Böhm-Bawerk’s Critique of the Exploitation Theory of Interest
Austrian economist Eugen von Böhm-Bawerk is known among historians of economic thought for his formidable History and Critique of Interest Theories(1884). Before offering his own explanation of the phenomenon of interest (in a second volume which appeared five years later), Böhm-Bawerk first systematically classified and refuted all previous explanations.
In my own history of economic thought class, I assign several of Böhm-Bawerk’s critiques as reading for my students. I do this not so much because someone might hold the (erroneous) view in question, but rather because Böhm-Bawerk’s arguments are of great pedagogical value.
In other words, the novice can learn a great deal about economics by reading Böhm-Bawerk’s critiques.
In previous articles I have touched on (what Böhm-Bawerk called) the “naïve productivity theory” and also the “abstinence theory” of interest. In the present article I would like to summarize Böhm-Bawerk’s critique of the “exploitation theory.”
The Exploitation Theory of Interest
The exploitation theory could be equally well titled the socialist theory of interest, but Böhm-Bawerk picked the former name because of its greater precision. After explaining that many writers had advanced various versions of the exploitation theory, Böhm-Bawerk decided to focus on the specific exegesis of Rodbertus, because his was the clearest and most coherent version.
Rodbertus’ explanation of interest is itself based on a labor theory of value, in which the value of a commodity is determined by the amount of (total) labor involved in its production. The fact that the capitalists consume products year after year, even though they may not perform any work themselves, is only possible because the workers collectively are paid less than the full product of their labor. The actual mechanism by which this transfer is effected is the institution of private property; the capitalists are in a position to demand that workers submit to their unfair wages because otherwise the workers will starve. In Rodbertus’ own words:
Since there can be no income, except as it is the result of labor, an excess of proceeds over labor costs depends on two indispensable prerequisites. First, there can be no surplus proceeds unless the labor at least produces more than is required for the continuation of the labor. For it is impossible for anyone to draw an income regularly[,] without himself doing any work[,] unless there is such a margin. Second, there can be no surplus proceeds, unless [institutions] exist which deprive the workers of this margin in whole or in part, and divert it to others who do not work themselves. For the workers are, in the nature of things, in possession of their product at the outset…. That this margin is wrested in whole or in part from the workers and is diverted to others, is the result of legalistic factors. Just as law has from the
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