To the socialistic claim that interest is robbery and that, therefore, interest taking ought to be prohibited, the popular answer is, interest is justifiable because capital is productive. This answer contains a grain of truth. While it is true that capitalistic methods of production are more productive than direct methods, capitalistic methods of production are, as we have seen, really simply the application of labor to the productive processes in a roundabout fashion instead of directly. The socialist, therefore, has a right to protest that the greater productivity of the capitalistic methods may be traced back to the original labor that created the capital. Therefore, he holds that even if capital does produce interest, the interest should not go to the capitalist, but to the laborer who produced the capital.

But the case for the capitalist is better than this exchange of arguments would indicate. The capitalist is entitled to interest because he chooses to defer the consumption of his income from the present to the future. Often this is no sacrifice at all to him but still it is a service to society. If there were enough persons who chose to defer present consumption of income to the future, there would be no interest, since there would be no discounting of the future. Since society as a whole chooses to make use of the putting off of consumption by a relatively small number of persons, it is only fair that society should pay for the service which is rendered to it. The socialists urge that society as a whole should look after this function of saving capital. Whenever society as a whole develops foresight and will power and the other characteristics necessary to saving in a sufficient degree, it may well be that society as a whole can do its own saving. In such a case the payment of interest to individuals might be done away with. As we know society to-day, however, whether it is organized under the form of an autocratic government or under a democracy, there is room for serious doubt that it has sufficient foresight and self-denial to defer present consumption sufficiently to maintain the capital requisite for production in the future.

Questions

1. What is meant by interest? What is the distinction between interest and rent?

2. What elements must be subtracted from gross interest so as to leave only net interest?

3. Does the rate of interest depend upon the country's supply of money? Why?

4. Is it a sufficient explanation of interest to say that interest is the excess of the output which is turned out when capital is used, over what would be turned out if labor were employed without capital? Why?

5. What is the weakness of the use theory of interest?

6. State and discuss the abstinence theory of interest.

7. What are the merits of the exploitation theory of interest?

8. How do you account for the difference in value between present and future goods?

9. What are the characteristics of persons and of incomes which influence the rate of interest? Show how these various influences operate to fix the rate of interest.

10. Can the marginal productivity theory of interest be harmonized with the discount theory? Explain your answer.

11. What determines the value of a machine which is to be used as a capital good?

12. How should you justify interest taking?

Supplementary Reading

Bohm-Bawerk, Positive Theory of Capital, Book v.

Carver, Distribution, Chap. vi.

Devas, Political Economy, Book III, Chap. iii.

Ely, Outlines, Chap. xxiv. Fisher, The Rate of Interest, Chap. vi. Marshall, Principles, Book VI, chap. VI.' Seager, Principles, Chap. xvi. Seligman, Principles, Chap. xxv. Taussig, Principles, Chaps. xxxviii.-xl.