Capital, Interest, and Rent: Essays in the Theory of Distribution
by Frank A. Fetter
Introduction by Murray N. Rothbard
Sheed Andrews and McMeel, Kansas City, 1977, 400 pp.
Reviewed by Israel M. Kirzner
Reprinted from Austrian Economics Newsletter 2, no. 3 (1980)
This book is a most valuable collection of “all the essays in which Fetter developed and presented his theory of distribution;” it is prefaced by a substantial and characteristically scholarly Introduction by Professor Rothbard, to whose editorial vision and initiative our gratitude is due for this volume. Frank A. Fetter (1863–1949) was, of course, a leading American economic theorist of the early years of this century, teaching at Cornell from 1901 to 1911, at Princeton from 1911 to 1931, and serving as President of the American Economic Association in 1912. During the course of a prolific and distinguished career of scholarly writing, commencing from about 1894 and continuing until the year of his death, Fetter made a particularly brilliant series of contributions to the theory of distribution, most of them during the years from 1900 to 1904. In these papers Fetter carried forward the radical reformulation of economic theory which had begun with the marginal utility revolution of the 1870’s, but which, at the turn of the century, was still far from being complete. Along with the new insights learned from the marginal utility theorists there remained pervasive and incongruous traces of earlier misunderstandings. These were particularly troublesome in the area of distribution theory, in the treatment of rent theory, interest theory, the concept of capital. Fetter attacked these problems with keenness of insight, with profound clarity of understanding, and with a delightfully lucid literary style. In the course of his essays he challenged some of the leading theorists of his time, including particularly Böhm-Bawerk, Marshall, J.B. Clark, and Irving Fisher. From his work there emerged a unified theory of distribution which fits illuminatingly into the broader framework of modern, subjectivist economic theory. (In this respect Fetter offers a striking similarity to Phillip Wicksteed — whose work is nowhere quoted in this volume, and in whose own work Fetter is himself not mentioned either.) Professor Rothbard is to be warmly congratulated for his excellent idea of collecting these papers and offering them to the present day student. Not only can the modern reader learn a great deal of the history of modern economics from this volume; these papers also demonstrate how economic theorizing can be engaged in by a master. It is a rare pleasure, these days, to encounter economic reasoning so elegantly presented, so powerfully yet lucidly argued.
The Introduction is a gem in its own right, giving us Murray N. Rothbard, the economist, at his very best. Careful and wide scholarship, perceptive interpretation and keen criticism of Fetter’s contributions, characterize this brilliant introductory essay. Probably the most provocative statement in the Introduction is Professor Rothbard’s opening sentence describing Fetter as “the leader in the United States of the early Austrian school of economics.” This may come as a distinct surprise to the reader of this volume, who encounters Fetter’s numerous, trenchant, no-punches-pulled attacks on Böhm-Bawerk, and Fetter’s dismissal of the Austrian school as having “stopped short of any lasting contribution to better concepts of capital and income” (p. 159). The reader may also recall Schumpeter’s asserting it to be “not quite correct” to classify Fetter as an “Austrian” (History of Economic Analysis, p. 874). Yet Rothbard’s claim can be defended. While it is difficult to discover any “early Austrian school” in U.S. twentieth-century economics, to which present-day U.S. Austrians might look back with filial pride, it cannot be denied that Fetter’s own work is thoroughly imbued with insights from the earlier Austrians whom he describes (p. 75) as holding the center of the stage in the post-1885 theoretical developments. That Fetter, while paying his respects to his Austrian forebears, is prepared to push forward the frontiers of knowledge by his own efforts (one thinks particularly, in this regard, of his splendidly consistent pure time preference theory of interest), can provide a useful model for today’s Austrians.
To seek, in this review, to examine Fetter’s contributions in detail would, in view of Rothbard’s own comprehensive Introduction, surely be a mistake. Rather than attempting to duplicate Rothbard’s treatment, the reviewer begs permission to dwell critically on one small part of that treatment. It may be confidently hoped that many economists will be stimulated by this outstanding volume to an appreciation of the roots of modern Austrian economics, and to making their own contributions to its further wholesome development.
Professor Rothbard credits Fetter with a “brilliant criticism” of Böhm-Bawerk’s famous “third ground” (in which Böhm-Bawerk claimed to explain that present goods are worth more than future goods as a result of the greater productivity of the former). Rothbard cites Fetter as showing this argument to be “totally invalid” by pointing out that “capital goods are really future goods.” When a firm hires workers or buys capital goods, Rothbard argues, it “is really buying future goods in exchange for a present good, money.” The “capitalist-entrepreneur hires or invests in factors now and pays out money (a present good) in exchange for productive services that are future goods” (pp. 11–12).
This reviewer wishes, with respect, to question the use of a terminology that may foster unnecessary confusion. When a firm hires, let us say, a truck, the truck is certainly, in one obvious sense at least, a present good: it does exist now. Similarly when it hires the services of laborers, these services are provided in the present. What Professor Rothbard (quite correctly) means, of course, is that the final consumption output, to which the truck and the labor services make their contribution, will become available only in the future. However, this perfectly correct and useful insight does not require us to say that when a firm buys a truck it is merely buying future consumption goods. It is entirely in order (and perhaps more simple) to say that the firm (a) buys present capital goods and services; and then (b) puts these present productive goods and services to work in timeconsuming production processes — in the course of which production processes these present intermediate goods ripen and mature into the final consumption goods to be available in the future. The capitalist producer in so doing is of course sacrificing present goods for the sake of the consumption goods to be available only in the future. But this does not require us to say that the truck is nothing but a future good.
Strictly for illustrative purposes let us imagine Knight’s Crusonia plant (an edible plant that grows at a fixed rate). Say that one pound of the plant today will grow into two pounds of the plant next year. An entrepreneur buys a pound of Crusonia today. Has he bought a present good or a future good? Clearly the pound of Crusonia he has bought is in one sense a present good, it can be consumed today. Nonetheless, since the purpose in buying it is, let us imagine, in order to obtain the two pounds that will be available (if present consumption is abstained from) next year, it is quite correct to say that the present one pound of plant is the key to two pounds of future plant — and it may hence seem harmless to describe the one pound of present plant as not being a present good at all, but as simply being “two pounds of future plant.” However (quite apart from the Hayekian criticisms of this Knightian view of present capital goods as guaranteeing a flow of future outputs — as if such output will be automatically forthcoming, without need for entrepreneurial decisions at all), such a formulation unhelpfully conceals the distinction between means and ends. One pound of present plant may be seen as the end goal of earlier growth processes. It may also be seen as present means for the achievement of future ends. It does not seem helpful to describe present means as being nothing but future ends. Rather we focus attention on the doubly Austrian insight that, while means tend to assume the value of the ends which they are expected to produce, nonetheless, where the ends are available only in the future, the present value of the presently available means equals the value of their future output only after discounting for time preference.
Fetter does (on p. 184) as Rothbard cites, write that it “would be far more consistent use of language to call intermediate, or productive, agents ‘future goods’ than present goods,” — but this does not appear to be the basis for an attempted refutation by Fetter of Böhm-Bawerk’s third ground. After all, if Böhm-Bawerk were to argue that one pound of Crusonia plant today is more valuable today than the prospect of one pound of Crusonia plant next year, (because of the greater productivity of the former), this cannot immediately be shown to be nonsense merely by asserting that the present pound of plant is two pounds of future plant. Rather, in emphasizing the future output of which present capital goods represent the inchoate form, Fetter appears simply to be challenging the parallelism claimed by Böhm-Bawerk to exist between the third ground and the other two grounds. In the other grounds it is argued that present enjoyments are valued today more highly than future enjoyments are valued today. In the third ground, on the other hand, it is argued that present intermediate goods (i.e., present means) expected to ripen into valuable future enjoyments, are valued today on the basis of these valuable future enjoyments. In this third ground, therefore, there is no comparison between the present valuation of present enjoyments and that of future enjoyments — only the insight that the value of present means depends on the value of future ends. This represents a criticism of Böhm-Bawerk’s understanding of the relation between the third ground and the other grounds; it does not seem intended as a refutation of it. For this Fetter had, of course, devastating and thoroughly Austrian arguments — forged, ironically enough, by none other than Böhm-Bawerk himself.
