewholeamountofgrossreturnthatisdeducted；thesubtrahendissomewhatlessthantheminuend，andtherequiredresidueofinterestmustbetheresult。
Ifthisbeso，then，inthecommunisticstatealso，capitalvaluemustbeestimatedinsuchwisethatitabsorbsonlyaportionofthegrossreturntocapital；solongatleastascapitalretainsthesameefficiency，asanauxiliaryofproduction，whichgeneralexperiencefromtimeimmemorialhasshownittodo。Andforsolong，consequently，mustit，eveninthecommunisticstate，bearinterest。Calculationofthenetreturntocapital，anddeductionordiscountofthesamefromthegrossreturn，inordertofindthevalueofcapital；——thesearenaturaleconomiccalculations，indispensableineveryeconomysolongasthefundamentalconditionsofproductionknowntogeneralexperienceremaininforce。
Acapitalwhich，intwelvemonthsfromthedateofpossession。yieldsthesamegrossreturnsay105andthesamenetreturnsay5，isvaluedatthedateofpossessionatthesameamountsay100。Itis，nevertheless，notamatterofindifferencewhetherthecapitalcomesintoourpossessionnoworonlyattheendofthetwelvemonths，inasmuchaspossessionnowguaranteesareturnofinterestbesides。Itwould，therefore，beincorrectifweweretotaketheequivalenceofvaluationputuponcapitalsinthepresentandinthefuture，andarguefromthattothefulleconomicequivalenceofthepresentandthefuturepossession。Apresentsumisalwaysworthmorethanthesamesumatafuturedate，or，aswemaysay，thefuturesumisalwaysworthless，andthatinproportiontothefuturityofthetimewhenitwillcomeintoourpossession。IfinthecourseofayearIcanmake105outof100，thesumof100whichIshallobtainonlyattheendofayear，is，to-day，worthonlyabout95。Toreducefuturecapitalvaluestopresentvalue，theymustbediscounted，justasthevaluesoffuturegrossreturnsare。
Thereaderwillrememberthat，inchapterviofBookI，wedefendedthepropositionthatpresentandfuturewants，comingintocompetitionwitheachother，are，asarule，toberegardedasequal；thatistosay，thedifferenceintimedoesnotnecessitateanydifferenceinvaluation。Tothispropositionwehavenowtoaddasecond:——that，withinthesphereofproduction，thedifferenceintimedoesnecessitateadifferenceinvaluationofthegoodsemployedinproduction。Thetwopropositionsareinperfectaccord，andmutuallysupplementoneanother。Ifwantsarecontinuouslytofindthesamesatisfaction，equalamountsofreturnmustcontinuouslybeproduced。Andifequalamountsofreturnarecontinuouslyproduced，capitalmustremaincontinuouslythesameinsubstance。Butifcapitalisactuallytoremainthesameinsubstance，andsoisabletoyieldcontinuouslythesamereturns，thismustfindexpressioninavaluationwhichascribestocapitalahighervalue，theearlierthepointoftimeitcomesintoourpossession。Fortheearlierthepointoftime，theearlier，andconsequentlythegreater，thereturnthatmaybeexpected。
Thebusinessmanwhotakesnoteofhisowncalculations，whotestshisrecollectionsandimpressions，andaskshimselfwhyhecalculatesinterest，andonwhatprinciplehegraduatesthevalueofhiscapital，willarrivesubstantiallyatthesameconclusionsasthosetowhichwehavejustcome。Thevalueofgoodsisderivedfromtheirutility；thevalueofcapitalgoodsfromtheirusefulreturns；interestrepresentsanetincrementtoorfruitofcapital:——thesearetheaxiomsofpracticallifesomuchcontradicted，evenlibelled，bytheorists。Theyareaxiomswhicheverylaymanrecognises，inhisownway，asthemotivesbywhichhebelieveshimselfguidedinhiseconomicoperations。Atheorywhichshouldsucceedinvindicatingtheseaxiomsofripenedexperience，whichshouldgiveadistinctformtothevagueimpression，andagoodandnecessarycontenttoopinionsnotquiteconsciousoftheirownraisond\'etre，couldhavenobettertestimonytoitscorrectness。
NOTES:
1。CompareMenger，p。135。
Chapter3
TheValueofCapitalandtheInterestonCapitalcontinued。II——
TheRateofInterestInterestisthereturntocapitalwhenthatreturn，withitsvalue，isconsideredinrelationtocapitalvalue。Therelationexistingbetweencapitalvalueandinterest，whenconsideredintheindividualcase，maybedescribedasthepercentageofincrement；itbecomesthe“rateofinterest“onlywhenitobtainsinalargenumberofconnectedcases。Therateofinterestisthegeneralpercentageofincrementtoallthecapitalinthemarket。
Thefactthat，inoneandthesamesphereofproduction，thereemergesageneralpercentageofincrement，oratleastaconstanttendencytowardit，arisesfromthemany-sidedconnectionsbetweenvariouskindsofproduction。Inconsequenceofthecomparativelygreatfreedomofchoiceinthedestinationofmostcapital，land，andlabour，itisalmostalwayspossibletoextendanysingleproductionatthecostofsomeother，ortolimititinfavourofsomeother。Ofthispossibilitypeoplewillavailthemselveswhenever，andaccordingas，anyoneproductionshowsaparticularlyfavourableorparticularlyunfavourablepercentageofincrement。Inseekingforthemostfavourablepercentageofincrement，andinstrivingtowardstheequalisingofalldifferences，ageneralpercentageofincrementwillbecreated，oratalleventswillbeaimedat，sofarasthereiscompetitionbetweenthevariousproductions。
Theorganisationswhichatpresentcontributemosttotheequalisationoftheinterestratearethemoneymarkets，wheretheprincipalamountsofcapitalintheshapeofmoneyarelent。
Inthemoneymarketsitis，ofcourse，inthefirstinstanceonlyinterestonloansthatisdetermined，butthestateoftheloanmarketinthelastinstanceaffectsalsothereturntoproduction，inasmuchasitinfluencestheextendingofindustriescarriedonwithborrowedcapital。Notonlyloancapital，however，butalsothatcapitalwhichisthepersonalpropertyofundertakers，movesperpetuallyinthedirectionofthehighestpercentageofincrement。Underacommunisticregimeallcapitalwouldbelongtotheonesingleundertaker，thestate；capitalwouldnolongerbelentforproduction；andtheinterestonloanswouldceasetoinfluencethepercentageofincrementinproduction。Butthiswouldsimplyleavecapitalstillmorefreetoshiftfromoneproductiontoanother；itwouldnolongerbehinderedbythosebarrierswhichthecircumstancesofprivateownershipatpresentoppose。
Everyoneknowsthattherateofinterest，inspiteofthetendenciestoequaliseit，isneverreallythesameallover。
Thisischieflycausedbythefactthattheunityororganisationofproductionisbynomeansperfect。Thereisnosuchthingasaunitedmoneymarket，andmuchlessisthereanythinglikeaunitedwayofconductingproductivebusiness。Theindividualismofthepresenteconomicorderdistributesproductionamongindividualundertakings。These，ofcourse，undertheinfluenceofcompetitionandthedesireforgain，arebuiltintoonecoherentstructure，whichtosomeextentrealisestheeconomicorderthatanidealplanofproductionwouldpresent。Yetathowmanypointsdowefindgreatgaps；howmanydislocationsthroughexcessiveaccumulationofmeansofproductionatthewrongplaces；howoftenthingsgotooquickly，howoftennotfastenough！Andmistakesliketheseareallthegreaterthemoredistantthegroupscomparedarefromoneanother。Theseparatebranchesofagriculturalproductionmaybe，relativelyspeaking，moreinharmonywitheachother，than，forexample，agricultureasawholewithmanufactureasawhole。Thetransferencesfromagriculturetomanufacturing，andviceversa，takeplacetooseldomtoallowoftheproperbalancebetweenthembeingmaintained。
Thisresults，aswehavesaid，indifferencesofpercentageofincrementamongtheindividualproductivegroups。Itisscarcelynecessarytoemphasisethefactthateverydifferenceinrateofinterest，arisingfromthiscause，isamisfortune。Everysuchdifferenceimpliesaviolationoftheveryfirstprincipleofemployinggoods；thattheyshallfirstbeusedinthemostfavourableemployments，andthatthelessfavourableshallbeallowedonlyinsofarasthereisnotenoughofthemorefavourable。Inonegrouppeoplearecontentwithalesspercentageofincrement，whileinotherstheymaybeobtaininghigherpercentages。Thehurtfulconsequencesofthisarebynomeansconfinedtotheuseofcapital；theygofurther，andmisdirecttheproductionofcapital。Capitalswhichyieldatriflinginterestareproducedfarmorelargely，andcapitalswhichmightyieldahighinterest，toamuchlessextentthantheyoughttobe。
Ontheotherhand，uniformityinthepercentagesofincrement，andauniformrateofinterest，are，wheretheyexist，proofs，economicallyspeaking，ofawell-balanceddistributionanddisposalofcapital。Theyareproofsthattheeconomicallyindicatedlimitsoftheemploymentofcapitalareeverywhereequallyrespected；thatnowhereisthereanyfallingshort，andnowhereanyoversteppingofthem。Intheprinciplewhichdemandsthattheemploymentofcapitalshallbeguidedbytherateofinterest，andthatallemploymentswhichfailtoreturnthecustomaryinterestbeleftalone，wefindthemarginallawbroughtintoonecommonexpressionasregardsallthedifferentformsofcapital。Thenetreturnisadefinitequotaofthegrossreturn，andwherethequotaofnetreturniscontrolled，thedirectionofcapitalgenerallyiscontrolled。
Inthecommunisticstate，whenproductionisdirectedfromonepointandtooneend，thedifferencesinpercentageofincrement，sofarastheseareoccasionedbytheinorganicnatureofoursystemofproduction，woulddisappear。Ofcourse，eventhere，certaindifferenceswouldstillremain；allthose，namely，whichcouldnotbefurtherequalisedbytransferencesfromoneproductiontoanother。Inthenatureofthings，byreasonofthevarietyinthepropertiesofthings，noproductioncanbeincreasedatthecostofothersbeyondacertainpoint，and，onsimilargrounds，noproductioncanbelimitedinfavourofothersbelowacertainpoint。Agriculturalcapitalcouldneverbecompletelytransferredtotrade，nortradecapitalalltransferredtoagriculture。Butwhatdoesobservationhereshow？
Itshowsthatthoseverydifferences，whichitseemsquiteimpossibletoremove，arealwaysremoved，andthatthroughaninstrumentalitywhichispermissibleevenwheretransferencesofcapitalarenotpermissible；bymeans，thatistosay，ofcalculation。
Howthishappensandwhatitmeans，weshallnowtrytoshow。
Chapter4
TheValueofCapitalandtheInterestonCapitalcontinued。III——
TheLawoftheUniformCalculationoftheInterestRateAcapitalwhich，inaoneyear\'sproductionperiod，transformsitselfintoagrossreturnof？05，willbevaluedat？00ifthegeneralrateofinterestbe5%:theresidue？isnetreturn。Ifthegrossreturnshouldrisesuddenlyandgreatly，say，e。g。，to？26，——thegeneralrateofinterestremainingunaltered——itappearsatfirstsightthattherisemustaffectthenetreturn，andcauseittobecalculatedat？6insteadofat？asformerly。But，asamatteroffact，isthereturnsocalculated？Itisinoneparticularcase；that，namely，wheretheriseisregardedasasolitaryinstance。Butifitisregardedaspermanentthecalculationwillbedifferent。Theownercertainlyreckonstheentireincreaseof？6asgain，buthedistributesitbyputting？0tocapitaland？tonetreturn。Fromthistimeonwardhewillreckonhiscapital，andconsequentlyhisconsumptionofcapital，at？20，andhisnetreturnat？；sothathedoesnotassumeanincrementof26%，butonlyof5%，correspondingtothegeneralrateofinterest。1*Inthesameway，shouldthegrossreturnofacapitalsinkpermanently，whiletherateofinterestremainsunaltered，aportionofthelosswillbewrittenoffthecapitalvalue，insuchamannerthattherelationbetweencapitalvalueandnetreturnshallagaincorrespondtothegeneralrateofinterest。
Inthiswayitcomesaboutthat，wheretransferencesfromproductiontoproductionarenolongerpermissible，theindividualpercentagesofincrementonindividualcapitalsare，bycalculation，regulatedaccordingtothegeneralrateofinterest。
Therateofinterestwhichobtainsintheparticularproductivegroup，orintheparticularmarkettowhichthecapitalinquestionbelongs，istheratethatdecides。
Themeaningofthisactofcalculationiseasytounderstand。
Acapitalyielding26%interestandoneyielding5%，arenotequivalenttooneanother，althoughbothmaybeexpressedinthesamefigures。Onlyequalcapitalsbearingequalinterestareequivalent。Capitals，then，canbecalculatedoff-hand——i。e。
withoutconsiderationtotheinteresttheybear——onlywheretherateofinterestisthesame。Thatisthereasonwhy，whentherateofinterestcannotbemadeequal，itisatleastcalculatedassuch，bymeansofshiftingthedifferencestothecapitalvalue，andgivingthemexpressionthere。
A3%capitalanda6%capitalof？00arenotequivalenttooneanother；theyareputintotermsfitforcomparisonbycalculatingthe3%capitalat6%，andsoreducingthecapitalto？0，orbycalculatingthe6%capitalat3%andraisingcapitalvalueto？00。
Asameansofsimplifyingcalculation，itmightbeexceedinglydesirablethattherateofinterestshouldbethesameinallmarkets，andinallproductivegroups。Therate，however，isnotthesame，andthefactmustbereckonedwith。Iftherateofinterestonbondsamountto4%andthebankrateto3%，itisaconsequenceofthefactthatthetwoloanmarketsareseparatedfromoneanother，andthatdemandandsupplyintheonedonotapproximatetodemandandsupplyintheother，or，atallevents，approximateonlyintriflingdegree。Thiswantoftouch，however，whichrendersimpossibletheequalisationofratesofinterest，alsorendersitlessnecessary；itisonlywhencapitalistransferredfromonemarkettotheotherthatthedifferenceinratesofinteresthasanypracticalimportanceforthevaluationofcapital。Itisdifferentwhereoneandthesamemarketisconcerned。Herecapitalsarecontinuallyvaluedagainsteachother，andhere，therefore，differencesinpercentageofincrementcouldnotbeputupwith。Theyareovercomeeitherbyregulationofproduction，or，wherethatisnotpracticable，bycalculation。Inthecommunisticstate，whereallcapitalswouldbeunderauniformadministration，itwouldbeanobviousexpedientofcalculationtoregulateallindividualpercentagesofincrementaccordingtotheprevailingrateofinterest。
Wenowproceedtofurtherapplicationsofthefundamentalpropositionthattherateofinterest，whenpossible，shouldbeuniformlycalculated。
NOTES:
1。IntheaboveexampleIassume1circulatingcapital，and2
circulatingcapitalwhosevalueisnotdepressedtoalowerlevelbycheapercostsofproduction；——say，ascarcerawmaterial。
Supposethereisanincreaseddemandforarticlesmadefromamber，whileambercannotbeobtainedingreaterquantities；itwillriseinvalue。Thoseundertakingswhichworkwithambercertainlyobtaintherebyariseintheirgrossreturns；butthereis，ontheotherhand，asimilarriseintheamountdeductedforconsumptionofcapital，andthismustbetakenintoconsiderationintheirestimateofgain。Inthelongrunthereremainsahighernetreturn，butitisonlyrelativelytotheincreasedoutlayofcapital。
Amuchmorecomplicatecalculationhastobemadeasregardsfixedcapital，asalsoasregardscapitalwhosevalueisinfluencedbythecostsofproduction。Imustleavethereadertothinkoutforhimself——inthelightoftheprinciplesnowtobediscussed——thecorrespondingmodificationsinthevaluationoffixedcapitalandintheinfluenceofcosts。
Chapter5
TheValueofCapitalandtheInterestonCapitalcontinued。IV——
ChangeintheRateofInterestIthasjustbeenshownthat，whenthevalueoftheserviceofanyindividualformofcapital——e。g。arawmaterial，oramachine——risesorfalls，thefactexpressesitselfinacorrespondingelevationordepreciationinitscapitalvalue。Thenetreturnimputedis，ofcourse，alteredatthesametime，butonlyinsofaraswillbringitagainintothatrelationwiththecapitalvaluewhichcorrespondswiththeordinaryrateofinterest。
Inorderthatthegeneralpercentageofincrement——therateofinterest——mayfallorrise，theremustbechangesofanextensivekindinthereturntothegreatmassofcapitals——
broughtaboutthroughchangesinsupply，indemand，intechnique，inaword，inanyofthefactorsofimputation。Ageneralriseinthegrossreturntocapital，broughtaboutbyagreatanduniversallyeffectiveinvention，wouldcauseageneralriseinthenetreturntocapital，anditsrelationtocapitalvalue，——
thatistosay，intherateofinterest。Thecapitalvaluemightinthisinstanceremainentirelyunaltered。Onlythosecapitalswhichhadnopartintheeffectsoftheinvention，andwereinthisrespectindividuallyseparatedfromthegeneralmassofcapital，mustnecessitybeaffected。Wheretheamountoftheirserviceshadremainedunalteredinthemidstofthegeneralincrease，inestimatingthevalueofthosecapitalsagreaterdiscountfromthatamountwouldrequiretobemade，correspondingtotheincreasedrateofinterest。Supposetherateofinteresttorisesuddenlyfrom3%to6%，thevalueofallcapitalwhoseinterestremainsunalteredat3%mustbeappraisedatacorrespondinglylowerrate。
Wehavediscussedtheeffectwhichtheindividualfactorsofimputationproduceuponthecontributionsofcapital，insufficientdetailtomakethederivationoftheruleswhichgovernthechangeintherateofinterestamatterofnodifficulty。
Onesingleremarkmaybeadded。Itisquiteahackneyedpropositionthattheincreaseofcapitalcausesadeclineintherateofinterest。Thispropositionistrueonlywithacertainlimitation；itholdsonlywhen，byincreaseofcapital，isunderstoodincreaseinamount，withoutasimultaneousincreaseinthevarietyoftheformsofcapital。Increasedvarietyincapitalissynonymouswithanadvanceintechnique；itisoneofthosefactsofeconomichistorytowhichspecialattentionmustbedrawn，whenitisdesiredtoshowclearlythedifferencebetweenprimitiveanddevelopedproduction。Thustoitisduewhatweknowtobetheeffectofeverytechnicaladvance；namely，ariseinthevalueoftheservicesofcapital，asregardsindividualbusinesses，and，whencomprehensiveenough，ariseintherateofinterest。Notuntilthequalitativeadvancehasbeenquantitativelyusedup，andthestocksofthenewvarietiesofcapitalbeenmultiplied，withoutothernewvarietiescomingtothefront——thatis，notuntilproductionexpandsandfillsoutthenewly-setlimits，——cantheincreaseofwealthhavepower，first，todepressthevalueoftheservicesofcapitalindividually，and，inthelongrun，shoulditscompassbesufficientlyextensive，——tocauseafallintherateofinterest。
Ifwelookbackoverthechangesintherateofinterestonproductionoverthewholecourseofeconomichistory，weshallnoticeanunceasingupwardanddownwardmovement，accordingasadvancesinproductionaremade，orasthemarginalvaluesofthenewly-acquiredwealthareagaindepressedbytheincrementofcapitalwhichfollows。Butthroughtheseunceasingfluctuationsrungreatfundamentaltendencies，whichare，ofcourse，subjecttodisturbancefromopposingtendenciesoftherateofinterestonconsumptionloans。Economichistorybeginsataperiodwhenthereisalmostnocapital，——thezeroofpropertyincapitalaswellasthezeroofreturnfromcapital。Fromthattimeonwardspropertyandreturn，measuredabsolutely，goongrowingsolongastheeconomicworldthrives，andhasnotyetreachedthedowngradeofthemovementofvalue。Andtherelationbetweenthesetwo——i。e。therateofinterest——risessimilarlyfromthebeginning，andonlybeginstofallwhenthedowngradeinthemovementofvaluebeginstocomeinsight。
Chapter6
TheValueofCapitalandtheInterestonCapitalcontinued。V——
TheValuationofFixedCapitalUptothispointwehavedisregardedthecircumstancethatmanycapitals——allthosecalled“fixedcapitals“——donotexhaustthemselvesinyieldingonesinglereturn，butco-operateinseveralprocessesofproduction，andyieldseveralreturnsbeforetheyarefinallyusedup。Wewerejustifiedinhithertoneglectingthiscircumstance，asitisofnoimportancetotheprincipleofthevaluationofcapitalwhichwehadfirsttoestablish。Now，however，thattheprinciplehasbeenestablished，wemustgoontothisnextquestion。Weshallfindthatthecircumstancealludedtodoesnotessentiallyaltermatters，althoughitcertainlyrendersthemmuchmorecomplicated。
Inthecaseoffixedcapital，insteadofonesinglefuturereturnthereareseveralreturns，andthepresentvalueoftheseseveralreturnsmustbedeterminedbydiscounting。Ifamachineremainscapableofworkovertenyears，theservicesofallthetenyearswhicharetobeimputedtoitmustbediscountedandaddedup，attheirpresentvalue，inordertoobtainthecapitalvalueofthemachine。Itneedscarcelybesaidthateverylaterservicemustbeestimatedatsomuchlessinpresentvalue，asthediscountmustberelativetotheterminalpoint。Furthercomplicationsarecausedbythefactthatrepairs，andreconstructions，andextensivereplacements，frequentlytakeplaceinfixedcapitalduringtheperiodinwhichitiswearingout。Theoutlaywhichthisoccasionsmustbediscounted——takingintoaccountofcoursetheperiodoftimeatwhichthisoutlaymaybeanticipated。Stillfurthercomplications，finally，arisefromtheuncertainty——whichincreasesastheperiodofwearandtearlengthens——whetherthereturnsexpectedwillactuallybereceivedatall。Andthisalsonecessitatespeculiardeductions，whichwillbemostsimplymadewherepeoplecaninsureagainstthedanger。
Inthecaseofsuchfixedcapitalsasareconsumedexceedinglyslowly，and，consequently，yieldexceptionallymanyreturns，theprocessofcapitalisationfrequentlytakestheplaceofdiscounting。Beforespeakingofthis，however，itwillbenecessarytotouchatleastuponanothersomewhatdifficultquestion。
Thisisthemethodofcalculatingtheindividualpercentagesofgrossreturnassignablerespectivelytointerestandtowearandtear。Ifamachineremainsserviceableforfiveyears，andyieldseveryyear？000，thisyearlyincomemustbedividedoutbetweeninterestandwearandtearAmortisationinaccordancewithacertainlaw。Inordertofindthislaw，itisbesttorepresenttheindividualratesofreturnasannuities。Thefirstinstalmentmustyieldinterestforthefirstyearuponthetotalcapitalvalue，allreturnbeyondthatisrepaymentofcapital；
thesecondinstalmenthastoyieldinterestonthecapitalvalueremainingafterdeductionofthisrepayment，andtheresidue，whichmustnowbealargerone，servestowardfurtherrepayment；
andsoon，untilfinallytheentirecapitalisreplaced，andinterestobtaineduponalltheportionsofcapitalaccordingtotheperiodoftheiremployment。Thereasonforthiskindofcalculationlies，inthelastresort，inthelawoftheuniformcalculationoftheinterestrate。1*
NOTES:
1。Calculatedonthefiguresgiveabove，andassuminga5%rateofinterest，thevalueofthemachine，onputtingintopresentvaluethefiveexpectedannualreturnsof1000，withinterestandcompoundinterest，maybereckonedat4329。48。Thefirstreturnof1000pays216。47，as5%interestonthecapital，whiletheresidueof783。53goestorepaymentofcapital，thusleavingaremainingcapitalsumof3545。95。Fromthesecondreturn117。30
fallstointerest，and822。70tothesinkingfund；fromthethird，inthesamemanner，tointerest136。16，and，toreplacement，863。84；fromthefourth，92。97tointerest，907。03
tocapital；andfinally，fromthefifth，47。62tointerest，and952。38torepayment，wherebytheentirecapitalisreplaced。
Chapter7
TheValueofCapitalandtheInterestonCapitalcontinued。VI——
CapitalizationInterestisalwaysanaliquotpartofcapitalvalue，andcapitalvalueisalwaysamultipleofinterest。Whereinterestis5%，forexample，theinterestis1/20ofthecapitalvalue，andthecapitalvalueisequalto20timestheinterest。Itisthisfactwhichrendersitpossibletodeterminethevalueofcapital，notbydeductinginterestfromgrossreturn，butbyanothermethodwhichleadstopreciselythesameresult——namely，bymeansofacorrespondingmultiplicationofinterest，or，tousetheordinaryterm，bycapitalisation。Whetherdiscountingorcapitalisationispreferredwilldependuponcircumstances。Withcirculatingcapitaldiscountingistheusualmethod，asthegrossreturninthiscaseformsthenearestandclearestbasis。Withfixedcapital，ifthewearingoutiscomparativelyrapid，andthegrossreturnsarefewinnumber，discountingwillbethepreferablemethodinthiscasealso；butifalongseriesofgrossreturnsistobetakenintoaccount，capitalisationwillbepreferred。
Capitalisationiseasiestwherethegrossreturncontainsnoquotaforwearandtear，andisthereforeentirelynetreturn。
Thiswouldbethecasewithacapitalwhichneverworeout，whichpromisedrenttoalleternity，andarent，moreover，absolutelysecure。Tocarrythroughtheprocessofdiscountingherewouldbelaboriousinthehighestdegree；therentofeachseparateyearwouldhavetobeseparatelycalculated，untilthatrentwasreachedwhosepresentvaluewaszero；andnottillthencouldthecalculationbefinished。Howmuchsimplerinsuchacasetomultiplytheyear\'srentinaccordancewiththerateofinterest！
Theresultobtainedinthisfashionagreeswiththatgivenbytheformerandmorelaboriousmethod，notmerelyapproximately，butwithmathematicalexactitude，asanytext-bookofmathematicswillconfirm。Themathematicalformulaforthediscountingofaneternalrentissimplytheformulaofcapitalisation。
Thecalculationisalittlemorecomplicatedwhenthegrossreturnscontainquotasforwearandtear，andwhenrepairsandthelikemustbecoveredandinsurancepremiumsorpremiumsagainstriskretainedoutofthesegrossreturns。Insuchcasesallnecessarydeductionsmustfirstbemadefromthegrossreturnbeforewegetthenetreturnwhichistobecapitalised，andthisisveryoftenexceedinglydifficultintheindividualcase。Thepremiumsjustmentionedarefrequentlynotdeducted，buttheamountofriskfindsinsteaditsexpressionsimplyintherateofinterest。Thereturn，forexample，ofabusinessregardedasofdoubtfulsoliditywillbecapitalisedatahigherrateofinterest，i。e。asasmallermultiple。1*
NOTES:
1。Alltheseparateprinciplesherededucedforthecalculatingofcapitalvalueandinterestarefollowedinpracticallifeandarepracticallyfamiliartous。Thetheoryofthem，too，isoftengiven。Buttheyarealwaysfollowedandtaughtundertheassumptionthatthefactofinterestandafixedratioofinterestaregiven。Nothingissimpler，undersuchanassumption，thantocapitalisearent，ortoshowthemethodofcapitalisation。Butthedutyofthetheorististodiscovertheselaws，and，atthesametime，toexplainwhysuchassumptionsmaybemade。Whencecomesinterest？whencetherateofinterest？
Theseareourfundamentalquestions。Allthesinglelawswhichwehavelaiddownareconfirmedtheoreticallyonlyifwehavesucceededinexplainingalsotheassumptiononwhichtheyarebased，i。e。theexistenceofinterestandtherateofinterest。
Theanalysisofthevalueoflandwhichfollowswilloncemoregivethereaderoccasiontonoticehowdifficultitiswiththematterinhandtoescapearguinginacircle，andtopreventtheentranceofanyassumptionwhichisitselfinneedofexplanation。
Chapter8
InterestontheConsumptionLoan。HouseRentThenaturalprincipleshithertolaiddownforestimatingcapitalvalueandinterestreferonlytoproduction。Itmustnowbeaskedwhetherthereisalsoanaturalinterestwhichcorrespondstotheinterestgivenonaloanforconsumptionpurposes，orinterestderivedfromlettingofdwelling-housesandthelike。1*
Themotivesofadebtorwhoborrowswiththeviewofspendingtheloanonhimselfaredifferentfromthoseofanundertakerwhoborrowstoincreasehisbusinesscapital。Theundertakerhopestoobtainbothrepaymentofcapitalandinterestoutofthereturnontheborrowedsum。Themeredebtorcannothopeforthis，butmusttrustthatitwillbepossibleforhimtorepayhisdebtofcapitalandinterestoutofsomeotherincome。Heborrowsbecauseheneedsgoodsnow，andhasnotgotthem，whileheexpectsinthefuturetohavethemandnottoneedthemtothesamedegree——atleasthedeludeshimselfwithsomesuchhope。Thusinacertainsenseinterestonproductionandinterestonconsumptionhaveacommonsource。Bothofthemrelatetoadifferenceinthevaluationofpresentandoffuturegoods，onlythatthecauseswhichproducethisdifferencearedistinct。Inthecaseoftheproductiveoutlayofcapitalitistheproductivityofcapitalwhichcausesthedifferencebetweenpresentandfuture；inthecaseoftheconsumptionloan，itisaccidentalandpersonalcircumstances，——accidentalaccumulationofpresentwantsandexpenditure，accidentaldisturbanceofincome，andsoforth。Onewhofindshimselfinasituationofurgentnecessityisactingquiterationallywhenhepromises——atsomefuturetimewhenhehopestobemorefavourablysituated——topaytothepersonwhoassistshimbyanadvanceofmoneyoutofhispresentdifficulty，notonlytheamountadvanced，butanextra，aninterest。Asumof