Knut Wicksell: Selected Essays I

KNUT WICKSELL

‘Usually when a great economist is translated into English, reputation is deflated. Not so with Wicksell.’ Paul A.Samuelson ‘No finer intellect and no higher character have ever graced our field’ wrote Joseph Schumpeter about the Swedish economist Knut Wicksell (1851–1926). Wicksell made lasting contributions to capital theory, monetary theory and fiscal policy. However, whilst most of his books, originally published in German or Swedish, have long been translated into English, only a few of his more than eight hundred articles are available in English. This volume fills part of that huge gap by presenting a wide range of hitherto untranslated material. This volume includes: • contributions to neoclassical marginalism and Austrian capital theory; • essays on income, taxes and duties, including Wicksell’s doctoral thesis On the Theory of Tax Incidence; • one of Wicksell’s few articles on unemployment. A second volume contains essays on monetary questions and population, as well as a number of Wicksell’s book reviews. Bo Sandelin has been at the Department of Economics, University of Gothenburg, Sweden since 1973. His publications in international journals include articles on the economics of housing, the economics of crime, capital theory and the history of economic thought, with special reference to Wicksell’s capital theory. He has published several books in Swedish, and edited The History of Swedish Economic Thought (Routledge, 1991).

KNUT WICKSELL Selected essays in economics

Edited by Bo Sandelin VOLUME I

London and New York

First published 1997 by Routledge 11 New Fetter Lane, London EC4P 4EE This edition published in the Taylor & Francis e-Library, 2003. Simultaneously published in the USA and Canada by Routledge 29 West 35th Street, New York, NY 10001 © 1997 Bo Sandelin All rights reserved. No part of this book may be reprinted or reproduced or utilized in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Wicksell, Knut, 1851–1926. [Essays. English. Selections] Knut Wicksell: essays in economics/edited by Bo Sandelin. p. cm. Translated from German or Swedish. Includes bibliographical references and index. ISBN 0-415-15512-6 (alk. paper) 1. Economics. I. Sandelin, Bo, 1942– . II. Title. HB34.W48213 1996 96–9038 330–dc20 CIP ISBN 0-203-44354-3 Master e-book ISBN

ISBN 0-203-75178-7 (Adobe eReader Format) ISBN 0-415-15512-6 (Print Edition)

CONTENTS

Preface Introduction

vii viii

Part I Marginalism and capital theory 1 IN DEFENCE OF THE THEORY OF MARGINAL UTILITY

3

2 KAPITAL—UND KEIN ENDE! (Reply to Docent Brisman)

15

3 LEXIS AND BÖHM-BAWERK

26

4 ON THE THEORY OF INTEREST (Böhm-Bawerk’s ‘Third Ground’)

41

Part II Income, taxes and duties 5 ON THE THEORY OF TAX INCIDENCE

57

6 THE INHERITANCE TAX

116

7 TARIFFS AND WAGES

153

8 HIGH PRICES, TARIFFS AND WAGES

158

9 VOLUNTARY OR FORCED SAVINGS?

166

10 THE HISTORICAL DEVELOPMENT OF THE CONCEPT OF INCOME

170

11 THE CONCEPT OF INCOME AS REGARDS TAXATION, AND SOME ASSOCIATED TAX ISSUES

213

12 A FEW COMMENTS

240 v

CONTENTS

Part III Unemployment 13 WHY ARE FACTORY OPERATIONS BEING CURTAILED? Index

253 261

vi

PREFACE

This is the first of two projected volumes of previously untranslated writings by Knut Wicksell. The publishers have already responded to interest in Wicksell by publishing three volumes of articles on him in their Critical Assessments series, edited by John Cunningham Wood. Altogether, then, the availability of material both by and about Wicksell has now been improved for Englishlanguage readers. The texts have been translated by Dr Timothy Chamberlain (1, 4–6, 8– 13) and Julie Sundqvist (2–3, 7). Working with the translators has been very stimulating, and I have been impressed by their skill in interpreting Wicksell’s frequently complicated way of expressing himself. They deserve special thanks for their efforts. The translation has been financed by the Swedish Council for Research in the Humanities and Social Sciences. I should like to thank the Council for its support, which has made this project possible. Bo Sandelin

vii

INTRODUCTION

‘Einige werden posthum geboren’—some are born posthumously—says the German philosopher Friedrich Nietzsche in his autobiography; he has himself in mind. From the perspective of English-language readers, the same claim can be made for the Swedish economist Knut Wicksell (1851–1926), since his most important writings only began to be published in English after his death. Wicksell’s best-known work, the two volumes of Lectures on Political editions had already appeared, the first in 1901–6. In addition, a German ediEconomy, was published in English in 1934–5. By this time, three Swedish tion had come out in 1913–22.1 The Lectures on Political Economy were followed almost immediately by the translation of Interest and Prices. A Study of the Causes Regulating the Value of Money (1936).2 The original edition (in German) had been published in 1898. Wicksell’s first book, Value, Capital and Rent, was published in German as early as 1893, but had to wait until 1954 before appearing in English translation.3 Wicksell’s main work on the theory of public finance, Finanztheoretische Untersuchungen nebst Darstellung und Kritik des Steuerwesens Schwedens (1896) is still not available in its entirety in English. The main part of the section ‘A New Principle of Just Taxation’ has, however, been translated into English by James Buchanan.4 The preceding section, ‘On the Theory of Tax Incidence’, is published in English for the first time in this collection. Wicksell himself published very little indeed in English—barely a dozen short articles, about half of them on population. He published a couple of brief contributions on the gold problem in the Economic Journal and an article on international freights and prices in the Quarterly Journal of Economics. All his more significant essays were published in Swedish instead, and to some extent in German. Ekonomisk Tidskrift, which was renamed the Swedish Journal of Economics in 1965 and the Scandinavian Journal of Economics in 1976, was his most important scholarly forum in Swedish. Wicksell’s German articles were spread among several different journals, most prominently Jahrbücher für Nationalökonomie und Statistik. Fourteen articles viii

INTRODUCTION

have previously been translated for a volume edited by Erik Lindahl, entitled Knut Wicksell. Selected Papers on Economic Theory (1958). A bibliography of works by Wicksell printed between 1868 and 1950 lists 889 titles.5 In addition, he left about one hundred unpublished manuscripts, which are now preserved in Lund University Library.6 As stated above, very few of Wicksell’s works were originally published in English, but some have been translated. All things considered, a very small proportion of Wicksell’s work has been available in English.7 The present collection is the first of two projected volumes containing further translations from Wicksell’s ample production.

PRINCIPLES OF SELECTION The selection has been guided by the following principles. First, only material that—as far as I have been able to establish—has not previously been published in English is included. Second, only writings on economics have been taken into account. (A few works on the closely related issue of population are included in the second volume.) The emphasis therefore lies on Wicksell’s role as a scholar of economics, while his contributions to general public debate are passed over. However, it is worth pointing out that in Wicksell’s lifetime it was his activity as a provocative participant in public debate that made him known to the public at large. Here, no topic was beyond his range. He wrote articles or gave lectures on subjects as far apart as defence, euthanasia, spiritualism, marriage, prostitution, foreign policy, issues of law and religion. On one occasion, he dealt with the latter topic in a lecture in so deliberately provocative a manner that as a reputable professor in his late fifties he spent two months in prison in 1909 for ‘blaspheming and mocking God’s holy word in such a manner as to occasion public offence’. Wicksell’s many contributions to public debate and letters to the press undoubtedly retarded his career as an economist. But he liked journalism and, in addition, for many years this kind of activity provided a necessary contribution to his livelihood. He had no regular income until he was fifty, when he became Professor of Economics and Fiscal Law at Lund University. Nevertheless, his contributions to the daily newspapers are not represented in this collection. A third criterion is that, to be included, an article should throw light on some principle. I have tried to avoid articles that focus too narrowly on a specific case and have little general interest. Fourth, Wicksell published a number of articles that were draft versions of chapters of his books, or that summarized central sections of his books. I have avoided those articles because they do not add much to what the reader can find in the books themselves. ix

INTRODUCTION

Fifth, Wicksell, however, also wrote articles in which he clarified points that may have seemed obscure in his books or in earlier articles, or in which he concurred with critical comments, or, on the contrary, defended his propositions against attacks. A few articles of this kind are included. One example is the first article in this collection, ‘In Defence of the Theory of Marginal Utility’, which contains a critique of ideas that Gustav Cassel had put forward in his article ‘Grundriß einer elementaren Preislehre’. Among other things, Cassel censures the concept of marginal utility in price theory used by Wicksell in Value, Capital and Rent, as well as by other authors. Cassel prefers to go directly to the relationship between price and quantity demanded. Another example is the second article (‘Kapital und kein Ende’), which deals with the concept of capital and the return to capital and is mainly a response to criticism levelled by Professor Sven Brisman against Wicksell’s views after the publication of the first part of the second edition of Lectures on Political Economy. WICKSELL’S AREAS OF RESEARCH AND THIS COLLECTION Most of Wicksell’s scholarly writings can be classified in three broad groups. The first comprises his work on microeconomic price theory and capital theory, the second his work on fiscal theory and fiscal policy, and the third his monetary or, to use a term more adequate today, macroeconomic writings. His best-known publications on price theory and capital theory are his books Value, Capital and Rent and the first volume of Lectures on Political Economy. Even if his achievement here largely consisted in clarifying and refining the thoughts of earlier authors—particularly Böhm-Bawerk, Jevons and Walras—he also made enduring original contributions. His account of the phenomenon in capital theory that has come to be known as the ‘Wicksell effect’ played a major role during the so-called Cambridge controversy in the 1950s to 1970s. Wicksell demonstrated here that problems can arise if capital is treated like any other factor of production. It is an irony of fate that the ideas of the neoclassicist Wicksell were used to support the position of the English Cambridge School, which opposed neoclassicism. Joan Robinson was even of the opinion that the Wicksell effect not only obstructs the construction of an aggregate production function and challenges orthodox marginal propositions, but it ‘is the key to the whole theory of accumulation and of the determination of wages and profit’.8 In this collection a few articles in the first research category are brought together under the heading Marginalism and Capital Theory. In addition to the two articles already mentioned, ‘In Defence of the Theory of Marginal Utility’ and ‘Kapital und kein Ende’, there is first an obituary tribute to Lexis and Böhm-Bawerk. Here Wicksell explains the enormous significance Böhmx

INTRODUCTION

Bawerk’s Positive Theory of Capital had for him; the book hit him ‘like a revelation’. The final essay in this section, ‘On the Theory of Interest’, was originally published posthumously and contains a critical discussion of BöhmBawerk’s grounds for the rate of interest, especially the third ground. Wicksell’s central work on fiscal policy is his book Finanztheoretische Untersuchungen nebst Darstellung und Kritik des Steuerwesens Schwedens (1896). What has attracted most attention here is his argument for the benefit principle in taxation, i.e. that the tax imposed on a given individual should be in proportion to the benefit that person receives from the tax. Further, in Wicksell’s version, the principle implies ‘approximate’ unanimity and voluntary consent in taxation. Wicksell’s views have been made known to the English-speaking world by James Buchanan’s translation of the relevant section of the book, but they had previously been further developed by Erik Lindahl in his doctoral dissertation Die Gerechtigkeit der Besteuerung. Eight pieces on fiscal policy and related areas make up the second part of our collection, entitled Income, Taxes and Duties. It begins with ‘On the Theory of Tax Incidence’, which was Wicksell’s doctoral thesis, defended in 1895 and included as the first part of Finanztheoretische Untersuchungen. ‘On the Theory of Tax Incidence’ was a short thesis, only seventy-five pages, the reason being that Wicksell wanted to keep down the cost of the 360 complimentary copies he was obliged to submit to the university. In his thesis, Wicksell sorted through existing ideas on the effects of taxes on monopoly profits, indirect taxes and income taxes. The second piece on taxes is an article from Ekonomisk Tidskrift on the inheritance tax. In Wicksell’s time, due attention was paid to fundamental conceptual issues, and this informs the whole essay. Thus, should what is called inheritance tax be seen as essentially a fee or a tax, or should it be seen as an expression of the view that the state and municipality also have a right of inheritance when one of their members dies? And where do considerations of social policy lead? Wicksell’s policy conclusion is that the inheritance tax ought not to be used in its entirety for current expenses but that most of it should go to capital formation on the part of the state and the municipality. After a few shorter articles on various issues, including tariffs, we have two lengthy articles on the concept of income. They derive from a government report written by Wicksell and David Davidson. (One of Wicksell’s contributions was also published in Ekonomisk Tidskrift.) It is worthy of note that Wicksell and Davidson were unable to agree on the appropriate concept of income in connection with taxes.9 Davidson wanted to view all revenues contributing to increased wealth or employed in consumption as taxable income. Consequently he included, for example, inheritances, lottery winnings and increases in the value of land. Wicksell wanted to restrict taxable income to the individual’s contribution to the national income. In his view, inheritances, increases in the value of land and similar revenues should be xi

INTRODUCTION

treated separately and be confiscated by the state to the extent that they were unearned; they were not part of taxable income. The final, short article in the second section is entitled ‘A Few Comments’. This article responds to views on the issue of taxation advanced by David Davidson, in part polemically against Wicksell, and which are based on the so-called principle of ability to pay. Wicksell himself, as I have said, is generally cited as an important advocate of the benefit principle. Here, Wicksell tones down the difference between the two principles, and he clarifies his own position in a way that some of his interpreters may find surprising. His intention was not to transform taxes into voluntary payments. ‘The voluntarism I talked about only applied to the actual passing of tax bills’. Furthermore, ‘These days, taxation is actually exercised by and by means of the taxpayers themselves [because of the universal franchise in parliamentary elections and the right of parliament to decide on taxes]. That the result must then be taxation according to perceived benefits, as far as these are capable of making themselves felt, seems to be not merely, as Davidson would put it, ‘a postulate’, but a real axiom’. Thus, in a democratic, parliamentary system, the benefit principle is de facto the main principle applied. Wicksell did not write much about unemployment. 10 Nor did his contemporaries. As is evident from the single article (‘Why are Factory Operations being Curtailed?’) in the last section of this volume (‘Unemployment’), unemployment was an ‘irrational, almost incomprehensible’ phenomenon. For a rational economist it seemed like a paradox that it could ever pay to do nothing, to leave the available productive forces unused. The fundamental question in economics was how to manage an economy with scarce resources, but the question of unemployment was of the opposite nature. This was undoubtedly one of the reasons why the neoclassical economists of the time, including someone as engaged in social policy as Wicksell, did not really feel that unemployment was a central field for their discipline. I have argued that most of Wicksell’s scholarly writings can be classified into three broad groups, the third of which comprises his monetary writings. Two of his books have to do with this area, namely Interest and Prices (1898) and the second volume of Lectures on Political Economy (1906). The element that has attracted most attention in this context is undoubtedly Wicksell’s cumulative process, which he presents in both books, though with minor differences.11 The main idea here is that if the rate of return on investments is higher than the lending rate, it will be profitable to increase production, which will lead—via increased demand for the factors of production, higher incomes and greater demand for consumer goods—to inflation. This process will continue as long as the difference between the rate of return on investments (the ‘natural rate of interest’) and the banks’ lending rate persists. There was no space for Wicksell’s monetary articles in this volume, but a selection will make up the first part of a second volume that is in preparation. The second volume will also include writings on the population question, xii

INTRODUCTION

and a number of reviews written by Wicksell of books by his contemporaries Walras, Clark, Seligman, Mises, Knapp and others. Bo Sandelin NOTES 1 The English edition was followed by editions in Japanese (1938–9), Spanish (1947) and Italian (1950). A new Japanese translation of Volume 1 was published in 1984. 2 Also published in Japanese (1939 and 1984). 3 A Japanese edition was published in 1937. 4 It was published in Classics in the Theory of Public Finance, ed. R.A.Musgrave and A.T.Peacock, London: Macmillan, 1958. The same section and the preceding section (‘On the Theory of Tax Incidence’) were published in Japanese in 1995. 5 Erik J.Knudtzon, Knut Wicksells tryckta skrifter 1868–1950, ed. Torun HedlundNyström. Lund: CWK Gleerup, 1976. 6 These were assembled for publication by Torun Hedlund-Nyström and Lars Jonung in 1985–6, but have not yet appeared in print. Parts of Wicksell’s correspondence, especially letters to Wicksell, have been compiled by Hitoshi Hashimoto and published (in Swedish) in 1992–5 in numbers 19–22 of Economic and Business Review, published by the Society of Economics and Business Administration at Kyoto Sangyo University, Japan. Hashimoto has also put together a catalogue of 4,007 letters to Wicksell, published in The KeizaiKeiei Ronso, The Economic and Business Administration Review, vol. 28, no. 3, Dec. 1993. 7 There is a good deal of material in English by other authors on Wicksell. The classic biography is Torsten Gårdlund, The Life of Knut Wicksell, Stockholm, 1958. A comprehensive survey of Wicksell’s economic thought is given by Carl G.Uhr, Economic Doctrines of Knut Wicksell, Berkeley and Los Angeles: University of California Press, 1962. There are two major collections of articles on Wicksell: Knut Wicksell (1851–1926), Pioneers in Economics 28, ed. Mark Blaug, Aldershot, Hants.: Edward Elgar, 1992, and Knut Wicksell, Critical Assessments, ed. John Cunningham Wood, London and New York: Routledge, 1994. The Scandinavian Journal of Economics, vol. 80, no. 2, 1978, is a special Wicksell issue. 8 Joan Robinson, The Accumulation of Capital, London, 1956, p. 396. A comparison of Wicksell’s approach with that of later economists is given in Bo Sandelin, ‘Wicksell’s Wicksell Effect, the Price Wicksell Effect and the Real Wicksell Effect’, in Perspectives on the History of Economic Thought, vol. 6, ed. William J.Barber, Aldershot, Hants.: Edward Elgar, 1991. 9 A brief survey is provided in Lars Söderström and Bo Larsson, Svensk skatteforskning 1919–1979. En annoterad bibliografi, Riksbankens Jubileumsfond, 1981. 10 Lars Jonung has written a survey article which shows that Wicksell’s few works in this field mainly date from the years immediately following the First World War, when unemployment was high in Sweden. See Lars Jonung, ‘Knut Wicksell on Unemployment’, History of Political Economy, vol. 21, no. 1, 1989, pp. 27–42. These articles, which seem to have numbered fewer than ten all told, were published in very diverse forums. Wicksell’s article on ‘Ricardo and the Present Unemployment’ was sent to the Economic Journal, but was rejected by the editor, Keynes. It was, however, published in the same journal in 1981 with an introduction by Jonung. 11 C.-H.Siven describes in ‘The Early Swedish Debates about the Cumulative Process’ (manuscript, 1995) how Wicksell changed his mind. xiii

Part I MARGINALISM AND CAPITAL THEORY

1 IN DEFENCE OF THE THEORY OF MARGINAL UTILITY

In the third number of this journal for 1899, my fellow-countryman and friend Dr G.Cassel published an essay ostensibly intended as a synthetic presentation of the theory of prices according to Walras, but actually comprising in the main a critique of modern theories of value.1 This critique boils down to the judgement that ‘absolutely nothing is left of the formulas presented by the theorists of marginal utility that is capable of standing up to rigorous criticism’. However, Cassel’s essay includes a substantial number of arguments whose correctness must be challenged. Moreover, since I (along with many other writers) am directly attacked by Cassel, I take the liberty of making a brief response. Cassel first criticizes the theorists of marginal utility on the grounds that it is impossible to measure in real terms and make a direct comparison between the various needs either of a single person or of a number of people compared with one another. For any measurement, he claims, demands a unit of measurement, and the theorists of marginal utility have never established and can never establish a unit of this kind. Rather, we only gain a measurable sign of psychological processes, of the varying intensity of our feelings, by observing some kind of outward effect they have, i.e. in the case in question, by evaluating the goods to be bought or sold in terms of some conventional yard-stick, most simply in monetary terms. ‘In money’, says Cassel, ‘the individual possesses a scale of value by the aid of which he is able not only to classify his needs, but also to express their relative intensity in numerical terms. If need be (i.e. if I cannot get it more cheaply) I am prepared to pay 10 marks (but no more) for a certain good. For another good I might perhaps pay up to 20 marks. This means that not only is the second good more important to me than the first, it is also, over and above that, precisely twice as important.’ In passing, in conventional linguistic usage this is only true when relatively small portions of my assets or income are involved—in other cases it is false. For example, I should if necessary spend half my income on accommodation Originally published as ‘Zur Verteidigung der Grenznutzenlehre’, Zeitschrift für die gesamte Staatswissenschaft, 1900.

3

MARGINALISM AND CAPITAL THEORY

and dress appropriate to my social class, assuming the prices of other goods remain unchanged; for food I cannot, of course, spend more than my whole income, even if I need to. Does that mean that food, for me, is only twice as important as accommodation and dress appropriate to my social class? ‘Thus’, Cassel continues, ‘money is a scale of value for the individual, and by means of trade it becomes a shared, public scale of value, too. For if A and B are prepared at any time to exchange their units of value, the one mark coin, for the same goods, this proves that A’s and B’s scales of value are in fact identical…. It is of course impossible a priori to compare the intensity of A’s needs with B’s. At least such a comparison lies completely outside the domain of economics. But if I make the assumption that A’s and B’s needs are of equal intensity as soon as they both evaluate these needs at the price of one mark, then I have derived from the psychological presuppositions all that is of significance for the economic side of the matter.’ No more precise justification for these claims is to be found in Cassel’s essay. In response I should now like to observe the following. To take first the case of a single individual, a comparison, and a direct comparison at that, between the intensity of our various needs is not only possible, it takes place, as it were, every minute of our life. According to circumstances, each of us prefers to satisfy one of our needs—for sleep, reading, exercise in the fresh air, etc.—rather than the others, without any need to undertake a prior valuation of these needs in monetary terms. Of course, in this process our judgement of value generally goes no further than to rate two different needs as approximately equal in importance to us, or to rate one of them somewhat higher, or even markedly higher than the other, but it is really only a step from this to a precise numerical evaluation. For example, let us suppose a boy already in possession of a stock of apples and nuts is prepared to exchange one of his apples for ten more nuts, but is also, on the other hand, prepared to give up nine nuts from his stock in order to acquire one more apple. Then, obviously, he values one apple above nine, but below ten nuts, that is, at approximately 9 nuts. But not only is that the case: under the given conditions he values the nuts to be in turn given up or acquired almost equally, and therefore considers the value of an apple 9 times that of a nut. Now for those around him, to be sure, the boy’s judgements of value are perceivable only through their ‘symptoms’, their ‘economic expressions’, but for the boy himself the unmediated intensity of his feelings, the amount of pleasure he anticipates from the apples on the one hand and the nuts on the other, is obviously decisive. It is clearly this, and nothing else, that Böhm-Bawerk intends to emphasize in his polemic against Dietzel, mentioned by Cassel (p. 399). Böhm-Bawerk ‘does not (as Cassel believes) claim to know how much Robinson’s hut is worth’. He merely asserts that Robinson himself knows it, in other words, that he has an unmediated sense of the utility of his hut and of his stock of provisions, and that it is just this sense that forms the basis of his judgement of their value. 4

IN DEFENCE OF THE THEORY OF MARGINAL UTILITY

Of course, it is a rather different matter when dealing with different people, or with the same person in different circumstances. A direct comparison between the intensity of the emotions felt by different individuals is of course out of the question, but this by no means prevents a comparison being possible—not as might be supposed by means of money, but rather via induction and analogy. When dealing with people of the same age, the same sex, possessing the same degree of education, etc., one can reasonably assume that their elementary needs—precisely those that are significant for the science of economics—are virtually the same; and if in addition they have equal wealth, then the extent to which they can and will satisfy these needs is surely probably identical. If on the other hand all these circumstances or even just some of them are different, then of course the comparison will involve the greatest difficulties; it could really only be made by an individual who himself had lived in all these circumstances and preserved a vivid memory of his impressions. Here indeed the imperfection of the standard is commonplace: the old forget they were once young, the rich they were once poor (if they ever were poor at all), the rulers are incapable of comprehending the ruled as creatures of their own ilk, etc. But this does not mean giving up hope that the technique of measurement may be perfected. On the contrary, progress in psychophysics towards this end promises well. Fechner’s well-known psychophysical law—first proposed, if I am not mistaken, by E.H.Weber for sensations of pressure—according to which the minimum distinguibile, the just perceptible change in an impression on the senses within certain limits, always demands the same quota of the strength of the stimulus used in each case, constitutes in fact a kind of confirmation of D.Bernoulli’s and Laplace’s earlier speculations about the relation between fortune morale and fortune physique. To the best of my knowledge, no theorist of marginal utility doubts that in the case of real—not just theoretical—measurements of this kind one necessarily requires a unit determined in advance, and that this unit can only be some use or another, and a concrete use at that, taking effect under quite specific conditions—let us say, for example, the use that a pair of work boots affords a middle-aged agricultural labourer living in Brandenburg over the course of a year. The only one who seems to overlook this fact is Cassel himself when he recommends money as a general standard even for subjective valuations, for like other things, money to be sure is useful, but this usefulness is obviously completely different in differing circumstances. It is like wanting to use the length of the day at the winter solstice as a measure of time, or the length of the seconds-pendulum’s swing, which also varies with geographical latitude, as a unit of length. I hardly need to remind Cassel that the element assumed as fixed in measurements and similar processes can never be something purely conventional. It only became possible to make the rate at which the earth turns the basis for all measurements of time when a process of induction had demonstrated that it possesses in the highest degree the quality that we understand as uniformity of motion. As we have seen, Cassel 5

MARGINALISM AND CAPITAL THEORY

himself terms the process in question ‘an assumption’, at least when dealing with different individuals, but he has been unable to convince me of the usefulness or even the admissibility of this assumption. In the theory of prices, assuming free competition, it is harmless, to be sure, but only because there it never comes to be employed in practice, since, as Cassel himself emphasizes, when determining prices under conditions of free competition there is never any need at all to compare the varying utility or marginal utility a good has for different people, but rather, only its relative significance over against the numeraire good for one and the same person. However, price formation under free competition far from exhausts the domain of economics, and as soon as one progresses from purely individualistic to altruistic or social points of view, the concept he proposes, or rather the way in which he confuses concepts, turns out to have dire consequences. Cassel himself later admits this, moreover, even if with a rather dissatisfied air! Oddly enough, Cassel later attributes to other writers his own definitions of subjective value and marginal utility in place of those they use themselves, as I shall now show. In order to determine the price ratio of two commodities on the market Walras, as is well known, assumes this ratio itself as an independent variable and the quantities of goods given and received in exchange as variables dependent on it. Jevons, in contrast, had viewed precisely these quantities as the independent variables in the problem, but obviously that means taking into account as many (or twice as many) unknown quantities as there are exchanging persons. If on the other hand we restrict our attention to just two exchanging persons, which may have been Jevons’s original notion, then again the law of competition (the law of indifference according to Jevons), which entails that there can only be a single uniform price for each commodity on the market, is deprived of its effect. For this reason Jevons has hit on the idea of bringing commodity owners together into two groups, so-called trading bodies, but now has to operate with the unclear and in fact undefinable concept of a marginal utility valid for each of these groups in its entirety. Cassel considers the observation I make on this (Über Wert, Kapital und Rente, p. 47) ‘incorrect’. ‘If I know’, he says, ‘that I can sell to a group of buyers who have already acquired x kg of a commodity an additional 1 kg for at most y marks, then I am surely justified in designating y this group’s marginal utility. When I use this term, it must simply be ignored for a moment who buys this final kg; for this buyer in any case the marginal utility is equal to y, and the marginal utility of the group coincides with his.’ I could of course simply respond that this concept of marginal utility is actually not the one Jevons had in mind; but in addition I must emphasize that the method indicated by Cassel is just as impracticable, unless it is a matter of the purchase and sale of a few discrete items of the same size and quality, as in Böhm-Bawerk’s well-known example of the horse market. For the level of the marginal utility in Cassel’s sense depends not only on the 6

IN DEFENCE OF THE THEORY OF MARGINAL UTILITY

size of the stock of goods acquired, but also on its distribution among the buyers (and similarly with the seller’s marginal utility). But in order to ascertain this level—assuming the personal allocations of the exchanging individuals as given—one has to solve the original problem or a very similar one at every step, over and over again, or, to put it differently, one has to investigate by whom and at what maximum possible price the first, second, third, and so on up to perhaps the hundred thousandth kilogram of the commodity might be acquired. Certainly this is a method, too, but one that functions very slowly. In this connection Cassel upbraids me for ‘not properly understanding the significance of a common measure of value’, and consequently ‘also failing to lay the axe to the root of all the confusion that Launhardt has brought forth in this area under the cover of mathematics’. The answer to this reproach is already given in the preceding passage. I do not consider incorrect in principle Launhardt’s treatment of the marginal utilities of different persons as commensurable quantities, and in my opinion he has caused no confusion by this procedure. In general Cassel could have treated this author somewhat more kindly, for on the very next page (414) he reaps the benefits of Launhardt’s work. For the elegant method he employs there, ‘diverging from the customary manner of presentation’, by treating all consumers of a commodity uniformly, whether with prices at a given level they be buyers or sellers, originally comes, to the best of my knowledge, from Launhardt. At least I adopted this method from Launhardt, and Cassel probably found it in my work (Über Wert, Kapital und Rente, pp. 52f). The section of Cassel’s essay that might be expected to arouse most interest among theorists of marginal utility is probably the third, where he endeavours to show that the equality or rather proportionality they assert between marginal utility and commodity prices in general does not obtain. This assertion, according to him, rests on ‘two assumptions, namely, first, that consumer goods are divisible at will, and secondly, that our estimations of value represent continuous functions of the quantity previously possessed’. These assumptions, he says, are ‘both fundamentally incorrect’. Now, concerning the first of these assumptions, surely nobody has advanced it as a generally valid fact, and to this extent of course the strict law of marginal utility suffers certain exceptions, as also is generally recognized. On the other hand, there is a fact that is regularly overlooked by Cassel, which entails that those goods which by their very nature can only be employed as discrete units are subject to the laws of marginal utility no less than those divisible at will. This is the fact that in reality they almost always occur in numerous different qualities or nuances. Let us hear how Cassel argues his case. Cassel ‘lives at present in Berlin and rents a room there’. The room costs 30 marks, and he ‘assumes for the sake of simplicity’ that in Berlin there 7

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exist ‘only similar rooms and, in fact, all at the same price. If the price rose to 100 marks per month, Cassel would ‘probably pay it’; but for an additional room he is only prepared to give at most 5 marks. Therefore, he argues, there is no question of the marginal utility according with the price, neither on one side nor on the other. Now it is clear, however, that the assumption that Cassel makes ‘for the sake of simplicity’ in reality begs the question and decides the entire issue in advance in the way he desires. In fact not just one, but a hundred kinds of room exist in Berlin; if Cassel were prepared to invest even 35 marks he would certainly be able to obtain a more spacious, brighter, more favourably located or in some other way more convenient room in the same part of the city, perhaps even in the same house. If he is not prepared to pay this price, then that of course shows unambiguously that he does not value the better room and therefore a fortiori not the worse room he currently lives in at quite 35 marks. Similarly, he could certainly obtain a simpler or more inconveniently located room for 25 marks; but in fact he prefers the one he lives in now for 30 marks. What could show better that he raises or lowers his demands for space, comfort, location, etc. to the point at which a further addition to or subtraction from these qualities, i.e. what one could designate in the real meaning of the term as the marginal utility of Berlin rooms valid for him, is approximately equivalent to the price demanded for it? But even in the case of goods which he himself conceives as divisible at will, the proposition mentioned above does not in general hold, according to Cassel. ‘Let us take’, he says, ‘my consumption of sugar as an example. I do not consider it particularly healthy to eat sugar, yet on account of its pleasant flavour I consume, say, 10 kg of sugar a year. I should quite certainly consume this same quantity even if sugar cost 2 marks per kg, and it is just as certain that I should eat not a bit more if the price of sugar went down to 10 pfennigs.’ The latter statement is certainly possible, for since he considers eating sugar unhealthy, even a moderately increased consumption might soon bring him more qualms of conscience on account of the danger to his health than pleasure. But this makes me even less able to accept that a price increase would cause no change in his consumption of sugar. For it is quite obvious that if he spends, say, 15 marks more on sugar, a corresponding deficit must arise somewhere in his annual budget; at the end of the year he may have to cut down on the Christmas presents for his wife or the savings put by for his children by 15 marks. Is he willing to do that? Probably not. Rather, he will attempt in future to distribute the sum in question more or less equally over all his needs, and why then should precisely his consumption of sugar, the actual source of the evil, be spared reductions? Here, incidentally, we have a point that does not have to depend exclusively on theoretical speculations, but could instead perfectly well be settled by statistical enquiries. Cassel claims that ‘every even moderately prosperous man satisfies a large part of his needs fully, and is prepared to pay far more 8

IN DEFENCE OF THE THEORY OF MARGINAL UTILITY

for this degree of satisfaction, if need be, than he has to in reality. However, he is not in the least disposed to pay anything for an additional degree of satisfaction.’ If this is true, then so remarkable a fact must of necessity be reflected in consumption statistics. These statistics admittedly do not generally distinguish between poor and rich; with a little ingenuity, however, it would surely not be difficult to establish that in the case of several important articles a price reduction leads to absolutely no expansion in consumption on the part of moderately prosperous people, but at the same time a price increase causes no decline in consumption on their part—if this really is the case in fact.2 In accordance with the rule that the burden of proof is on the one making the claim, I should like urgently to recommend to him statistical studies of this kind. However, in my experience this is not the way things are; on the contrary, I remember from my youth that at the time, when sugar prices were high, even quite prosperous people treated this article far more economically than happens today. For the present, therefore, I should be inclined to assume that the law of marginal utility retains its validity not only, as Cassel claims, for one group of individuals, the least well-off, but rather, if correctly understood, more or less for all people and all commodities. This does not of course prevent its working being in part counteracted or obstructed by other forces, above all the power of habit, human inertia, etc. What Cassel says about the impossibility of reducing the problem of price formation to just two variables, since in fact of course all prices at the same time influence the demand for every single commodity, is perfectly right and correct. However, when he says that it ‘has become customary in economics’ to overlook this, that the ‘invalid argument’ in question ‘comes up again and again in price theories’, and so on (pp. 422ff), he should in justice at least have excluded from this general judgement those writers influenced by Walras. He does not do this, and occasionally accuses Walras himself of having committed this elementary error, which to my mind sounds more or less like trying to accuse Newton of ignorance of the binomial theorem. Cassel is mistaken in claiming that Walras ‘regards the occurrence of competing goods as an exception’, for on the contrary, in the very passage that Cassel cites Walras calls it an everyday phenomenon (‘c’est ce qui se voit tous les jours’). Also, Walras has never said that ‘the demand for each of the previous goods is approximately equally influenced by the appearance of the new commodity’. On the contrary, he says that those changes in demand for the other goods would in certain circumstances be so small that the ratio of the aggregate demand quantities to one another remains virtually unchanged, which means something completely different. I now turn to that section (VI) in which Cassel subjects the view of some theorists of marginal utility, or rather the dogma of the old free-trade school, 9

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which they accept, that free competition would realize ‘the old Benthamic maxim of the greatest possible happiness for the greatest possible number of individuals’ to a critique which in itself is fully justified. In passing, as far as I know Bentham is not to blame for the illogical formulation of the maxim in question; this formulation derives rather from Beccaria. Bentham, on the other hand, at least in his Traité de législation, always speaks of the greatest possible sum of happiness, an expression that can certainly not be attacked on formal grounds. Here the critique is, as I say, perfectly justified. But the point is by no means novel. A critique of this dogma that essentially coincides with Cassel’s is already given in Böhm-Bawerk’s well-known treatise in Conrad’s Jahrbücher (1886), and subsequently in my work Über Wert, Kapital und Rente. Later I went further—further, too, than Cassel goes now—and showed that free competition only has the quality of bringing about the greatest possible total satisfaction in a special case—e.g. when all traders are in precisely the same economic position (in the broadest sense of the word).3 In the general case, on the other hand, it is always possible to set up another combination of uniform prices without otherwise changing the current distribution of property that must necessarily give rise to greater total satisfaction than can be attained under free competition. And in arguing this I, just like the defenders of the proposition in question, took as my starting point precisely the constancy of marginal utility functions. Cassel is therefore in error when he believes that this assumption could serve in any way to support that proposition (p. 431). On the other hand, precisely in this area the whole inadequacy of Cassel’s own definition of subjective value or marginal utility becomes apparent. For if it were correct, then in fact that proposition concerning the greatest possible total satisfaction under free competition would indeed be impossible to refute. For if the subjective value of the last portion of goods given and received in purchase is equal for both the buyer and the seller—and of course according to Cassel this would be the case, at least for the groups of ‘marginal buyers and marginal sellers’—then, since one can further assume that each unit of goods acquired earlier or sold later is worth somewhat more, while each unit of goods acquired later or sold earlier is worth somewhat less, the necessary consequence must be that both a reduction in consumption on the part of the purchaser together with an increase on the part of the seller, and an increased consumption on the part of the purchaser together with a decrease on the part of the seller, would cause a loss in total value—and this is of course a genuine and correct maximum condition. Rightly anticipating this unwelcome consequence, Cassel here deviates without noticing it from the path he has followed thus far, and at the end of the section arrives at the statement: ‘If one has the least ambition to invest the term total satisfaction with something more [than he himself has done], something that cannot be defined in conceptual and still less in numerical 10

IN DEFENCE OF THE THEORY OF MARGINAL UTILITY

terms, but that must be understood and felt by anyone engaged in making social policy, then all one can do is to strike out at once all theories about maximum satisfaction on the free market.’ Indeed, but that clearly also means striking out his own definition of value, at least in the area of social policy. Finally, I must make a few comments on the final two sections (VII and VIII), which deal with price formation taking into account production. Here Cassel first summarizes what Walras has elaborated in lesson twenty of his Éléments. The fundamental thought is that under free competition the actual profit from operations tends towards zero, so that the purchase price of the productive services or, in Cassel’s terms, the ‘raw materials’, reappears without remainder in the sales price of the finished goods. Sensibly, Cassel excludes for the time being the part played by capital, the treatment of which was precisely the vulnerable point in Walras, by assuming that production demands no time, and this is undoubtedly permissible as a first approximation. But when he proceeds to draw up equations for the demand for finished goods, he forgets that this demand depends not only on the prices of these goods, but also on the purchasing power of the individual buyers, and that this in turn depends on the prices of the ‘raw materials’; for of course, in the long run, each person receives only so much in income as is given for the producer goods he has in his possession. In other words, the demand functions (system 4) become dependent not only, as Cassel thinks, implicitly, but also explicitly on the price of the ‘raw materials’. But over and above this, these functions are not all independent of one another. Rather, if equilibrium is to continue to prevail on the market, they have to be such that the sum of the exchange values of the producer goods corresponds to that of the consumer goods. An equation to this effect must therefore be satisfied identically, or one could, as Walras does, replace one of the equations in system 4 with the equation just mentioned. But then it becomes evident that in system of equations 6, too, by which Cassel intends to determine definitively the prices of the producer goods, not all the equations can be independent of one another. For if one multiplies them each in turn by the prices of the ‘raw materials’, q1…qr, and then adds the results, this yields precisely the equation that must be identically satisfied. In reality, therefore, for the determination of the unknowns we have not as Cassel claims r, but rather only r—1 independent equations. And this has to be the case by the nature of things, for in this connection money is treated only as a means of exchange or even only as an arithmetical quantity; in the final analysis consumer goods are paid with ‘raw materials’ and ‘raw materials’ with consumer goods. But then of course it is impossible to gain any kind of information about the concrete money prices of the goods; all that can be determined are the relative prices, the exchange ratios of these goods to one among them, and there are precisely only r—1 such ratios for 11

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the r ‘raw materials’. Perhaps Cassel will regard this observation of mine as petty, but since he himself is of the opinion that ‘Walras is almost always misunderstood’, he really should have taken care not to encourage new misunderstandings himself. Now over against this method of ascertaining, or rather of explaining, the prices of producer goods and with that the part played by the factors of production in the results of production, there stands according to Cassel another, which he would like ‘to designate with the name maximum method’, and whose main representative he names as myself, among others. This statement caused me some surprise, for I should never have wanted to regard the procedure I employ as the opposite of Walras’s. If one disregards the divergent treatment of capital goods (which indeed Cassel does not take into account at all), then the two methods are rather, in my opinion, in essence one and the same, or differ at most somewhat in their starting-points. But my astonishment increased when I read in Cassel that my method takes as its point of departure ‘the principle that the economy tends to achieve the greatest possible total utility’. If I had claimed such a thing, I should in fact have made myself guilty of the most gross inconsistency, for otherwise I have of course explicitly emphasized everywhere in my work that the economy as such under the system of free competition precisely lacks any such inherent tendency. In fact I have never said anything of the kind. On the contrary, I talk about the tendency present in every entrepreneur by the nature of economic activity to maximize his profits, to attain the greatest possible total earnings from his production.4 By means of these competing efforts of individual entrepreneurs a condition of equilibrium will finally be reached, in exact analogy to the process of exchange dealings (and in reality under the simultaneous influence of the exchange trade), and in this equilibrium the parts played by the factors of production under the given circumstances can be neither raised nor lowered. Let me add that the few hints to this effect in the preface to my book, which Cassel praises as ‘clear and concise’, but which he has gravely misunderstood, are elaborated very thoroughly in the book itself. If Cassel has discovered any flaw in my reasoning in that presentation, he should have drawn attention to it; if he has not, or if he has not read the chapters in question, he should really have held back for the time being from judgements such as ‘unsolvable problem’, ‘a priori false’ and the like. On the basis of this brief and succinct discussion Cassel, however, considers himself in a position to dismiss as ‘completely off the mark’ the critique provided in my preface of Wieser’s attempt to ascertain the parts played by the factors of production by means of a system of simultaneous, conventional equations. For according to Cassel, ‘Wieser’s account shows quite clearly that he regards the technical ratios as given from the start’, and ‘there is therefore no maximum problem at all to be solved here’. But first, if he read Wieser’s work carefully, Cassel could easily satisfy himself that Wieser does not in the least assume the manufacturing ratios as given. On the contrary, a 12

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few pages previously (Der natürliche Wert, p. 71), Wieser emphasizes quite explicitly that every entrepreneur faces the task of deciding whether under given circumstances he should ‘make savings’ on one producer good or another, ‘on labour or capital, machines or raw materials’, or whether he should ‘on the contrary spend more on them’, and this would of course be impossible if their proportions were already ‘fixed once and for all’ by the technology. Of course it is rather inconsistent of Wieser to go on to reckon those ratios among the known instead of the sought quantities in the problem; my observation that his equations only state the facts of the case, not the how and why of the problem of ‘attribution’ or distribution, is probably justified at least in this connection. But even if one assumed as fixed each and every one of the technical ratios, then too the marginal law and the maximum method of course come into full application, only in a much simpler way, as labour, land, etc., are transferred from the less profitable or loss-making businesses to the more profitable, until equilibrium is reached throughout. To be sure, in this special case the necessary conditions of equilibrium are already included in Wieser’s equations, if one goes along with him in extending them to cover the entire area of production. I am happy to admit this, and perhaps should have emphasized it explicitly. Cassel’s own criticism of Wieser for taking into account only the cost equations and not at the same time those governing exchange I do not consider substantial. In the same way as stocks of goods or rather the periodic supply of goods is in the first instance assumed as given in the problem of exchange, one is doubtless justified in assuming as given the exchange ratios or prices of consumer goods as a first approximation when discussing production and distribution. This approach even has certain advantages from a pedagogical point of view, for later of course it is relatively easy to unite the two systems of equations in a single one. Whether after all this very much remains of Cassel’s critique that deserves serious consideration, the knowledgeable reader may decide. Upsala, December 1899

NOTES 1 ‘Grundriß einer elementaren Preislehre’ [Outline of an elementary theory of prices]. 2 However, let me point out that a consequence of this kind could sometimes occur even in full accord with the law of marginal utility. A reduction in the price of certain foods, e.g. corn or potatoes, could very well cause certain people to give up in part their predominantly vegetarian consumption, i.e. to reduce their demand for corn, etc., in order to go over to more expensive means of subsistence, e.g. meat. 3 See my review of Pareto’s Cours d’économie politique, vol. I, in the Austrian Zeitschrift für Volkswirtschaft, 1897. 13

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4 Incidentally, it really can be claimed, if commodity prices are assumed fixed, that the sum of exchange values of the goods produced and to that extent the total earnings from the total production of the economy (but not necessarily its total utility) must become a maximum under free competition, for if it could be increased at any point with the available means of production, the entrepreneur involved would of course necessarily pocket a profit.

14

2 KAPITAL—UND KEIN ENDE! (Reply to Decent Brisman)

The controversy about the modern, Böhm-Bawerk capital theory appears highly reluctant to come to an end. Of course, it is not surprising that older economists, brought up as they were in completely different systems, have only unwillingly and hesitatingly acquired this new approach. But one would think that the younger generation of economists might be more interested in elaborating on the grounds already established—which is certainly not the same as uncritically accepting all of the details in Böhm-Bawerk’s presentation—than in wasting time and energy on rather futile attempts to overthrow their very foundations. A priori it is still somewhat improbable that when an author who is generally recognized, even by his opponents, as one of the most astute thinkers of our time, devotes years of his life to studying a particular scientific issue, the result of his work is such that its principal points could justifiably be regarded as ‘meaningless’, ‘unsuccessful’, ‘of little value’, etc. Nevertheless, the criticism continues, also from the younger generation, with undiminished intensity or at least vehemence. For every single upholder of B.-B.’s foundations, there are readily ten subversives. These reflections are provoked perhaps mostly by certain phenomena in the recent German economics literature (Schumpeter, Liefmann, et al.). More specifically, however, I refer to a couple of essays in this Journal by Sven Brisman.1 The latter of these primarily contains some criticism of my own Lectures (Vol. 1, 2nd edition)—remarks whose legitimacy I acknowledge in several instances, and for which I am anyway grateful—as well as, of course, for his otherwise kind recognition of my work. As an introduction to his analysis, however, he has interposed a general criticism of the newer capital and interest theories, which to me hardly seems justified or in any case considerably overshoots the mark. Indeed, the author concludes by saying that ‘as a nonspecialist in the theoretical field, [he] has embarked on these questions only with hesitation’ and he ‘has a feeling that the remarks he wanted to make should have been question marks instead’. However, opinions

Originally published as ‘Kapital—und kein Ende’, Ekonomisk Tidskrift, 1912.

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such as those I cited above, which he levels against Böhm-Bawerk, resemble exclamation points more than question marks. I shall now briefly counter Brisman’s critical remarks, more or less in the order in which he offers them. Brisman begins by pointing out the ways in which economists use the term capital to denote several quite different concepts; he then gives a detailed account of some meanings of the word. Among these distinctions, however, he does not appear to have an eye for the one which I regard as by far the most important, i.e. the distinction between that which comprises capital in the context of the national economy and that which is merely capital in a private economic sense.2 For example, the latter category includes everything associated with assets which, of course, are frequently an integral part of private individuals’ capital resources. But if they were regarded as a component of social or national wealth, then all liabilities would necessarily have to be incorporated as negative items, and since the algebraic sum of assets and liabilities is obviously equal to zero, the simplest solution would be to exclude both altogether.3 Such assets cannot be treated as a component of national wealth unless a country has a credit surplus with the rest of the world, but they disappear again if we adopt a worldwide-economy perspective. This also applies to capital in the form of cash. Böhm-Bawerk does include ‘money as an instrument of exchange’ in social wealth, but this is probably inappropriate. For society, only the function of money is important, while its volume or substance is again altogether trivial—at any event from a world-economy point of view. If the world supply of coins and banknotes were reduced by half, then apart from some disturbances during a transitional period as well as in the technical use of precious metals, this would not cause the slightest change in real economic life or the welfare of nations. Admittedly, an individual would again be much poorer if half his money were taken from him. Therefore, it is indeed of the utmost importance that a careful distinction is made between real capital and means of exchange (money). It may be argued that it was precisely because this distinction was established, and rigorously implemented by the Physiocrats and by Adam Smith and Ricardo, that economics became a bona fide science for the first time. It is certainly true, as the author points out, that most later economists (even a Mill or a Jevons) were not always able to maintain this distinction; sometimes, against their better judgment, they fell back on an unscientific, mercantilistic approach. But such a procedure merely shows that although this distinction is a difficult matter, the application of which requires rigid consistency and not a little mental acumen, it would by no means be impossible to execute, as the author claims (p. 112). The fact that the return on real capital determines the level of interest, and not vice versa, is undoubtedly one of the most important and best certified truths in economics. The return on tangible capital assets in relation to their cost may fluctuate, as the author asserts, ‘between 0 and 16

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100%’; however, this variable return is surely concentrated within the first 10 per cent, and the money rate of interest adjusts to this level. How this dependence arises and what happens when the money rate of interest is temporarily too high or too low in relation to the real rate of interest are, in principle, very interesting problems; but they belong to monetary theory and the theory of changes in the general price level of commodities, not to the foundations of capital theory. Although an accurate distinction between these concepts can only be achieved on an abstract level, without such abstractions theoretical economics would simply be in hopeless chaos. Even after making these distinctions, which the author has completely neglected or does not want to acknowledge, the fact remains, however, that the word capital in economic parlance, as in everyday language, has several different meanings. In some instances, this occurs intentionally, and should seldom give rise to misunderstandings. In discussions of social issues, where ‘capital and labour’ represent opposing class interests, it would be pure pedantry to separate, for example, ownership of land from capital wealth. As regards production and distribution, once again, and particularly in population theory, ‘capital and labour’ are instead often united in relation to natural resources. On the other hand, land or agricultural output and labour which, among themselves are analogous, original forces of production, form a sharp contrast to the ‘producing means of production’, capital. The old trinity: land, labour and capital, is self-evident and can hardly be replaced by some shorter formula in a purely economic context. But once this classical classification has been accomplished, I do not think anything can be gained scientifically by further decomposing the concept of capital. Of course, some gradations, especially important in a practical respect, have to be taken into account, such as when distinguishing between fixed and circulating capital; but this is of no importance to the principle—all capital is more or less circulating, etc. Since the days of Adam Smith, however, it has been customary to use an additional classification, i.e. into that which Brisman, in undeniably improved terminology, calls productive and gainful capital, where the latter is then a more general concept and includes objects which provide their owner with income without actually participating in production themselves. For example, a dwelling house would belong to this category if it were rented out; but when inhabited by its owner, according to Adam Smith, it would be considered a pure consumption good and should not be classified as capital. Brisman approves—this time in agreement with Böhm-Bawerk, but contrary to the authorities for whom he otherwise has the highest esteem—of this distinction; as far as I am concerned, almost twenty years ago4 I tried to show that it is unwarranted and scientifically unproductive. Why should a dwelling house not be perceived as a means of production just like a factory building, such as a bakery or a sugar factory? The latter produce food—with an admixture of human labour and additional capital; the former produces, primarily quite 17

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spontaneously, another, almost equally important consumption good, i.e. that which we call a ‘roof over our heads’, protection from the outside world, in other words, a place to live. But the house itself is not consumed in a literal sense (unless, like Strindberg’s bohemians, someone takes up the floorboards to be used as fuel, etc.); the gradual deterioration of a house is caused mainly by the elements and is on the whole of secondary importance. Similarly, it is inappropriate to say that someone who rides the streetcar consumes the streetcar or the tracks. He probably does so to a small extent, but he primarily consumes a streetcar ride, which the streetcar system and its staff produce for him, and which can be either a final consumption good if he travels for pleasure or, alternatively, a means of production if he travels to his business premises or workplace. The same approach can be used only too well for all durable so-called consumption goods: books, furniture, even clothing. As for food and other immediately nondurable means of consumption, even Brisman admits that they should be treated as capital, as long as they are still in the hands of the producer or merchant. But once they are in the hands of the consumer, their remaining visible existence—at least as regards the consumption of the urban population—is usually reduced to a few hours, and when dining at an inn no more than a few minutes. Whether or not they continue to be thought of as capital during this short period of time is altogether trivial—de minimis non curat lex [the law does not concern itself with trifles]. For these reasons, I have always been of the opinion that the question of whether or not workers’ basic necessities in particular should be treated as capital fundamentally amounts to nothing more than quibbling and could easily be deleted from the agenda. Böhm-Bawerk’s painstakingly constructed distinction—retained in the third edition of Pos. Theorie d. Kap, according to which these necessities, when advanced directly by the employer, are to be considered solely as gainful capital, but when they are in a granary or other merchants’ storehouses, where they are purchased by the workers themselves, the term is productive capital—seems undeniably as contrived and far-fetched as it could possibly be. This long-winded discussion about the dimensions of the concept of capital would probably have been over a long time ago if we had been initiated into Böhm-Bawerk’s really epoch-making idea right away, even though, regrettably, he himself did not execute it consistently. This idea was to recognize in the capitalistic production process itself—i.e. production to the extent, or from the standpoint, that it always more or less applies to the future—the simple, primary concept, of which capital in all its guises is then only derived or secondary. If so, it soon becomes clear that there is nowhere to draw a boundary line successfully; rather, everything produced but not yet consumed, and which has some exchange value, becomes capital.5 Production without capital is not really production; in any case, it does not yield any products. A tribe of monkeys climbing about in the bush has no capital, but it does not 18

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have any products either; it sustains itself literally from hand to mouth (or perhaps from foot to mouth) on what it harvests from the trees. Hence, nor is there basically any real difference between productive and gainful capital. All gainful capital produces, and all productive capital (except for failed capital investments) yields a return. Oddly enough, Brisman does not even want to accept this last thought: as examples he cites ‘streets and roads which merely generate costs for the owner without providing any income’. But it would not be difficult to show that streets and roads actually do furnish income to the corporations that could be regarded as owning them; if they are privately owned then, of course, the owner is free to charge travellers a toll, as is still sometimes done. Moreover, the capitalistic production process is not finished in so far as there is a finished product. The labour and land that are utilized naturally remain invested in it and mature only gradually, perhaps over many years, into immediately consumable products or definitive consumption activities. Therefore, later on, when Brisman rejects my definition: capital is (in the perspective of economic theory) saved labour and saved land, and instead proposes the expression: capital is the product of saved labour, this is hardly any improvement. A dwelling house is usually the product of, let us say, two years’ work, but many decades will elapse before this labour as a whole can be said to have been used consumptively or consumed, and in this sense, of course, it remains saved. Something peculiar now occurs. While Brisman’s entire train of thought, in so far as I have understood it correctly, gravitates towards precisely this conception of capital, he is almost completely unsympathetic towards the concept when he encounters it in the guise imparted by Böhm-Bawerk: the profitability of prudent roundabout methods of production. He calls this aspect ‘a pure truism, not worth the effort of wasting any words on it’ (p. 103). A roundabout method of production would not be wisely chosen if it did not give rise to a technical surplus, so he says. But the emphasis, of course, is on the fact pointed out by B.-B. that such a surplus always, or at least as a rule, can be attained, although at the cost of prolonging production—which obviously also has to be chosen discriminately.6 This theory, disputed so ardently and perhaps not initially formulated with sufficient rigour by B.-B., may be explained in the following simple way. It may safely be assumed that all, or at least most, production processes could be changed in a number of ways. Since every change implies either prolongation or shortening of the production process, while either increasing or decreasing output, all possible and conceivable changes in production necessarily fall into the following four categories:

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1 those which prolong the production process and simultaneously increase output (per unit of labour); 2 „ prolong „ decrease „ ; 3 „ shorten „ increase „ ; 4 „ shorten „ decrease „ . In practice, the second category should obviously be eliminated as uneconomical. Nor does the third category have to be taken into consideration for the simple reason that every rationally managed production company can be assumed to have implemented such changes already. That leaves categories 1 and 4 as the only practical alternatives. Except for new inventions, in order to increase output, one always has to submit to prolongation of the production process; again, it can only be shortened by relinquishing some of the output. But why is it, someone might ask, that all the changes in category 1 have not yet been carried out? The answer varies, depending on whether one takes a private or a national economic standpoint. These changes are not implemented by the private entrepreneur because, although always ‘technically’ worthwhile, they are not always economically profitable. Production profits have to be acquired by prolonging the period of capital circulation and this can easily result in a lower return on capital than that already achieved. In a national perspective, again, such changes cannot take place because there is not enough social capital to support them, unless it is deducted from other branches of production, which would then be left with shorter periods of production and lower returns. If capital is increased, however, then production processes are necessarily prolonged, even without all kinds of new inventions, as new capital would compete with the old for labour and land; wages and rents would rise, and hence, even from a private economic point of view, prolongation of the production process would be profitable. Böhm-Bawerk has, on the whole, irrefutably demonstrated all this, whereas Jevons, for example, by no means had a clear idea of this causal relation. This is also why it is unfair of Brisman (p. 120) to assert that B.-B. had derived the essential thought content of his theory from Jevons.7 There are further circumstances which are frequently overlooked. In the case of the individual capitalist, when capital assets are rising, prolongation of the production process can very well serve as a means of partially neutralizing the unavoidable fall in profits but cannot increase them. From the point of view of society, prolonged production brought about by an increase in the capital stock can raise the social output, but not specifically interest and, at any event, not the rate of interest. On the contrary, the latter declines, while wages and rent (either or usually both) more or less soar. So when Brisman (at the bottom of p. 120) remarks that a war or, ‘as Cassel pointed out’, a population increase and economic progress could have a strong effect on interest ‘without being associated with prolongation 20

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of production’, it is really not easy to understand his way of thinking. If the war or population increase had not taken place, then during capital accumulation, the result would be both prolonged production and a reduction in the interest rate; now perhaps neither or the opposite of both occur, but this would not even remotely contradict the Jevons-Böhm-Bawerk theory. Meanwhile, of course, economic progress causes more or less of a shift in the overall economic scenario or its background. It could have either a favourable or an unfavourable effect on each product share of the productive factors, as well as on interest. Inventions which shorten roundabout methods of production have an unconditional tendency to lower the interest rate—but they do not invalidate the basic rules for solving distributionary problems. Therefore, during an initial orientation, it seems wisest to assume that the technical standpoint remains unchanged and, in general, that all conditions remain stationary—except for changes in the capital stock. Brisman’s lengthy enumeration on p. 105, which is intended to show that even factors other than capital, such as inventions, exchange and rational economic organization, could increase the productivity of human labour—a conviction which no one would deny—seems to be more devoted to obscuring than to analysing the key issue. At the end of the first essay, Brisman occupies himself, in particular, with the origin of interest. I have already conveyed some of his reflections in this context; it seems to me that the others are also rather insubstantial. For instance, Brisman could hardly imagine that the analysis of these issues is advanced by set phrases such as ‘interest is a common phenomenon of price formation’ or that ‘the reason why savings have a price is exactly the same as why wood, iron, meat or any other good has a price’. If it were this simple, then it is indeed difficult to comprehend how ancient and medieval thinkers could have been so totally unsympathetic towards this ‘common phenomenon of price formation’. It is no doubt somewhat easier to understand that wood and meat cost money, than that money costs more money, or that ‘savings have a price’—besides, the latter expression is quite unclear and somehow invites contradiction. There is, of course, an analogy; the difficulty lies in showing what it contains and how far it reaches. Here, as in a couple of other matters, Brisman refers to Cassel’s authority and appears to have a very high opinion of his work, Nature and Necessity of Interest. For my part, however, I am unable to grant that Cassel’s presentation of any problem either critically or positively surpasses Böhm-Bawerk’s; in most cases it probably lags far behind. The relatively most original idea which can be attributed to Cassel is his attempt to show that a reduction in interest to between 2 and 1 1/2 per cent would cause all further capital accumulation to come to a standstill. But here, Brisman wholly disagrees with Cassel and maintains instead that almost all savings would be saved even if there were no interest—which is probably a contradictory exaggeration. 21

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All in all, I fear that in his first essay Brisman has not made any noteworthy contribution to the development of capital theory or to criticism of Böhm-Bawerk’s theory. Sometimes, it may even be asked whether he seriously examined, in particular, the later parts of B.-B.’s work, where the relation between the size of capital and interest is explored for the first time in the literature in a completely clear and convincing, albeit schematic, way. BöhmBawerk summarizes his analysis by the familiar cliché that it is the ‘last, economically permissible prolongation of production’ which determines the interest rate. Even the expression ‘permissible’ is, in my opinion, somewhat unfortunate; ‘economically necessary’ would have been more appropriate. The statement is nevertheless clear from the context, and the fact that someone could object that it is instead ‘the prevailing interest rate’ which determines the duration of roundabout methods of production, is surprising. The task, of course, is to explain how the prevailing interest rate arises or is maintained. Given are: social capital of a fixed size, a fixed stock of labour and a fixed productivity of labour which increases with the duration of the production process. In equilibrium, how will productive output be distributed between workers and capitalists or, in other words, how high will wages and interest be? This is the question, and B.-B.’s answer is that, under such circumstances, the production process will be extended to a specific duration, which he carefully defines, whereby the marginal return on the last prolongation of production will determine the interest-rate level. Can words like ‘unreasonable’, ‘incorrect’ and ‘meaningless’ be justified when describing this argument? The fact that the size of the interest rate thus determined in turn affects capital formation and thereby the duration of roundabout methods of production is another matter, which B.-B. has by no means overlooked (and which Brisman, by the way, hardly mentions). But when Brisman himself explains the ‘interaction’, which in his view takes place between these phenomena, he takes refuge in ‘new inventions’ and thus introduces a new element which is alien to the argument. This amounts to nothing other than confusion. As regards the criticism of my own book, I willingly admit, as already mentioned, that some of it is warranted. Regrettably, I have not always expressed myself with sufficient lucidity and stringency; however, I hope that most of the obscurities are due to the way I have expressed myself rather than to unclear reasoning. Thus Brisman reproaches me for having ‘combined two concepts as completely different as physical productivity and value productivity under one hat’ (p. 162). This criticism is justified to some degree (particularly with respect to a few subsequent words which Brisman does not cite). Allow me to point out, however, that above, when treating production and distribution, I distinctly declared my intention to abstract from the phenomenon of exchange. I do this, in principle, by considering—in the two respects indicated—a closed society which, due to 22

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technical conditions, is limited to producing one or a few staples whose selling price is already determined by the foreign market. Under this condition, the concepts of physical and value productivity obviously coincide. Moreover, in the general case, when commodity prices are also variable, I strongly suspect that the two concepts can never be defined and separated in an unambiguously clear way: the different goods evidently cannot be compared in a physical sense or added together. Again, the sum of their exchange value depends on the more or less conventional choice of a standard of value and hence is of no immediate or primary importance to economic life. In one instance, however, I am in fact to blame for a vague classification, and this is the reason for several of my expressions which Brisman criticizes as too imprecise. The issue is whether some of nature’s treasures: mineral deposits, newly accessible natural forests, etc., should be classified as ‘capital’ or ‘land’. They are not the fruit of any labour or even of valuable, already occupied, natural resources. But during their subsequent use in the service of production, they undeniably bear greater similarity to real capital than to natural resources that are renewed from year to year, i.e. land. In the fineprint paragraph on p. 157 of my book (2nd edition),8 I have tried to solve this difficulty by precluding the supply of such immediately accessible natural resources of limited size from the scheme of the stationary society, thereby disregarding them in an initial orientation. In a ‘dynamic’ approach, they obviously have to be incorporated, but then there is so much else to be taken into account which would more or less modify the preliminary conceptual scheme. On other occasions, again, Brisman’s criticism is probably due to a misunderstanding of my intentions—for which I myself might be partly to blame—or of the case in point. Thus, it is obvious that he has completely misunderstood my remarks regarding Thünen’s theory of adjusting interest on the basis of the return on ‘the last share of capital’; yet it would take me too far to demonstrate this in detail here, and I think I have examined this question sufficiently in my book. Nor do I need to address Brisman’s own objections to this theory—which, formulated with appropriate care, is undoubtedly correct and has by no means, as the author claims earlier (p. 119), been abandoned by economists—since they have already been implicitly refuted above. Moreover, I believe I have already provided a sufficient explanation for another seeming contradiction, pointed out by Brisman in this context. It concerns my statement that interest is no doubt a more general concept than productive capital itself, which in his opinion would imply ‘that interest can be obtained from something which is not capital’. This refers to interest on pure consumption loans. In a private economic sense, the lender’s claim is capital, and thus far, as well as in everyday language, his income can, of course, be called interest. But it is not part of the return on social capital; instead it only parasitizes, so to speak, on one of the large social income 23

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categories: wages, rents and (with respect to the whole economy, as derived from social production) interest. Another strange and hardly correct view held by Brisman is that owners of fixed and circulating capital have different, and even conflicting, interests in regard to an increase or decrease in interest. This may be true with respect to a temporary change in the interest rate, but certainly not in the long run. For example, if mortgage interest has declined due to increased capital accumulation, it is undoubtedly to a property owner’s advantage to replace his old mortgage debt with new loans at lower interest. Later, however, low interest is likely to encourage increased housing construction, so that his own rental income will decline in the same proportion as the decrease in interest; then, in sum, he has obviously made a loss and not a gain. Only that share of the rental which corresponds to interest on the site will be unaffected (or rather, favourably affected) by the fall in interest. But the interest on the site is rent, and the concerns of property owners are unquestionably in conflict with those of (all) capitalists with respect to the interest rate level. I herewith conclude my countercriticism. I hope it will not be regarded as stemming from an author’s wounded pride, which would be unwarranted since, on the whole, Brisman is very favourably inclined towards my book. Besides, I am grateful for all objective criticism, including these critical aspects. Nor do I rule out the possibility that the idea which Brisman appears to prefer: capital perceived as saved purchasing power or postponed consumption—because this is the real meaning of his, not fully defined, expression ‘savings’—could serve as a basis for 1a very useful theory of capital and interest. Under the condition that the time element is given its proper place in the theory of capital, I think the point of departure could be almost anywhere, even in Hermann’s utility theory. (Only the theory of ‘exploitation’ would have to be eliminated as unscientific because, in principle, it neglects the time element.) But I am also strongly convinced that any such undertaking, consistently carried out, can only be a parallelism, a more or less faithful counterpart to Böhm-Bawerk’s theory. This is not to imply that it would be superfluous, however. On the whole, this anti-critique of mine is by no means intended to discourage Brisman from further visits to the theoretical realm, where I rather bid him welcome.

NOTES 1 Editor’s note: Wicksell’s article is a response to two articles by Brisman which appeared in Vol. 14, 1912, of Ekonomisk Tidskrift (now the Scandinavian Journal of Economics). The first is entitled ‘Kapital och kapitalräntan’ [Capital and Interest], (pp. 89–121) and the second, ‘Prof. Wicksell’s framställning af kapitalet och kapitalräntan’ [Professor Wicksell’s Interpretation of Capital and Interest], (pp. 157–70). After Wicksell’s critique, Brisman replied in a third article (also 24

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2 3

4 5

6 7 8

published in Vol. 14) entitled ‘Ännu några ord om kapitalet och kapitalräntan’ [A Few More Words on Capital and Interest], (pp. 399–416). Not to be confused with the, even in my view unfortunate, term ‘private capital’ used by B.-B. et al. Of course, this is by no means intended to deny that even in the context of the national economy, credit is of considerable importance; but it belongs on another level, in monetary theory and applied economics, not in the basic theoretical foundations. In Über Wert, Kapital und Rente (pp. 74ff) [Value, Capital and Rent (pp. 99ff)]. Brisman has not fully understood me, when he discusses my implicit agreement with Böhm-Bawerk’s concept of capital called intermediate products (p. 159). At any event, in the portion of my text referred to, this concept by no means designates the opposite of ‘finished products’—on the contrary, I think this distinction is irrelevant. I merely mention capital assets, which are thought of as secondary in relation to the capitalistic production process. This is what, in my opinion, ‘makes all further discussion concerning the essence and extent of the concept of capital superfluous’. On the other hand, I have no objection to conceiving of the production process as extended all the way to the point in time of consumption, when all products basically become ‘intermediate products’. As an old ‘mathematician’, I am more inclined to generalize and schematize than to classify. Brisman’s objection that, according to B.-B., ‘in exceptional cases, prudent roundabout methods of production would exist which do not yield any return’, is nothing more than a so-called quaternio terminorum [a fallacy of four terms]. Moreover, immediately afterwards, Brisman explains that ‘all similar attempts… failed’, and then, at least, there would not be much argument about whom to ‘credit’ with the invention. Editor’s note: Page 151 in the English edition.

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3 LEXIS AND BÖHM-BAWERK

I This past summer, two of the most prominent men in German economics, Wilhelm Lexis and Eugen von Böhm-Bawerk, were carried off by death. Lexis had reached the respectable age of seventy-seven and, although active until the very end, it may be said that his lifework had essentially been completed. Böhm-Bawerk was almost fifteen years younger; all things considered, he would still have had occasion to afford us many products of his incomparable acuity; his death was totally unexpected, and it elicited, not least for the author of these lines, an immensely painful shock. In many respects, these two competent men were opposites of each other. Indeed, Lexis’s most distinguishing quality was, as indicated, his incredible versatility. He can hardly be regarded as having produced any great or monumental oeuvre, but in nearly all areas of economics and related disciplines, statistics, finance, sociology, he has written monographs which belong among the most valuable of their genre. It is enough merely to read the list of his contributions to the vast Handwörterbuch der Staatswissenschaften (Conrad’s Hwb.): approximately ninety articles, most of them comprehensive and dealing with specific issues in all areas of economics and statistics. In addition, we have his two excellent essays in Schönberg’s Handbuch, on consumption and on trade (a summary of the latter has been translated into Swedish in Ekonomiska Samhällslifvet [Economic Society], although with some amplification which is of the translator’s own doing). Further, there are numerous articles in journals and independent treatises on widely different topics. In the forthcoming collection, Die Kultur der Gegenwart [Modern Culture], he has written not only an entire volume on general economic activities (at the age of seventythree), but also a second volume—Das Wesen der Kultur… [The Nature of Culture].1 In several of these areas, particularly statistics, the monetary system and trade policy, he has acquired a name and reputation as one of the most eminent scientific authorities of our time. Originally published as ‘Lexis och Böhm-Bawerk’, Ekonomisk Tidskrift, 1914.

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Böhm-Bawerk, on the other hand—if I disregard his purely practical work as a civil servant in the Austrian Ministry of Finance, over which he presided several times—concentrated his entire lifework on a single question: the modern theory of value in general and the theory of interest in particular. It should be kept in mind, however, that he devoted ten or more years in the prime of his manhood exclusively to his activities as a civil servant and statesman. Otherwise, his literary production would probably also have been somewhat more versatile—his splendid critical essay Zum Abschluss des Marx’schen Systems2 (in Festgaben für K.Knies) gives us an idea of what he could have accomplished even outside the area which literally became his own. But in this area he has written a study which, if I am not mistaken, will someday belong to the, regrettably few, classical works in our scientific literature, and place him beside Adam Smith, von Thünen, Malthus, Ricardo, Mill, Jevons and a handful of other truly great economists. He has not quite reached this point yet. His theory of capital has certainly remained at the absolute forefront of theoretical discussion in recent decades, but the declared proponents of Böhm-Bawerk’s theory are, at least ostensibly, still rather few in number—I count myself among the earliest and staunchest—while most modern authors in this area have more or less polemicized against him. Even a man like Alfred Marshall, who should have all the requisites for a rightful appreciation of this theory, has on the whole been rather brusquely unsympathetic towards it, without realizing that he has thereby denounced his great countryman Jevons, whose theory of capital, although inexplicit and fragmentary, in its very essence fully corresponds to Böhm-Bawerk’s. Opponents would like to replace the theory they attack with unequivocal propositions. On closer examination, however, one can hardly avoid discovering that, to the extent they have any content and consistency, these propositions are in fact merely—the Böhm-Bawerk theory, more or less thinly disguised; of course, according to the old adage that imitation is the highest form of praise, this seems to vouch for its enduring success. Lexis and Böhm-Bawerk both shared perseverance and a tireless capacity for work, which are, so to speak, the professional secrets of German scientists. Compared to most of their countrymen, they excelled in their remarkably clear and easily comprehensible style of writing—in the case of Böhm-Bawerk this quality not infrequently ascended to true artistry. As regards Lexis the economist, however, I have not a few misgivings; it would be unnecessary to recount them here were not for the fact that he enjoyed a reputation for authority on so many topics, which imposes some sort of scientific obligation. No matter how praiseworthy it might be, versatility is almost always accompanied by the danger of superficiality. But this is not to be found in the way Lexis assembled or organized the material itself—as far as I can tell, he was exemplary in this respect. When subjected to intensive scrutiny from a strictly theoretical point of view, however, this 27

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material was not always on the same level. In monetary theory, which after all was one of his most distinguished fields, it seems to me that his own theoretical stand-point was rather wavering and uncertain. For example, for a long time—if I am not mistaken—he was sceptical towards the Indian experiment of appreciating the value of the rupee by restricting the free coinage of silver, although this experiment turned out to be highly successful. Its potential had already been anticipated and established theoretically by L.Walras; moreover, a similar experiment had been carried out, also quite successfully, in the Netherlands twenty years earlier.3 Lexis’s criticism of Ricardo’s theory of so-called comparative advantage, which regulates international trade, is also well known. This criticism has appeared unchanged in all four editions of Schönberg’s handbook (Ekonomiska Samhällslifvet II [Economic Society], pp. 477ff) and has finally begun to receive the rank and dignity of authentic refutation of this theory. As a matter of fact, however, Lexis’s entire argument is based on a petitio principii. He assumes that in a country which is in all ways economically inferior to another country, money wages would, under the protection of tariffs, nevertheless be equally high and commodity prices would be consistently higher than in the latter country. Hence, after tariffs were lifted, this country would, at least for some period of time, undersell the other country in all commodity sectors. This assumption of his is absurd, however. Regardless of how high the tariff barriers surrounding a country might be, there is always some good or commodity group whose price is lower than in other countries; otherwise, the country in question would not be able to satisfy its demand for gold from abroad. The only possibilities would be if the country itself produced an over-abundance of gold—in which case gold would be its obvious export good—or if it increased its gold supply excessively by some artificial means, through economic sacrifice. But Lexis does not mention either of these alternatives. Wages in the economically inferior country would thus of necessity be so much lower than in the favoured country that exports from the former, after the introduction of free trade, could begin immediately. Concerning modern theories of value and capital, Lexis has made a number of statements which reveal that he had not become very carefully acquainted with them; even in this instance, his high scientific reputation has probably prevented these theories from gaining widespread acceptance, at least in Germany. One such statement (regarding the prolongation of ‘round-about methods of production’ as synonymous with an increase in capitalist production) may be found in an otherwise favourable review of my book Uber Wert, Kapital etc. which appeared in Schmoller’s Jahrbuch. This prompted Böhm-Bawerk to write a very exhaustive countercriticism (Einige strittige Fragen der Kapitalstheorie [Some Controversial Issues in Capital Theory]—formerly in the Austrian journal), where Lexis may definitely be said to have lost out; nor did he, to my knowledge, engage in any defence. 28

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As a matter of fact, Lexis’s contributions to statistical theory are probably of greater and more enduring importance than his authorship in economics. To be sure, he did not come up with anything positively new in this area either: now currently in use, the catchwords he coined, such as ‘normal’ as well as ‘below-normal’ and ‘above-normal’ dispersion (distribution) in statistical series, are simply facts which have been well known in probability theory for a long time. But Lexis is credited with being the first to have pointed out the crucial importance of these concepts for statistics, where experience has shown that, with few exceptions, an above-normal dispersion almost always has to be taken into account. The following modest attempt to explain what this is all about may be of interest. If we shake a number of coins in a box and scatter them on a table, experience shows that approximately half of the coins will fall with the obverse (script) side up and the other half with the reverse (weapon or portrait) side up. An excess of even a few coins of either kind above half occurs relatively less often, large deviations almost never. Under the assumption that none of the coins has any inherent tendency to fall on one side more frequently than on the other, in principle, a very simple calculation— in fact merely an application of Newton’s binomial theorem—can be used to determine the probability that the different combinations will occur and, for instance, prove that under repeated experiments with, say, 100 coins, the number of obverse sides below 47 or above 53 should only occur every other time. Moreover, the distribution of coins should be outside the margin 38–62 for either occurrence in only about one case in a hundred. If we instead have 1,000 coins, then the most frequent deviations in absolute numbers will be approximately three times larger, but relative to the number of coins about three times smaller; that is, they vary by the square root of the number of coins. If the coins had a predominant tendency to fall with either (e.g. the obverse) side up, then the mean of a sufficient number of experiments would infallibly yield somewhat more obverse sides, for example, half plus one or two per cent; but during the various experiments, the most frequent deviations around this mean would crowd together in the same way. This is the ‘law of large numbers’; and a ‘misdistribution’, which in this way corresponds to the distribution stipulated by the calculation, is called normal dispersion. It could happen, however, that the mass of coins is not completely homogeneous: some of the coins might have a predominant tendency to fall with the obverse side up, others a similar tendency in the opposite direction. If this is the case, the result is reinforced, i.e. the deviations will on average be smaller than expected. This is easily understood if we consider an extreme case where each half of the coins exhibited a very strong tendency in one direction or the other. Then the ultimate result for each new experiment would invariably be 50 (and 500, respectively) coins of each kind. This is called below-normal dispersion. As a further eventuality, the mass of coins could also vary from one experiment to the next. In this case the deviations from the mean would, on the contrary, be larger than those stipulated by the ‘theory’, i.e. those calculated under the assumption of an invariable (and homogeneous) mass. This is also easy to grasp if we imagine an extreme case. For instance, if all or most of the coins used in half of the experiments had a strong tendency to fall with the obverse side up, but an equally strong tendency to fall with the reverse side up in the other experiments, the mean of all the experiments taken together would, of course, still yield an approximately equal number of obverse and reverse sides. However, the separate experiments could deviate from this mean to 29

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a vast extent and in any case much more than under the assumption of an invariable mass of coins. This therefore becomes what is termed above-normal dispersion. As a rule, both of these sources of error occur in statistical analyses; the material under study is almost always heterogeneous in itself and variable from one ‘experiment’ (e.g. one year) to the next. But the effect of heterogeneity is generally of little importance because statistical data are usually quite extensive, covering tens or hundreds of thousands of individuals, so that the relative deviations from the mean would be very small even for completely homogeneous data. The deviations based on variations in the data from year to year (or even month to month) are usually much larger. Even if such deviations are, on the whole, more temporary (for instance, variations in mortality due to favourable or unfavourable weather conditions, epidemics, etc., or the incidence of marriage which rises or declines with economic conditions), they are often several times larger than those calculated according to the simple probability framework above, which, as mentioned, assumes that the basic data are invariable.—Obviously, there are additional effects of unilateral, constant changes in the same direction (such as a continuous decline in mortality due to sanitary improvements, lower infant mortality through voluntary limitations on the number of children, etc.), which could make all calculations of probability illusory. There are only a very few instances of almost complete agreement between the basic framework and reality, among which the sex ratio of newborns is perhaps discussed the most. In other words, in this respect statistical data remain—for reasons unknown to us—more or less the same year after year.

The practical detection of this circumstance has given rise to two important consequences. It has modified the notion that even statistical phenomena could a priori be subjected to applications of simple Gaussian formulae, which have served physics (as well as biology) so admirably. On the other hand, it has also eliminated the unwarranted suspicion, i.e. regarding the overall importance of mathematical statistics, which had begun to evolve precisely because of the hypothetical discrepancy between ‘theory and reality’. To have achieved this is certainly not a trivial service.

II As if it were only yesterday, I recall the day twenty-five years ago in Berlin— while visiting there on a scholarship—when I looked in the window of a bookshop and read for the first time the title: Positive Theorie des Kapitales4 by Eugen von Böhm-Bawerk. I was already familiar with the author’s Geschichte und Kritik der Kapitalzinstheorien5 and, in particular, I had studied and greatly admired his exceptionally clear and convincing presentation of the theory of marginal utility in Conrad’s Jahrbücher from 1886. In passing, let me mention that in my opinion, these splendid essays should have been published in book form, instead of incorporating excerpts from them in the above-mentioned volume, where they primarily disrupt the course of the exposition and give the general impression of a longueur. I bought a copy and was soon engrossed in a study of the book. My notes, which are still in the margin, testify to the fact that I understood a 30

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great deal of it rather imperfectly; in particular, at the time I did not succeed in absorbing all of the last section: ‘Die Höhe des Kapitalzinses’ [The Level of Interest], although later I came to appreciate that part more than the rest. Nevertheless, this volume was a revelation to me. Earlier, I had tried—on my own, but with little success—to penetrate theoretically the phenomenon of interest and the overall problem of economic distribution when it is complicated by the presence of capital (in addition to labour and the forces of nature). Not even the ingenious ideas in Jevons’s Theory of Political Economy had helped me on my way; yet they do in fact contain exactly the same basic concepts, but in an overly aphoristic form. All of a sudden I saw, as if before my eyes, the roof being erected on a scholarly edifice. Ever since the days of Ricardo, economists had only managed to construct its lower floors and otherwise had to be content with collecting more or less useful building materials. In order to make an impartial evaluation of the significance of BöhmBawerk’s achievement, his book should be considered in the context of the standpoint on these issues which prevailed in economics at the time. Not too long ago, the wages fund theory, according to which the old-time economists thought they had the key to solving the problem, was explicitly repudiated, even by its most distinguished former advocate, John Stuart Mill. Regrettably, however, despite considerable effort, nothing had yet been found to replace it. Everything was in chaos. Mithoff’s vast monograph in Schönberg’s Handbuch (2nd edition, 1885) on Die volkswirtschaftliche Verteilung [National Economic Distribution] may serve as a good exponent of the situation in those days. Other topics are presented in a fairly satisfactory way, but when discussing the distribution of national product between labour and capital, he fails completely. After having shown—which, of course, is not difficult—that wages necessarily have to be enclosed between the worker’s most indispensable cost of living as their minimum and the value of aggregate output as their maximum, he proceeds (in section 32) to study how the real wage rate is determined within these limits. According to Mithoff, ‘such determination’ should be ‘based on the ability to pay of those who employ labour’. Entrepreneurs, he says, pay wages out of capital which is either their own or borrowed from others, but they have to be compensated for this capital (along with the profit on it) by consumers. As a result, the demand for labour ultimately emanates from consumers and the total amount of capital which can be used to purchase labour thus depends on their ability to pay. On the other hand, of course, consumers’ purchasing power depends on the size of national income; the share of this income used to pay for labour is therefore the source of wages. ‘This capital stock or the so-called wage fund’, however, is not of any fixed or predetermined size; in reality, it can only be determined as ‘the sum of wages actually paid at each point in time’(!). If wages rise, then the wage fund also increases, because ‘if entrepreneurs wish to or could be satisfied with lower profits, or else have reason to expect 31

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consumers to pay a higher price for their products’, then they could also obtain the requisite capital ‘by enlarging the share of their wealth thus far allocated to pay wages, at the expense of the other share, and by raising their credit’. (As regards this ‘other share of their wealth’ and the capital still unborrowed, M. gives no indication of what their earlier purpose might have been.) But let us go on. Workers themselves, M. remarks, occupy an important position among consumers. ‘And when national income is designated as a source of wages, then it is in large part created by the workers themselves.’ (As a matter of fact, the ‘part’ here is probably equal to the whole, because production generally cannot, of course, take place without labour.) ‘As a result’, M. closes the circle of his observations, ‘total output can also be designated as the source of aggregate wages.’ In other words, he arrives at the peculiar result that total output, which was initially specified as the upper limit for wages, now becomes the determining factor for their actual level below this limit.6 Against these and other ‘explanations’, which with good reason could be regarded as a scientific declaration of bankruptcy on this highly significant point—now and then disguised by high-sounding nonsense about ‘historicalethical-psychological’ viewpoints, etc.—Böhm-Bawerk has, as we know, taken up the classical economists’ train of thought and implemented it in a profound, fully motivated wages fund theory. In order to get a clear idea of the relative shares of labour and capital in production output, he says, total social capital or—as he calls it, with a subtle distinction which, in my opinion, makes no difference one way or the other—the social subsistence fund, has to be set in relation to the aggregate labour force, i.e. the annual ‘labour donation’. It should be kept in mind, however, that this ‘fund’ in its entirety is merely a figment; it is gradually transformed into consumable necessities, only to be constantly reinvested in production. Like Jevons, he maintains that even socalled fixed capital has to be replaced sooner or later, inasmuch as all capital can be called circulating—a fluid, although more or less sluggish, part of the general flow of capital. Hence, in getting to the bottom of this approach, capitalistic production becomes intrinsically synonymous with roundabout methods of production; the progressively capitalistic nature of production straightforwardly implies that, on average, an increasingly longer period of time is interposed between labour input and mature products, i.e. products immediately available for consumption. This fiercely controversial proposition is in fact a cornerstone, which I am convinced cannot be overturned, in both Böhm-Bawerk’s and Jevons’s capital theory. Evidently, in order to be profitable, these roundabout methods of production have to be chosen wisely and they are certainly not intended to be available at every stage of production. In general, however, the fact that the capital stock per capita also increases continuously, without bringing interest 32

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down to zero or the like, should be regarded as validating the emergence or availability of such ‘profitable roundabout methods’, with or without the assistance of technical progress. On the other hand, under otherwise equal conditions (i.e. if the total amount of capital remains unchanged), the average duration of the roundabout method of production and thus of capital investment or— according to Böhm-Bawerk’s more lucid, but less exact term—the production period, would now appear to be inversely proportional to the share of this capital which is freed annually and takes the form of consumable necessities, and thereby also to the average wage rate. If, for simplicity, we begin by disregarding agricultural output and some similar elements of production, whose compensation is in reality also advanced by capital in its free form, then every öre of this capital has to pass through the stage comprised of labour and wages; otherwise, of course, it could neither be reinvested nor yield any return. Needless to say, the length of different production processes depends to a large extent on technical conditions. Technical progress which cannot be implemented without increasing amounts of fixed capital has an inherent tendency to reduce the future share of capital freed annually, thereby depressing wages. At the same time, however, technical progress also encourages and facilitates new capital accumulation, which to a greater or lesser degree can counteract this unfortunate effect on labour. Meanwhile, at every given technical level, the wage level also affects the length of the most economically profitable production period. This circumstance had not been fully understood until it was clarified by BöhmBawerk. It is a commonplace that high wages dispose entrepreneurs to look for mechanical expedients; but the usual explanation for this, given even by professional economists, is superficial and basically without meaning. If labour becomes relatively costly, so they say, then machinery becomes relatively cheap; but they overlook the fact that machines are also the product of labour and should therefore—so it seems anyway—increase in price along with labour. Ricardo had already implied the correct explanation, but economists have since forgotten about it. Böhm-Bawerk definitely provided it in the general proposition that a spontaneous rise in wages (e.g. due to a diminished supply of labour or an increase in demand, or if workers succeed in enforcing a general pay rise through strikes, etc.) has to make it economically advantageous for each individual employer to increase the length of the production period which he had previously maintained. This ultimately depends on a purely mathematical relation that is certainly simple enough, but nevertheless sufficiently complicated to be neglected in most economic analyses which, as we know, are not generally distinguished by any high degree of mathematical stringency.7 All the more estimable in that it was a non-mathematician who showed this clearly for the first time. 33

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Assume, for simplicity, that a productive firm has reached such a high degree of ‘integration’ that it is able to produce all the machines and equipment necessary for its operations. Suppose the entrepreneur has to choose among, say, three different systems or degrees of mechanical production, of which the first would require his total capital to be invested for, on average, four years, the second, five years and the third, six years, i.e. this is the average length of time that will elapse between each unit of labour expended and the completion of the resulting finished product, hence also between advance payment of wages and compensation from selling the products. Of course, the latter two production systems are completely out of the question unless they are technically superior to the first system. We therefore assume that the entrepreneur’s net profit for the entire production period as regards the three systems will be 400, 510 and 600 kronor, respectively, per unit of capital. We also define a worker’s average yearly wage at the time as one unit of capital; the amount does not even have to be specified as long as interest is not compounded. The third and highest of these systems would appear to be the most profitable to the employer, but this is not the case because his objective is naturally to earn the largest possible annual net profit on his (own or borrowed) capital. Therefore, the first profit figure has to be divided by four, the second by five and the third by six. The quotients are 100, 102 and again 100 kronor, respectively, indicating that the middle system is more profitable than both the first and the third. If, however, the wage is increased by, say, 100 kronor, then ceteris paribus the employer’s profit (for the entire production period) is reduced by the same amount and would be 300, 410 and 500 kronor, respectively, for the three systems. If these figures are then divided by four, five and six, respectively, the quotients will be 75, 82 and 83 , i.e. the highest system is now relatively most lucrative. If the wage had instead been reduced by 100 kronor, the quotients would be 500/4=125, 610/5=122 and 700/6=116 kroner. Hence the lowest system is now preferable. As is easily seen, these arguments are completely general; the geometric proportion between two numbers cannot remain unchanged when they are both reduced or increased by the same quantity, but is displaced, in the former (latter) case to the advantage of the larger (smaller) number. (The same result is obtained when calculating compound interest.) So the secret is really no bigger than this, reduced to its simplest expression; but it was big enough before it was properly uncovered.

Under otherwise given conditions, this reciprocal effect between the wage rate and the degree of capitalistic production gives rise, in ways which we do not have to analyse here, to an equilibrium where the share of annually freed capital barely suffices to pay actual wages, while the actual length of the production or capital investment period is the most economically profitable for each entrepreneur at exactly this wage rate.8 It does not have to be emphasized how extremely abstract such reasoning is. It neglects (intentionally) all elements of production other than labour and capital (in a strict sense); this shortcoming has to be amended without fail before there can ever be any question of verifying the hypothesis in practice. It does not take into account the increase or decrease in labour efficiency which a rise or reduction in wages is apt to evoke (which, as pointed out by Brock, can sometimes lead to interesting complications). Moreover, it presupposes not only rapid and smooth adjustment of production technology, which far from corresponds to reality, but also extensive, ‘atomistic’ free 34

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competition. If the last condition does not hold, the formal solution will also be considerably different. Finally, this hypothesis makes use of the tricky concept of mean or average, which unfortunately does not have any concrete meaning except in a few, extremely simple cases, whereas it is merely a mathematical concept in more complex cases. Furthermore, the definition itself involves precisely the concept it is intended to determine, namely the level of interest (and hence of wages).9 But with all its shortcomings or, rather, imperfections (which, of course, could subsequently be amended), as compared to all previous attempts to explain the distribution problem, Böhm-Bawerk’s solution has a distinct advantage in that it is neither circuitous nor self-contradicting. It may be regarded as containing not only an ‘essential truth’, but probably also the essence of the truth itself in this area. The parts of B.-B.’s work considered so far are those which I value most highly, even though criticism of his theory has not dealt with them at all or else has understood them rather poorly. In addition to these aspects, his book also contains a chapter which initially gave rise to such criticism. Here, he tries to derive the essence and necessary existence of interest—in reality a superfluous undertaking because if it has been shown that the level of interest under given conditions has to be such and such, then the proof of its existence is thereby provided. As we know, he explains that interest is an agio between ‘the value of present and future goods’ on ‘three main grounds’: potentially more abundant satisfaction of needs in the future, unavoidably subjective underestimation of future needs and overestimation of future resources, and technical superiority of today’s productive resources to those which will not become available until some future date. Elsewhere in this Journal, I have already commented at length on BöhmBawerk’s presentation, and will not pursue the matter here. Lately, most of the attacks have focused on the notion that only the second of his three grounds would in fact be conclusive with respect to the existence or level of interest. The first ground cannot be considered universal: in a stationary society—if not for the individual, then for society as a whole—satisfaction of needs is the same at present and in the future. But the third ground, or what is now usually called the marginal productivity of capital (or rather of ‘waiting’), would only be secondary or temporary. If it allowed a return on capital higher than the above-mentioned subjective underestimation of future needs, the result would be rapidly progressive capital accumulation, so that interest would soon decline to the latter level—and likewise in the opposite case. The real reason for interest thus lies exclusively in the human psyche which, although it can be changed by cultural progress, legal rights, etc., by and large remains such as it is at any given point in time—so say, in particular, American authors such as Irving Fisher, Frank Fetter, etc., and among the Germans, Bortkiewicz. 35

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The formal accuracy of this objection should probably not be disputed, that is, under the assumption of fully stationary conditions. It should nevertheless be pointed out that even if the productive properties of capital are not the sole determinants of the interest rate level, they obviously prescribe the role of interest as the important social income category it is in reality. But as soon as it is recognized that during the past hundred years we have lived, and still live, under conditions which are anything but stationary, it seems to me that the objection loses its factual implication. So a ‘static’ economic equilibrium is entirely out of the question; only a ‘dynamic’ one is relevant. Accordingly, the marginal productivity of capital becomes the primary determinant of interest; indeed, even B.-B.’s first ground would then serve as a determining factor. Since capital accumulation still occurs today, and on a very large scale, it confirms that a permanent difference remains between the interest rate level determined by the return on productive capital and the more frequently mentioned subjective measure of underestimation in the future. The gap between the two is invariably filled by means of the first ground. In other words, capital accumulation and saving are constantly pushed to the limit where the underweight of present supply, and hence the overweight of present marginal utility, exactly correspond to this difference. Here, even the ‘supply ground’ comes into favour and, precisely as B.-B. wished, cumulates its effects with those of the second ground. For example, if the expected return on free productive capital is 5 per cent and the subjective underestimation of future needs is approximately 3 per cent (by the way, I doubt whether it is so high even in our country), then saving does not stop until the level at which present marginal utility is 2 per cent higher than the future level. The dynamic equilibrium will be expressed by the equality 5=3+2; but the actual interest rate will thus be 5 per cent, by no means a mere 3 per cent.

Böhm-Bawerk himself defended his approach very astutely in No. XII of his ‘Excursuses’ (to the 3rd edition). However, he might have made the mistake of concentrating on individual cases, whereas his opponents, especially Fisher, focused more on an overall social context. The Positive Theory is not Böhm-Bawerk’s only principal undertaking; five years earlier he had published the above-mentioned Geschichte und Kritik der Kapitalzinstheorien, which later appeared in an extensively enlarged second edition and now, if I am not misinformed, will be published posthumously in a third, which he had lately been preparing. Some regard this book as his best. But I cannot quite concur with this opinion; in any event, the positive part of his analyses has to some extent lessened my interest in the historical-critical aspects. As long as a fully accepted or completed theoretical scientific foundation does not yet exist in a certain area—compare, for example, the theory of crisis—the screening process within historical criticism remains highly important. But no sooner have we acquired a theory that meets all reasonable demands—as, in my opinion, thanks to Jevons and 36

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Böhm-Bawerk, now appears to be the case—than historical interest turns more to the germs and inception of the theory, which can be traced in earlier writings, than to disproving false statements and failed attempts. In this respect, my impression is that Böhm-Bawerk’s work, despite its breadth, has all too little to offer. For the most part he proceeds negatively, often with such fervour and ceremoniousness as to call to mind the German proverb: ‘allzu scharf macht schartig’ [excessive severity overshoots the mark]. What is new in his own theory, of course, is that the time element in consumption and production becomes the exclusive content in the concepts of both capital and interest.10 In their explanations of interest, many authors either totally neglect or merely touch on this viewpoint. Böhm-Bawerk’s criticism of them—which regrettably applies to most of the authors he discusses, old as well as young—is, in my opinion, entirely decisive. But the really great and original theorists, von Thünen, Ricardo, Senior and, in particular, Jevons, adopt instead precisely this viewpoint as the core of their own analyses of the phenomenon of interest, even though they have not succeeded as far as is necessary in forming a systematic whole. Therefore, so it seems to me, Böhm-Bawerk’s criticism in this respect is often rather forced and strained, sometimes even misleading. For instance, when admonishing the so-called production theorists, von Thünen, etc., he makes the—in this context—meaningless remark that ‘one more of a product is not necessarily one more [unit] of value’. Or, when commenting on Jevons’s familiar interest formula: ‘the rate of increase of produce, divided by the whole produce’, he asks for proof that the increase of produce which takes place ‘by means of the last increment in capital’, also comprises ‘an increment in value in addition to the capital spent on investment’.11 However, Jevons’s formula does not refer to any increment in capital, but solely to a (marginal) prolongation of the investment time for a given amount of capital. Therefore, the ‘concrete example’ B.-B. uses to illustrate Jevons’s supposed error is misdirected and on the whole of little value. In my view, when he initially wrote these and similar remarks, Böhm-Bawerk appears to have had no clear idea of all the details of his intended theory, and thought he could provide it with perfection which, according to the nature of things, cannot be achieved.12 Otherwise, there is no reason to doubt that Böhm-Bawerk, as he himself asserts, worked out his theory independently of Jevons; besides, their approaches are much too different. But if he had tried harder to investigate and emphasize the similarities between his own and Jevons’s theory, instead of pointing out the—often only illusory—dissimilarities, he would no doubt have greatly facilitated the establishment of the new theory in the world of economics. I have already mentioned Böhm-Bawerk’s brilliant style, which has turned large parts of his principal writings into true models of the art of presentation and many of his critical essays into veritable dialectical pearls. But more than 37

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anything else, in an oeuvre whose essence was predominantly polemic, I have to admire the unwavering urbanity with which he treated his opponents. Such a quality, unfortunately so uncommon in the scientific literature, is all the more praiseworthy in that it was exhibited to a far lesser degree by most of his antagonists. It was only on rare occasions, towards an unusually discourteous adversary, that he allowed himself to take the small revenge of disclosing—in a particularly incisive expression of his consistently objective argumentation—the weak intellectual powers of his opponents. So, in the Annalen des deutschen Reiches (1906), a certain Schade had undertaken, in a manner as arrogant as it was superficial, to refute Böhm-Bawerk’s basically self-evident proposition that an increment in a country’s capital wealth per capita of the population necessarily has to be associated with an increase in the average length of production processes. In three pages13 B.-B. dismissed this endeavour by an author who ‘probably took little pains to analyse his propositions as to their perceptive content’, and mercilessly exposed Schade’s faulty logic. He concluded with an edifying summation: ‘Followed to its logical conclusion, Schade’s argument results in the double impossibility of logic that an increase of capital per head brings about employment of more people than are available, and that this increase per head, because of his arbitrary increase of people, no longer signifies capital growth per head!’

The kindness he bestowed on all novices in our science, whenever he thought he had perceived even the smallest signs of productive future work, was unlimited; in this respect, the writer of these lines owes him an ineradicable debt of gratitude. During the past few years, Böhm-Bawerk had been president of the Akademie der Wissenschaften in Vienna. Our own Academy of Sciences had also elected him among its very few foreign members in the economics class.

NOTES 1 Lexis had studied in Paris and was said to have mastered French as if it were his native language. He was a mathematician in his youth and wrote a thesis in theoretical mechanics—in Latin! It concludes with eight propositions, of which the last is: ‘Lingua Latina ad modernam scientiam physicam tractandam apta non est’ [The Latin language is not well suited to treatises in the modern physical sciences]. 2 Editor’s note: Translated as Karl Marx and the Close of his System, London: Fisher Unwin, 1898; reprinted in P.M.Sweezy (ed.), Karl Marx and the Close of his System by Eugen von Böhm-Bawerk and Böhm-Bawerk’s Criticism of Marx, New York: Augustus M.Kelley, 1949; also translated as ‘Unresolved Contradictions in the Marxian Economic System’, in Shorter Classics, South Holland, IL: Libertarian Press, 1962. 38

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3 At the same time, however, on at least one occasion—in a book review, if I remember correctly—Lexis expressed his belief in the international paper standard as the medium of exchange of the future. In this respect he thus went further than, for example, K.Helfferich. 4 Editor’s note: First edition translated as The Positive Theory of Capital, London: Macmillan, 1891; fourth edition translated as Capital and Interest, vols 2 and 3, South Holland, IL: Libertarian Press, 1959. 5 Editor’s note: First edition translated as Capital and Interest, London: Macmillan, 1890; fourth edition translated as Capital and Interest, Vol. 1, South Holland, IL: Libertarian Press, 1959. 6 In passing, however, M. also reflects that wages should rise or fall as consumption is channelled towards goods whose production requires relatively much or little labour. But this idea, which in itself is correct and could undoubtedly have been used as a basis for a real theory of wages, is not pursued. 7 However, the fact that mathematics alone is of no help here may be exemplified by the following bizarre case. In the first volume of the Danish journal Nationaløkonomisk Tidsskrift (1883), two well-known mathematicians, F.Bing and (later Professor) J.Petersen, tried to examine the problem of the interrelation between interest and wages. They had been dissatisfied, and justifiably so, with the way this relation had thus far been treated in the economics literature. Their own proposal: compensation for labour and machinery in proportion to—what would now be called—their relative marginal productivity is altogether correct and, on this basis, the authors also manage to advance the discussion somewhat. But, incapable of penetrating the crux of the problem, they fall upon the unfortunate idea of representing the unit of measurement for the flexible wage by a mathematical expression which, on closer inspection, is synonymous with this flexible wage itself (merely enlarged by one year’s interest). After numerous calculations, they arrive at the inevitable result that a change in the capital stock and interest level has next to no effect on wages—naturally, because anything which measures itself always remains unchanged! 8 A mathematician is inevitably reminded of the way in which equilibrium is determined according to the principle of virtual movements in mechanics. 9 If capital invested once and for all in, for example, a machine, a house, a ship, etc., over a number of years initially yields a certain return, but then nothing, the average duration of this investment will depend on the size of the return itself, i.e. on the interest rate according to which the capital bears interest. 10 Six years before Böhm-Bawerk, [the Swedish economist, David] Davidson published his praiseworthy little treatise entitled De ekonomiska lagarna för kapitalbildningen [The Economic Laws of Capital Accumulation], which is solely concerned with capital accumulation, and not directly with interest. While arguing against Herrmann and to some extent against Menger, he emphasized this very same idea in an equally conclusive and intelligible way. 11 Geschichte und Kritik, 2nd edition, p. 568. 12 As is well known, in Positive Theorie, he tries to resolve the hypothetical problem by comparing two production elements from different points in time, e.g. two ‘working months’ of different vintages, where the older of the two would always be more productive than the younger, regardless of the future point in time for which production is intended. Subsequently, however, he does not make any use of this idea; instead, he continues on a path parallel to the reasoning of Jevons and von Thünen. As a general proposition, taken litreally, it can hardly be approved—as is also pointed out by Bortkiewicz. 39

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On the only occasion I met B.-B. personally (autumn 1911), I asked him why it was that the different parts of his Positive Theorie seemed to originate from different premises. His reply was that, due to various circumstances, the first half of his study had already been published before he had written the latter half. As a result, up until the last minute he had encountered difficulties with respect to certain details, which he had not been able to overcome without further deliberation. 13 Exkurse zur ‘Positive Theorie des Kapitales’ [Excursus…], pp. 158ff [Editor’s note: Capital and Interest, Vol. 3, pp. 71ff.]

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4 ON THE THEORY OF INTEREST (Böhm-Bawerk’s ‘Third Ground’)

On the first and only occasion I was fortunate enough to meet Böhm-Bawerk in person—in Vienna in the autumn of 1911—I asked him why it was that his positive theory made the impression, at least on me, of not forming a single perfect whole, but rather of arising out of several parallel strands of thought. When I asked this I was thinking of the differing treatment of the concept of capital at the beginning and end of his work. At the beginning, ‘capitalist’ production focused on the future is presented as the primary phenomenon, capital itself as secondary—as ‘the embodiment of the intermediate products that arise at the different stages of the roundabout path’. At the end, however, he recurs instead to the older concept of a subsistence or wage fund, which means that capital is again conceived of as the primary phenomenon and capitalist production in contrast as secondary. But I was thinking above all of the treatment of what is at bottom the same problem, the origin of interest on productive capital, which also varies greatly. It is first discussed in the ‘Third Ground’, which is very controversial and far from easily understood, and then again, quite differently, in the section on ‘The Rate of Interest in Market Trading’,1 in whose brilliant composition and cogency only very few critics have found anything to fault. My question did not seem to surprise him, but his answer certainly surprised me greatly. For he said simply that for extrinsic reasons he had had to hurry so much with the printing of the original edition of his book that the first half of the manuscript was already in press before he had finished writing the second half. This had in fact meant that he had found himself confronted at the last minute with difficulties of a theoretical nature. For example, in the well-known tables in the section already mentioned, ‘The Rate of Interest in Market Trading’, the numbers in certain columns kept turning out twice as high as he felt they should, until at last the happy idea of a so-called staggering of production brought everything into place. (The part in the third edition that has to do with this is a later insertion.) Originally published as ‘Zur Zinstheorie’, in Die Wirtschaftstheorie der Gegenwart, Vienna: Hans Mayer, Verlag von Julius Springer, 1928.

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If I have understood and reported this statement of his correctly, it might explain a lot, for it is probably inevitable when working in such a way that discrepancies and contradictions of greater or lesser significance creep in here and there against the author’s will. But all the indications are that in the beginning Böhm-Bawerk did not regard the original edition of the book as definitive. In the brief preface to the (unchanged) second edition he still speaks of the future ‘resumption’ of his plan ‘to subject the positive theory to thorough revision in terms of its composition’, and declares that he is determined not to give up this plan.2 But nothing came of it. For many years he was prevented by his duties as a civil servant from taking his work in hand at all—as is well known, the second edition is merely an unchanged reprint of the first—and when at last towards the end of his life he set about composing the definitive text, his book had already stood at the very focus of scholarly discussion for so long that I suspect it had become a kind of point of honour to change nothing in it, or only the most necessary things, but otherwise to let the book stand just the way it was written, for better or worse. He went so far in this as to leave the much-contested tables of the ‘Third Ground’, more specifically those on pp. 463ff (in the third edition) unchanged,3 although he has to confess in his polemic against Fisher (excursus XII, p. 374) that in their original form they ‘lack conclusiveness’. Perhaps, as he claims, he was aware of this fact from the very beginning and only set up these tables at the time as ‘highly illustrative’. Incidentally, the latter claim is inaccurate too; on the contrary, the numbers are poorly chosen. For if one completely disregards for the time being the added productivity of the roundaboutness of production, and with that the third ground, in other words, if one allows all the numbers in the table’s second column to become equally large, then by the sole effect of the first two ‘grounds’ it would obviously be possible to express the superiority in value of a month of labour this year over a month of labour next year by the ratio 5:3.8. However, if the third ground is added, then this superiority in value will instead be equal to the ratio of the two maximum values 840:720=7:6. But 7:6 is less than 5:3.8. Consequently—I do not know if any critic has observed this—the appearance of the third ground in itself would even cause a reduction of the premium that had been produced by the other two grounds—and that certainly seems completely paradoxical. Of course it is very easy to alter the numbers in such a way that the ratio of the two maximum values instead turns out larger than the decline in the perspectivally reduced marginal utility during the first year. In that case it is clear that the third ground, as constructed by Böhm-Bawerk, must have contributed at least something to the actual formation of the premium between the value of the two months of labour. As if this were not enough, Böhm-Bawerk has set up new tables in his polemic against Fisher (excursus XII, pp. 377ff), and these tables show that 42

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in the absence of the third ground the two other grounds in certain circumstances would produce absolutely no premium: a premium only begins to be produced when the third ground comes into play. But even in these cases the first two grounds are still present, although they only take effect in the later years; I do not understand Böhm-Bawerk’s new attempts to demonstrate that the third ground is capable of producing a premium even on its own, without the aid of the other two. In my opinion, therefore, Bortkiewicz and Irving Fisher certainly go too far when they deny Böhm-Bawerk’s third ground any independent effect and characterize its formulation simply as a self-deception on the part of the author. On the contrary, it seems to me that Böhm-Bawerk has vindicated his logical honour in excursus XII, painstakingly worked out and filling nearly 100 pages. It is surely not possible to reproach him for circularity, an error that is so extremely frequent in economics literature. The third column [of the table] refers to the so-called First Ground (the necessity or subsistence factor), and the fourth column to the Second Ground (subjective undervaluation of the future), neither of which are to be discussed further here. For a month of labour available in the next year, 1910, a similar pattern applies. The two columns just mentioned remain completely unchanged, the numbers in the second column, on the other hand, are displaced one step downwards (the final number falls away in the process), and the fifth column, finally, which is arrived at by multiplying the second and the fourth, acquires completely different numbers, of which the largest, namely 792, appears in the sixth year, 1914. But the third ground still remains rather unsatisfactory; its effect on the reader is more confusing than enlightening. First, what is its actual relation to the two other grounds? Böhm-Bawerk answers without hesitation that the first two grounds ‘aggregate their effects, while the participation of the third factor in contrast occurs not by means of aggregation but rather by Table 4.1 One month of labour available in 1909 yields

43

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alternation’ (pp. 475ff). The first point is undoubtedly correct. However, how could a factor that actually only takes effect in combination with one or more other factors be shown to alternate with it or them? When Böhm-Bawerk attempts to demonstrate this, in my opinion he forgets his own presuppositions. He speaks of ‘the adoption of a one-year production method’ with the aid of the present month of labour, while the month of labour in the next year ‘is used for unproductive immediate output’ (p. 476), as if this were already settled. He seems to have forgotten that in both cases the length of the most suitable production period was supposed to be determined by means of the interaction of all three factors or ‘grounds’. The position of the third ground with respect to Böhm-Bawerk’s later statements appears still more mysterious. Here both the length of the production periods and the level of the premium or interest are determined by the relative size of the capital. Already in the immediate continuation of his observations on the third ground (p. 472), Böhm-Bawerk suddenly begins to play this tune. He speaks of people who already own ‘a certain stock of goods’ (which provides them with support for several months or years of labour). ‘If their stock of goods suffices for three years of subsistence, then they can utilize their productive equipment in a production process averaging three years. Now if an additional year’s quota of current subsistence means is put at their disposal, then they can increase the length of the average production period from three to four years’, and so on. That may be true, although ‘can’ is of course not synonymous with ‘will’— if I adopt the most Spartan way of life my means might last for three years, but that will not necessarily prompt me to adopt a three-year production period. Moreover, how is this whole way of looking at things to be reconciled with the result of the tables mentioned above, according to which the present month of labour should be invested in a production process lasting only two years, while the next month available should in contrast be invested in a production process lasting four years, and not a word is said about how much capital may be involved? So some error or another, even if only of a pedagogical or presentational kind, must have slipped in after all. After much reflection I have come to the conclusion that this error lies in a mix-up that is easily committed yet has serious consequences. It seems to me that Böhm-Bawerk mixes up the yield of a production period of a certain length—or rather, the portion of this yield that could be attributed to the month of labour in question—with the highest possible yield that could be attained in any way with the aid of this month of labour in the period concerned. But these two things are not the same, and under certain circumstances can be quite different, as the same space of time is often occupied more successfully with several shorter production periods than with a single longer period. The problem is compounded with Böhm-Bawerk’s peculiar habit of always deferring the enjoyment of the fruits of some saving to a single point of time in the future, 44

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whereas in general, surely, our savings, big or small, are designed to enrich our entire future.4 I shall attempt to show all this and its consequences using two examples, which, though only hypothetical, present the pedagogical advantage of investing the somewhat nebulous concept of the production or investment period with concrete meaning, while the question of ‘the continuation of work’, left very much in the dark by Böhm-Bawerk in his discussion of the third ground, completely falls away. For in both cases it is assumed that the necessary labour is carried out at the very beginning of the production or investment period, and that for the remainder of this period the raw product is then simply left to the beneficial influence of cost-free natural forces. As is well known, the simplest example of this kind is furnished by the way in which certain commodities, above all wine, improve with keeping. So let us assume that a colonist in some region with a suitable climate cultivates some wine every year, but only for his own consumption or that of his family. Let us assume that through ignorance of the fact that the wine would be greatly improved by being kept, he consumes his entire stock in the year after harvesting, as grape-juice or new wine. But now he acquires the necessary knowledge about the method and purpose of storing wine and therefore takes the decision to refrain from drinking a portion, say 10 litres, of his current stock in order to save it for the future. For what future? Let us assume the quality of the wine rises, though at a decreasing rate, for twenty years. According to Böhm-Bawerk he would then prima facie prefer to let the wine lie for twenty years, this being the most productive ‘production period’, and the only thing that might lead him to adopt an at any rate somewhat shorter ‘period’ in reality is the (justified or unjustified) underestimation of future needs in comparison with those of the present (or of the immediate future). Is this reasoning correct? Hardly. I make so bold as to say that even if the man fully appreciates the value of the pleasure to be derived from wine in the future, or at least over the next twenty years, he will still in the circumstances described preserve the 10 litres of raw wine for just one year, and will then drink it up. For if he does this, then the next year he gets a plus of 10 litres of (one-year-old) wine, which will put him in a position to lay aside 10 litres of raw wine from that year’s harvest for the following year without any further sacrifice at all. The same thing applies in the third year, and so on. In other words, by means of the sole sacrifice of the present year, as it were as a continuous fruit of this year or an eternal interest on this capital, he acquires the advantage of being able to drink 10 litres of one-yearold wine instead of only new wine every year for the entire future, and more specifically for the next twenty years. It must after all be assumed that this advantage must far outweigh the single enjoyment of 10 litres of twentyyear-old wine (instead of new wine), no matter how good it tastes.5 The difference between the pleasure given by one-year-old and zero-yearold wine constitutes, as stated, the annual interest for the capital sacrificed at 45

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a single time, and this interest corresponds to the premium between the means of production in the present and the next year, embodied in one bottle of raw wine each. By saving one of next year’s bottles of raw wine for the next year but one, he can similarly guarantee himself the same pleasure for the entire future, with the sole exception of the next year. After the same futures have been cancelled out there therefore remains the enjoyment of one bottle of one-year-old (instead of zero-year-old) wine for the next year.6 Finally, the premium in question can be regarded from yet a third point of view. For if we ask why the man only saves 10, instead of immediately saving, for example, 20 or 30 litres for the future, then the answer will of course be that that would mean too great a reduction in the stock still available for his present consumption. In other words, the pleasure of consuming the ‘last’ bottle of new wine will be precisely equal to the total advantages of the ‘last’ of the ten bottles saved for the future. That means it will also have the same superiority in value as the last saved bottle over a bottle of next year’s wine, not because it gives pleasure earlier, but rather because as part of an already diminished stock it gives greater pleasure than the bottle of next year’s raw wine, which in line with our assumptions belongs to a stock of normal size. In this way, Böhm-Bawerk’s ‘first ground’, the subsistence factor, certainly also comes into play, and necessarily so at that, but as a secondary rather than a primary phenomenon, or, as Böhm-Bawerk puts it in his reply to Fisher, ‘this factor marks not the beginning but rather the end (for the time being) of the process that makes the present means of production superior to future means’. But a premium at this level will not last long. For the man is still dependent mainly on the consumption of new wine and can only enjoy the one-year-old wine as an exception. In order to extend this advantage he will surely be prepared by and by, perhaps as early as the following year, to impose upon himself a further sacrifice of, say, 10 litres of raw wine, which will put him in a position to drink 20 litres of one-year-old instead of new wine every year in future, and so on.7 Finally he reaches the point where he only consumes oneyear-old wine and regularly keeps the whole of the current year’s vintage for the next year’s consumption. Then the whole state of affairs suddenly changes. The premium between present and future goods whether of consumption or of production would actually already have sunk to zero, which is hardly surprising, since of course in so far as a production period of only one year has been adopted, the production would already be saturated with capital. In fact if he now receives a proposal from some neighbour to exchange a bottle of raw wine for a bottle of next year’s vintage, then obviously all this will mean to him is that he may have a bottle less for next year’s consumption, and a bottle more for the year after (to be specific, in both cases a bottle of one-year-old wine), and this cannot make any real difference to him. But now the time has come for two-year-old wine. In order to get any further, he now has to save a part of the vintage for two years, i.e. he must 46

ON THE THEORY OF INTEREST

not consume the wine in question until the year after next. This causes the premium to rise again, though not to its original level, representing the difference in quality between zero- and one-year-old wine, but rather, as can easily be proved, only to a level representing the difference between one- and two-year-old wine, which is probably rather smaller.8 At the same time the ‘accumulation of capital’, the successive savings, will proceed more and more slowly as the difference in quality between successive vintages of the wine and therefore the incentive to further savings becomes smaller and smaller. But in addition, in real life the perspectival underestimation of the future, Böhm-Bawerk’s second ground, will come into play and, accumulating with the first ground, will work against further savings and finally bring them to a halt, probably long before the wine has attained its highest possible quality. If the ‘Third Ground’ is understood in this or a similar way, it seems to me it acquires a genuinely independent position vis-à-vis the other two grounds. It is thus even possible to abstract from them—i.e. to retain the first ground only in so far as it is called into being by the activity of saving (to be precise, as a reaction against saving), and defer the effect of the second ground to the more distant future, which is not decisive for the length of the production period—without the premium disappearing. At the same time the results of the closed individual economy acquire a direct analogy to those of the open capital-labour market, as finally described in exemplary fashion by Böhm-Bawerk. The productiveness of the roundaboutness of production provides, so to speak, the material for the capital interest, on true productive capital, that is, in distinction to loan capital in consumer lending. The length of the production processes actually adopted, however, and the level of the capital interest or premium, are regulated in the first place not as might be thought by the influence of the first and second grounds, but simply by the relative size of the capital. The size of the capital in each case and the pace at which it increases or perhaps decreases—this, to be sure, is closely connected with Böhm-Bawerk’s first two grounds, and Böhm-Bawerk of course never denied this. (However, the analogy is not complete.) If the reader’s patience is not completely exhausted, I should like to present another example, which in certain respects is still more instructive, and seems to fit better with Böhm-Bawerk’s presuppositions. I am afraid it is only a Robinsonade, though no use will be made of the ‘net and boat’ which are only too well-known and in any case do not fit properly into Böhm-Bawerk’s scheme. Until now, Robinson has eked out a scanty living on his island from one day to the next by gathering fruits and roots, primitive fishing, etc. But at last he has accumulated enough food supplies to live on at his customary standard for a whole month. Now he is in a position to allow himself the rest he has long desired, but since he has a keen eye to the future he prefers to work during this month too. To be precise, he decides to work on clearing a small 47

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field near his hut, which he then intends to sow with grains of wild corn that he has found on his expeditions. Let us assume he has at his disposal in this enterprise several varieties of grain, which possess the following qualities. The first variety is ripe after one year. The second variety requires two years to reach maturity, but then delivers a larger (single) harvest. The third variety needs all of three years to reach maturity—I admit I do not know whether such grasses exist in nature—but its yield is then greater than that of the second variety, and so on. We assume in accordance with the numbers in the table printed above that the yield of his labour until now and therefore his customary food supply for one month can be denoted by 100, the yields of the various varieties of grain by 200, 280 and 350. The decisive point is that they increase not in proportion to time and therefore to the length of the production periods, but rather, somewhat more slowly. So which variety of grain will he choose? According to Böhm-Bawerk, if no underestimation of the future intervened, he would necessarily select the longest and most productive production period, i.e. the three-year period, but given the subjective underestimation of future needs he might choose the two-year period. But this is quite wrong! In the assumed position he will rather quite definitely employ the one-year variety. For even if he does not intend to enjoy the fruits of his month of labour until two or three years from now, he will gain more by adopting two or three successive one-year production periods (with the aid of the one-year variety of grain) than by immediately observing a two- or three-year period (using the two- or threeyear variety of grain). In the first case, in the very next year he will get a twomonth supply of food at his customary standard of living, which will free two months of labour, which he would otherwise have had to use in the laborious yet unproductive gathering of provisions. He can then use these two months of labour to cultivate a doubled area, and this will free four months of labour in the third year, not just 2.8 months, as would be the case using two-year corn. In the same way in the fourth year he can get enough food for eight and not just 3.5 months, and so on, always measured by his standard of living up to this point. At first, therefore, he will only employ the one-year variety of grain, or one-year production period. If he wants to, he can of course devote both the months freed in the next year to leisure. Then he will have gone through both the capital and the interest and it will all be over—rather as if the wine grower in the previous example had wanted to consume the plus of 10 litres of wine along with his usual stock in the second year. But if he prefers—like the wine grower—to consume only the ‘interest’ and to reinvest the ‘capital’, then as can easily be seen he can procure himself one month free of labour per year for the entire future, while otherwise having to live at about the same standard as previously. This will mean the annual interest on his single sacrifice of capital will amount to no less than 100 per cent, and that this corresponds to the premium between the present month of labour and a 48

ON THE THEORY OF INTEREST

month of labour next year is immediately obvious from the fact that the former month is as it were transformed into two months next year by means of production. But it may be that he wants to save both capital and interest—and perhaps a little more besides—for the future. Then the process described above will occur: he will gradually—and in fact very soon—completely give up his food-gathering expeditions and go over entirely to agricultural production. He will organize this production so that he either ensures himself his usual amount of food for the entire following year in six months, or else in such a way that he works for eight, ten, or, let us say, still all twelve months of the year, in order to provide himself in the next year with nourishment that is both more plentiful and tastier—in short, twice as much food as previously. At the same time the premium between present and future goods has sunk to zero (which, incidentally, means nothing to him in itself, as in his case the roles of capitalist and labourer are combined, and do not appear separately as on the market of a trading economy). To be sure, one month of labour still yields him 200 units of produce, but since this now denotes his food supply for one month, as long as he keeps up a one-year production period one month of labour this year can only free one month of labour next year, which will also give him just 200 units in the year after that. But now the time has come for the two-year period. If he now sows a (small) part of the area he cultivates each year with two-year grain, then in one month of labour he will produce 280 units for the next year but one, and since his accustomed food supply for one month now amounts to 200 units, he can therefore free 1.4 months of labour in the next year but one. The present premium therefore comes to 40 per cent over two years. Here the one-year premium cannot be directly ascertained, as it is always determined by the new additional capital, which is now applied in a two-year investment. But through competition on the market it would of course work out at 20 per cent, in the first instance. By means of continued savings, our man Robinson sooner or later reaches a position where he only sows two-year grain, in other words, he invests all his labour in the current year for consumption in the next year but one. His capital has now been doubled, in that each time twenty-four months of previously performed work (instead of just twelve) lies in the ground. His monthly food supply reaches the level of 280 units, the premium to be sure has again sunk to zero. But if he now switches to the three-year production period (three-year grain), then the premium rises at once, as is easily seen, to (350–280):280=25 per cent for three years or in the first instance 8 per cent for just one year. Here too, then, the ability of roundabout production processes to create interest or premium seems hard to deny. That this ability at the same time works towards its own demise by leading to expansion of the capital is a 49

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quite different matter, but one which Böhm-Bawerk did not deny; indeed, he pointed it out most emphatically. In general I have no wish to claim that the thoughts elaborated here are completely new or foreign to Böhm-Bawerk’s system. For the most part they are already presented in his book, though not always in a suitable context, and sometimes mixed in with somewhat superficial arguments, which do more to confuse than to enlighten the reader. There is talk of an individual having at his disposal a ‘month of this year’s labour’, but we learn nothing else about this person’s situation. For example, is this month of labour the very first he is able to use for future production, or has he instead already long been in a position to use his present labour mostly or ‘on average’ for a more or less distant future, while at the present time he lives on the fruits of work done in advance in earlier years? Böhm-Bawerk should have told us this at once; if he had done so, in my opinion he would from the very outset have got on to the track that was later to lead him to ‘The Rate of Interest in Market Trading’. I consider this section the most valuable and most original in the entire book. Admittedly the germ of it is already present in Jevons and even in Ricardo, but here, for the first time in the literature, a well-reasoned attempt is made to present a systematic, truly consistent solution to the old problem of the relationship between capital interest and wages under free competition on both sides. That this solution could only occur at all in hypothetical form under strongly simplifying assumptions, is obvious—among other things the involvement of non-free natural forces and consequently rent is completely eliminated. That Böhm-Bawerk at the same time, as mentioned, had to deviate somewhat from his original conception of capital, and represented capital as a given sum of exchange value instead of as stored labour, is a little troubling, but may be excused since it allows easier comprehension.9 What seems more important is that the ‘simplest hypothesis’ assumed by Böhm-Bawerk is so abstract that it can hardly be regarded even as a first approximation to reality. There are only very few cases where a production process continued over the course of years leads to the output at a single time of products ready for consumption. The typical method of production, especially in our day, consists rather in the collaboration of more or less durable capital goods (machines, buildings, ships, railroads, etc.) and human labour or the products of the soil. The actual production process here regularly becomes rather short, sometimes so short that it is negligible compared with the life of the machines and buildings. Consequently, the relative contributions made by the owners of the capital and the labourers (or landowners) cooperating with them to the final product ready for consumption are determined simply according to the rules of marginal productivity as in capital-free production. But these workers do not make up the entire existing workforce. Other workers are continuously occupied with the maintenance or renewal of the fixed capital, even in a stationary society. The number of these workers 50

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of course depends on the size of the capital, though not just on this, but rather also on the expected life of the individual capital goods. The most profitable life of the individual capital goods depends in turn—more or less like the length of the most profitable production period in Böhm-Bawerk’s scheme—on the level of wages (imagined as equal for all workers) relative to the value in use of the capital objects, and therefore, as mentioned above, on the respective marginal productivity of the labour and the capital items in the ultimate production of products ready for consumption. Even under the simplest thinkable presuppositions the determination of the level of interest at a given size of social capital will therefore be mediated by a whole series of unknown, mutually dependent quantities, which of course demands the setting up and ‘solution’ of a corresponding number of independent logical relations or ‘equations’. Obviously the problem formulated in this way has much closer contact with reality than Böhm-Bawerk’s construction. On account of its complicated nature it has until now only been hinted at quite perfunctorily by most writers (including myself), and never treated in detail. As is well known, Walras’s approach leaves the whole question of the differing or variable life of the means of production out of consideration. It is the achievement of a younger Swedish economist to have treated this difficult problem in all its details, and indeed almost throughout with elementary observations as in Böhm-Bawerk’s work.10 This leads to many very interesting and also surprising results. Among other things it becomes clear that the generally accepted conception of capital as previously performed, stored labour (along with the resources of the soil), a conception also approved by Böhm-Bawerk, cannot be directly applied to fixed capital, since on this view the amortization of the individual capital item remains a more or less conventional matter, whereas in Böhm-Bawerk’s construction the capital in question or the portion of capital involved is always amortized all at once, by means of and simultaneously with the production of final products ready for consumption. If I am not mistaken, this shows that with respect to fixed capital it is not enough to look at ‘static’ circumstances, ‘staggered’ production, and so on: the ‘dynamic’ prehistory of the capital involved must also be taken into account.* NOTES 1 III, section II, of the (present) IVth Book. 2 In a letter to me in 1893 he already speaks of the ‘self-criticism he has never ceased to exercise with respect to his own work’. It would be exceedingly interesting to know which points he had in mind at that time, for it must be admitted that very few traces of actual self-criticism are preserved in his later writings. 3 In order to spare the reader the trouble of looking it up, I reprint the first of the tables in question below, while otherwise assuming familiarity with Böhm-Bawerk’s relevant writings. 51

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4 In the third edition, Böhm-Bawerk has presented an example that is better in many respects, taking up an idea of John Rae. With a certain sum of labour, let us say A, I can build a house suited to my needs, but of so fragile a construction that it will probably only last thirty years. If after these thirty years I have a new sum of labour A at my disposal, then I can use it to erect a new house, which will also last for thirty years, so that I am assured of housing for a total of sixty years. But if already at the present time I have at my disposal a sum of labour not of 2A, but rather only of 1 A, it is reasonable to assume that I shall be able to give the house so solid a construction that it will last for sixty years. In my present situation, i.e. if I already have at my disposal a sum of labour A, the availability at the present time of an additional A will therefore mean the same to me as the availability of A thirty years from now. In my view it would be pedantry to refuse to admit that here the premium in question arises directly from the technical superiority of the present means of production. This does not of course prevent the size of the capital in each case, the rapidity of its increase, etc., and therefore in the final analysis the rate of interest from being governed by Böhm-Bawerk’s first and second grounds. 5 Logically this must be the case, whatever time period within the twenty years is involved, as soon as it is assumed that the improvements in the quality of the wine constitute a declining series. For n times the first and largest member of the series must necessarily be greater than the sum of the first n members. But it is precisely the former quantity that denotes the enjoyment of one-year-old wine (instead of new wine) during n years, while the latter quantity in turn denotes the single enjoyment of n-year-old wine (instead of new wine) during the nth year. The time after n years, more specifically the time after twenty years have passed, can of course simply be eliminated as it is identical in both cases. 6 It should be observed that here we are dealing with a series of real, successive pleasures, not with a series of imagined, alternatively appearing pleasures, as in Böhm-Bawerk’s scheme. Of course, sooner or later these pleasures are perspectivally reduced from the present point of view; indeed, so much so that they form a converging series, whose final sum then constitutes the value of the means of production. 7 Strictly speaking, subsequent savings will not cost him the same sacrifice as in the first year—they will cost him no real sacrifice at all. For since he finds the enjoyment of 10 litres of one-year-old wine equal to the enjoyment of, say, 15 litres of raw wine, he will for example in the second year be able to lay aside not just 10, but 15 litres of raw wine and yet still retain a normal wine consumption. But in addition to this in the second year, rationally speaking, he will have approximately the same motivation for a new, real savings sacrifice as in the first year. Moreover, our savings plans of course usually encompass not just one year, but several successive years. However, to take this into account would make the problem too complicated and at the same time too poorly defined for it to be possible to analyse it here. 8 The fact that the premium progresses in discontinuous leaps is of course connected with the fact that the production of wine is itself discontinuous, i.e. it proceeds in one-year steps. It should incidentally be observed that our imagined cultivator as labourer and capitalist in one can have no personal interest of any kind in the rise or fall of the premium. 9 In my published lectures, vol. 1 (Jena: Fischer, 1913), I have attempted to pursue Böhm-Bawerk’s original idea of conceiving of capital as an intermediate product (stored labour) somewhat more closely than he himself does. 52

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10 G.Åkerman, Realkapital und Kapitalzins. Inauguraldissertation zur Erlangung der juridischen Doktorwürde (Stockholm, 1923; in German). In the Swedish Ekonomisk Tidskrift (1923) I have both given a thorough review of Åkerman’s work and attempted to approach the same problem using conventional mathematical means. * Editor’s note: This article was typed out after Wicksell’s death which may explain a few obscurities. In Table 4.1 the figures for 1913 and 1914, which were confused in the German version, have been corrected.

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Part II INCOME, TAXES AND DUTIES

5 ON THE THEORY OF TAX INCIDENCE

I INTRODUCTION The theory of tax incidence or, as it is usually termed by German writers, tax shifting, is not a subject that has received much attention on the part of more recent financial theorists. Among older economists, above all the English writers Smith, Ricardo and Mill, studies of tax incidence still constituted a major part (in the case of Ricardo even the major part) of the theory of public finance. In more modern economic theorists, on the other hand, this subject, which is as important as it is difficult, is mostly discussed with the utmost brevity and with a superficiality that stands in stark contrast to the comprehensive, meticulous scrutiny accorded other details of taxation procedures, details that are often probably far less important. Even though Adolph Wagner fully acknowledges the importance of questions concerning tax incidence, he too deals with them in a way that is surely much too summary, at least in the first edition of his Finanzwissenschaft. This is still more the case in Leroy-Beaulieu, Cohn, Schäffle, and not least von Stein, who polishes off the whole theory of tax shifting in three or four pages, and yet thinks this is enough to achieve a thorough reform of the prevailing views in the field. In one of the most recent German works on public finance, the Grundzüge der Finanzwissenschaft by W.Vocke, the claim is even made that tax shifting is ‘not really a subject that has any place in the theory of taxation’ (p. 210). In making this claim, Vocke, to be sure, wants to include under taxes properly speaking only direct taxes. ‘If’, he continues, ‘excise duties had not been regarded as indirect taxes, nobody would ever have talked about tax shifting’. This is certainly a gross exaggeration. In the case of direct taxes, too, indeed even in the case of income tax, the possibility of shifting cannot necessarily be discounted, at least it has sometimes been claimed that it is possible. However, as long as the greater part of public revenue is raised by indirect Originally published as Zur Lehre von der Steuerincidenz, dissertation, University of Uppsala, 1895; reprinted in Finanztheoretische Untersuchungen, Jena, 1896.

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means, it can surely never be a matter of indifference, precisely when considering the justice of the taxation, who it is, in the final instance, who has to bear the burden of these impositions—whether they are called taxes or not. Vocke’s warning to legislators not always to count on shifting, i.e. not ‘to rely on the market to make good the transgressions of legislation’, is most deserving of appreciation. None the less, in actual fact the indirect taxes are in place, and cannot be got rid of so easily; for the time being, therefore, the question of their incidence will remain one of the most important topics that the theory of public finance has to consider. That it is at the same time one of the most difficult subjects in the entire field of economic theory can hardly be disputed, but this is really no reason not to pursue further studies in the area. Admittedly, in many cases we shall have to make do, perhaps for ever, with the purely negative result that it is impossible to calculate with any accuracy the relative distribution among the persons involved of the duty or tax at issue. But even a negative result of this kind is important and valuable. A tax of unknown or uncertain incidence is obviously for this very reason a bad tax and should if possible be replaced by some other means of raising the public revenue concerned. Fortunately, however, there are plenty of kinds of tax, even among the so-called indirect taxes, where there can hardly be any doubt as to their relative incidence. Moreover, a closer examination will reveal that the difficulties of tax incidence inhered not so much in the subject itself as in the underdeveloped nature of earlier economic theory. The most recent progress in the field of theoretical economics will in fact enable us to pursue for at least a considerable distance several problems of tax incidence whose resolution earlier seemed as good as unattainable. Coincidentally, particularly in recent years the number of works concerned in a more detailed way with questions of tax incidence has again increased somewhat. In the new edition of Wagner’s work considerably more space is devoted to the question of tax shifting, though without a deeper investigation of its fundamental principles. Similarly, in C.F.Bastable’s work Public Finance (1892) incidence is treated fairly thoroughly, both generally and with respect to each individual kind of tax. Several more recent monographs on the theory of tax shifting are worth mentioning, among others Pantaleoni’s Teoria della traslazione dei Tributi, which, though rather long-winded and in terms of its fundamental conception surely somewhat outdated, nevertheless contains many correct observations; Kaizl’s deserving little work Die Lehre von der Überwälzung der Steuern; and the relevant works of Falck, Fleeming Jenkin and Conigliani. The most recent work in this field, as far as I know, is Seligman’s book On the Shifting and Incidence of Taxation, which is both comprehensive and written in a stimulating manner. This book begins with a very complete history of the 58

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development of the subject and then proceeds to analyse the most important cases of tax incidence and to subject older opinions on the topic to a critical examination. Unfortunately this part of the work does not always live up to the standard set by the first, historical part. Here and there even logical errors have crept in, which in my opinion seriously diminish the value of the book. Some of these I shall discuss below, others, e.g. his attacks on Mill among others in connection with the practicability of shifting the burden of a tax on houses,1 will be mentioned here only in passing. (Vocke’s remarks on this subject2 also seem to me to be based in the main on a logical error.) In general, comparing older and more modern writers on this topic, I have become convinced that in terms of formal reasoning the former are frequently superior to the latter.3 Only by a deeper analysis of their fundamental principles can we hope at some time definitively to progress beyond the standpoint they represent. Such an analysis, as is well known, was attempted as early as 1868 by Adolf Held in his much-cited essay in the Zeitschrift für die gesamte Staatswissenschaft, ‘Zur Lehre von der Überwälzung der Steuern’ [On the Theory of Tax Shifting]. However, the results were for the most part purely negative. Held points out, quite correctly in my view, that the classical theory of value, which attempted to make average commodity prices dependent exclusively on the costs of production, actually proceeds in a circle, as the cost elements ultimately cannot be determined independently, but rather depend in turn on commodity prices. But he stops short at this result, without even attempting to lay bare the real connection between these things. What lies behind Held’s actual attacks on prevailing theory, incidentally, is not its circularity but rather the fact that he thinks the effectiveness of the compensating forces demanded by the Classical School is very questionable. That the ‘process of levelling can never attain to rest’, on account of other counteractive forces, must absolutely be conceded to Held. But this is a completely different thing from it having no effect, or having an insufficiently powerful effect, and it is precisely on this effect that the whole theory of tax shifting depends, after all. It does not lie within the scope of this work to respond to Held’s other arguments. Some of them at any rate seem to me highly contestable. For example, with reference to land tax, he claims it is completely impossible to prove whether the increase in land rent (in the usual sense) ever ‘derives’ from anything other than ‘newly raised capital invested in the land’, and this tenet is implicitly extended even to urban land rent! The amortizability of land taxes is—if I understand him correctly—simply denied with the strange claim that ‘a land tax of this kind is obviously borne by nobody, which is an absurdity’. Rather, ‘the next owners will find the remaining inequalities [of taxation] already in place as something given and therefore feel them the less’. According to Held, then, these inequalities have absolutely no influence on the purchase price. In Held’s opinion, moreover, the increase in land rent is not an isolated phenomenon. Rather, something similar is found in all areas of business life, and ‘there would be just as much justification for deducting from labourers in the form of taxes everything they now earn in excess of what they earned 1,000 years ago, on account of the growth of civilization, improvements in production, etc., as there is for taking away [the increase in] land rent’ [!]. 59

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If Held had lived in Sweden, he would surely have become the hero of our ‘Farmers’ Party’, which as is well known has recently freed itself from all land tax and ‘shifted’ it largely on to the unpropertied classes, presumably because the latter now earn enough, compared with 1,000 years ago, to be able to bear this burden, too. To be sure, a few excellent passages in the essay, e.g. the first-rate remarks on the practicability of shifting the tax on labourers asserted by the Classical School, are rightly highly esteemed. On the whole, however, one surely has to concur with Wagner’s judgement on this work, namely, that it is among its author’s weaker achievements.

Now as is well known, since Held wrote that work a complete revolution has taken place in the theory of value and prices. This revolution began with the studies of Jevons, Menger and Walras, and has found its conclusion, at least for now, in Böhm-Bawerk’s splendid work on the interest on capital. The true connection between value and cost, and the path one has to pursue in order to avoid the circularity of the older economists, to which Held merely draws attention, is no longer a secret to science. It therefore seems appropriate to undertake a revision of the prevailing theory of tax shifting, building on the new foundation laid by these advances, and this in fact constitutes the main purpose of the following investigations. But a revision of this kind also seemed to me desirable in two or three other respects, which I shall here briefly enumerate. 1 First, in my opinion, the very concept of tax shifting suggests a rather too narrow conception of the financial problem at issue, which is why I have used the somewhat more general word ‘incidence’ in place of ‘shifting’ in the title of this thesis. For to shift a tax implies that the taxpayer makes someone else reimburse him for a portion of the tax amount he has paid, but he can only do this indirectly, e.g. by successfully raising the price of his product. Now by this process the consumers in question are forced to make a sacrifice, but it is by no means obvious that this sacrifice will correspond only to the portion of the tax from which the producer has thus freed himself. On the contrary, it is fairly certain that in most cases it will turn out to be much higher. Indeed, as can easily be proved with reference to the taxation of monopoly profits, it can even happen that while the producer is forced by the imposition of the tax to raise his prices a certain amount (because he would otherwise have lost still more), in spite of this he still finds his income reduced by the full amount of the tax. In this case one can therefore hardly talk about any real shifting, and the consumers’ sacrifice is completely in vain, in terms both of fiscal results and of the national economy. The latter point was explicitly emphasized by Pantaleoni, though perhaps not quite clearly; Seligman on the other hand presents a completely wrongheaded view of the matter, as I shall show. 2 Second, more carefulness than is sometimes observed is required if the problem of tax incidence in general is to be formulated with complete precision. If a new tax has to be imposed in order to meet outlays already 60

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decided on, or if on the other hand an old tax can simply be decreased on account of a financial surplus, then of course it can be asked without further ado by whom the new imposition will be borne or who will benefit from the alleviation. But if we are investigating the incidence of one of the existing taxes or of the tax system in its entirety the matter becomes rather more complicated. To take the first case, it is impossible to imagine a single tax disappearing without a corresponding portion of government expenditure also vanishing and it cannot be wholly without significance for the question of tax incidence which category of expenditure should then be cut. I am not speaking here of the direct utility of the state activity in question for individual members of society; this may be completely impossible to ascertain and is in any case irrelevant to the theory of tax incidence. But the state as a consumer of goods or personal services or as a producer will certainly exercise a certain influence on other factors of demand and supply and thus also on the incidence of the tax. In the case of the entire tax system one would really have to imagine the absence of all state expenditure, which is impossible. Here it does not even help to suppose (as Held does) the case that the state could meet all its responsibilities completely without the help of material means, for then the state would necessarily have to cease completely being a consumer and a producer, and as before, this fact could not be ignored. In such cases the problem must therefore be understood not in the absolute but rather always in the relative sense, i.e. as soon as the incidence of a certain tax or of a system of taxes is under discussion, it has to be imagined that the amount of public revenue at issue is raised in some other way, e.g. by direct income taxes, and then we have to endeavour to ascertain the change in the tax burden that would thus arise. If this is done, in both cases the state activity in question would occur in a very similar way, and can consequently simply be eliminated, which greatly facilitates the argument. The failure to observe this fact has often led to erroneous or uncertain conclusions, particularly with regard to the treatment of the taxation of labourers. No less a person than John Stuart Mill advances the claim4 that a tax on labourers’ wages will do labourers little or no harm, if the state applies the revenue thus derived in such a way that the demand for labour increases accordingly. Even if this view were correct in other respects, which it certainly is not, it would still always be subject to the objection that the state does not seek labour in order to do the labourers a favour, but rather because it needs their labour, and that the manner in which the revenue in question would be used would probably remain the same even if the taxes were derived from some other source, e.g. by a progressive tax on income or property. In other words, the question of the application of state expenditure, however important it may otherwise be, should in general be carefully kept apart from the question of tax incidence, and this is always possible if the latter is understood in the relative sense mentioned above. 61

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3 Finally, and this is my main objection to the prevailing theory, shifting is chiefly regarded as a matter between the producer and the consumer, or between the representatives of various branches of production. The traditional theory contains very little about the ways in which taxes are shifted between the various classes of producers—the capitalists, the landlords, the labourers, etc.—and the little there is in my opinion is quite unsatisfactory. This obviously has something to do with the undeveloped state of the theory of income in general. Of course Ricardo’s theory of land rents has long provided a certain foundation, but this theory could not be developed further on account of a lack of insight into the reasons determining the interest on capital. The theory of wages was in even worse condition. The theory of the natural wage for labour held by Turgot and Ricardo and the wage fund theory of Mill and Senior are now generally dismissed, but have never been replaced by a more correct theory, again for precisely the same reason.5 But now this lacuna in the theory has been filled in in the most fortunate way by Böhm-Bawerk’s theory of capital interest, or at least this theory forms a point of departure from which further work can be done, as I shall endeavour to show in what follows. The practical significance of the failure to consider the way in which taxes are shifted between different classes of producers must not be underestimated, for the relative portion of the various taxes borne by the producers as such is undoubtedly very substantial, and actually grows with each extension of the range of taxes on production or duties on consumption. If one imagines a final state in which all products were taxed so evenly that all prices, even money prices, remained unchanged, then of course there would no longer be any question at all of the consumers bearing the taxes. However, for the purposes of a more thorough examination, the distinction between consumers and producers as separate economic categories is actually an unnecessary and even incorrect restriction of the problem. Everyone consumes, almost every adult is also a producer of commodities or personal services on the strength of his or her labour or property. The entire domain of private economic life can be understood as a single process of production, in which, after an exchange of products has taken place, the compensation of the productive factors—labour, the productive powers of the land, capital, etc.—is shown in a certain real income, a certain sum of practical utility. Now the question is, when pressure is exerted by the state on some point or another of this system by means of raised taxes, to what extent will this pressure be transmitted to the various other parts of the system, either in absolute terms or in comparison with an equivalent pressure on some other point? This is the most general formulation of the question of tax incidence and actually the only one that incorporates all the consequences of a given tax measure. 62

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Of course it is clear that if one puts the problem on so broad a basis, in the first instance it will only be solvable in an extremely abstract form, bearing little resemblance to real conditions. But that in itself does not mean that an investigation of this kind completely lacks (direct) practical application. In fact in the following we shall encounter several propositions advanced in the theory of tax shifting and in tax policy, find some of them confirmed, but be forced to cast doubt on others. In the former case, to be sure, it can certainly not be claimed that a conclusive proof of the propositions in question has been supplied, but none the less a confirmation of these propositions arrived at by a new method has a certain value. In the second case, in contrast, a proposition that does not hold good even under the simplest thinkable conditions can still less have any general validity and must therefore be considered refuted, provided the argument was sound. Moreover, in itself this investigation will uncover certain hitherto unnoticed facts that appear to have decisive significance for tax shifting from a theoretical point of view. Of course it cannot be decided without closer examination whether this significance will also prove to have practical applications; but none the less the theory here provides a hint as to the lines along which practical (statistical) studies might perhaps successfully be organized. However, before we enter into the main part of this study, it seems appropriate to undertake a brief discussion of a specific part of the subject, namely the taxation of monopoly profits and the manner in which it is shifted. In the course of this discussion, to be sure, the opposition between producer and consumer comes into the foreground again. Here the theory is very simple, relatively speaking, and is therefore especially well suited to serve as an introduction to the treatment of the main problem in an exact form, which is to be attempted subsequently. In addition, the topic is in itself of no little importance. Monopoly prices and monopoly income must in fact be regarded as a direct opposite of and necessary complement to the prices and income that arise on the ground of general competition. The following analysis was incidentally motivated in particular by the fact that the discussion of precisely this subject provided by the most recent scholar to work on the field of the theory of tax incidence, Seligman, is in my view incorrect. II THE TAXATION OF MONOPOLY PROFITS In a manner of speaking, any extraordinary business advantage could be regarded as a monopoly. Here, however, we shall only consider those that lend their owner a dominant position in the production of some kind of good or another, so that within certain price limits he is free of all noticeable competition. If in addition the quantity of the commodity in question can be increased at will, then his profit will be determined simply by the volume of sales he is able to make. Now if one further assumes—though to be sure this is only a theoretical ideal—that the possible level of sales at every 63

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thinkable price is known exactly and is a constantly variable quantity, then as is well known the theory of monopolistic price formation is extremely simple and can even be treated in an exact mathematical form, as Cournot proved long ago.6 Like any other businessman, the monopolist strives for the greatest possible earnings and therefore raises his prices as long as he can. However, with every price rise demand and sales decrease, and finally there comes the point at which these begin to decrease at a faster rate than the net profit on each unit of the commodity sold increases as a result of the price rise. From this point on, every additional rise in the price would again curtail the monopolist’s total net profit and rationally speaking he will consequently have to refrain from further price rises. Now, first, it can readily be seen that a tax that is imposed either at an invariable rate or purely relative to the monopolist’s total net earnings, whether it be proportional to these net earnings or in a progressive ratio to them, can have absolutely no influence on the level of the most profitable monopoly price and will consequently not cause the monopolist to raise prices at all. His profits may be reduced considerably by the tax, but will none the less still attain the greatest sum at all possible in the given circumstances. But it is a different matter if the tax is relative to the volume of the business itself, e.g. if it is calculated according to the quantity of goods sold. Then it obviously has the same effect as an increase in the production costs of each unit of the commodity, and consequently it will now be to the monopolist’s advantage to raise the sales price by a greater or lesser amount. Of course as a result, according to our presuppositions, his net earnings (inclusive of tax) will necessarily decrease somewhat, since of course they had already reached their highest level, but in theory this decrease will always be more than offset by the savings in taxes which will be attained precisely in consequence of the monopolist’s diminished production. This is a direct consequence of the conditions that must be satisfied in the maximization of a constant quantity, and follows very simply from the mathematical treatment of the problem, which we shall undertake subsequently. But the matter is not so easily appreciated without a mathematical treatment. Seligman has obviously not understood it properly, for he says,7 ‘If the tax is small and the demand is apt to fall off a great deal with an increase of price, the monopolist will be likely to find it profitable to bear the tax himself. If, on the other hand, as is the case in general, the demand is more stable, he will be in a position to pass on more and more of the tax to the consumers’, and so on.8 This gives a thoroughly distorted idea of the actual state of affairs. In the latter case the demand cannot be ‘stable’ at all, otherwise obviously the most profitable monopoly price could not have been reached by a long way. Rather, one has to assume here that the demand will always diminish when prices are raised. More precisely, if the 64

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greatest possible profit (without taxes) has already been reached, demand will decrease at the same or at a greater rate than the net profit on each single unit increases. Theoretically speaking, however, such a tax will nevertheless always have to lead to a price rise. If in reality a price rise sometimes fails to occur, the cause probably lies, for the most part, in the fact that when the tax rate is small, the relative profit the monopolist could make by saving on taxes is extremely tiny. For in fact, as we shall see, this profit declines in a quadratic ratio when the tax rate declines. This far from unimportant fact can also probably hardly be demonstrated with sufficient clarity without a mathematical mode of treatment. However, even at this point a very interesting fact may be pointed out, which Seligman seems to have completely overlooked, even though it was explicitly emphasized by Pantaleoni.9 The monopolist’s net earnings necessarily decrease in consequence of the price rise, and out of these diminished earnings he then has to pay the amount of the tax. Of course he saves a portion of the tax sum he was intended to pay, but nevertheless he will actually have to pay out of his own pocket and bear (more than) the whole amount of the taxes that flow into the public treasury. Here, consequently, no real shifting of taxes, properly speaking, takes place, but at most an ‘evasion’ of taxes, in the sense used by Hock and Wagner. Now of course this does not do the consumers much good, for obviously they too suffer a loss. In so far as they continue to consume the commodity in question, they lose because of the raised price, and to the extent that they wholly or partially give up their demand for the commodity they undoubtedly lose a certain utility. The latter quantity, of course, cannot easily be given numerical expression, but even if one completely ignores it, the result in any case remains that through this means of levying the tax both parties suffer an extra loss which taken together under certain circumstances can equal or even exceed the amount of money flowing into the tax-collector’s office. This therefore goes to prove in striking fashion the economic superiority of the taxation of net earnings (income tax). In this respect one could even go a step further, as we shall see later. It seems to me that the above result must also be of significance for the regulation of international trade, in so far as monopoly prices occur there. The home country, to be sure, cannot tax the foreign monopolist directly. But if two countries came to a mutual agreement that each would replace an approximately equal sum of tariffs on goods of the kind in question by direct taxes, then all those involved, both producers and consumers, would undoubtedly be much better off than today, when each country is at pains to give tit for tat.

Our task becomes somewhat more difficult when the tax on monopolies is proportional to the value of the goods produced, instead of to their quantity, in other words, when it is measured according to the volume of the gross earnings. In Seligman’s opinion a tax of this kind could not have any influence 65

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at all even on the most profitable monopoly price, and would therefore necessarily leave the consumers completely unaffected. However, this is quite wrong. The supposed proof Seligman has provided for this claim of his is based, as every reader of his book will easily convince himself, on a confusion between gross and net earnings, since he implicitly assumes that the monopolist has no production costs at all, or at least only ‘overhead costs’.10 In this case, the greatest possible gross revenue would necessarily give rise to the greatest possible net earnings. But if the monopolist, as is usual, also has running costs (costs on each unit of goods produced or sold), then obviously the greatest net earnings will not be reached at the price that the greatest gross revenues would provide, but rather at a somewhat higher price. But this means that with a tax proportional to gross revenues, too, a price rise cannot fail to occur. The simplest way to understand this is probably by means of a ‘reductio ad absurdum’. For of course the tax could conceivably be assessed at so high a rate that it would swallow up the monopolist’s entire previous net earnings. But at that point it becomes self-evident that he has to raise his previous price in order to earn at least something. It is true, however, that an ad valorem tax cannot cause as great a price rise as would occur if the same sum of taxes were raised by means of a (fixed rate) quantity tax. The former means of raising taxes is therefore more advantageous to the consumer—yet it is also more advantageous to the producer. In both cases, as a result of taxation the producer loses more than the entire sum of taxes that is really to be paid, but his excess loss is somewhat smaller with the ad valorem tax than with the quantity tax. So in every respect the ad valorem tax lies right in between the quantity tax on the one hand and the tax on net earnings on the other hand, this latter being, as already stated, the most advantageous for all parties. For the complete proof of the claims made here I must refer to the appendix at the end of this section. However, so as to be able to indicate the main features of my argument at this juncture, I shall here allow myself the simplifying assumption that demand and price stand in a so-called linear relation to one another. This means that price rises (or reductions) of the same amount—say, 1 mark—would also always lead to a decline (or increase) in the (annual, monthly or weekly) sales by an identical amount—say, 100 units of the commodity in question. If we imagine that the changes in price and sales occur in accordance with the same law even in still smaller gradations, then one could plot the price in each case as the abscissa and the sales quantity belonging to it as the ordinate of a curve, and under the given assumptions this curve would be a straight line. Now let us suppose, to begin with, that at a price that merely covers the monopolist’s running production costs—his overhead costs can obviously be completely ignored in this connection—the sales quantity during the time period under observation is 2,000 units. Then it is clear that the most profitable monopoly price must lie precisely 10 marks above the production cost for 66

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each unit of goods. At that price, to be sure, according to our assumptions, the demand has already sunk to 1,000 units, but at this sales quantity the monopolist’s net earnings have risen to 1,000·10=10,000 marks, whereas at the price first mentioned, for example, he of course earns absolutely nothing. At a price of 9 marks (always reckoned above cost) he would only receive 1,100·9=9,900 marks, and at a price of 11 marks, 900·11, i.e. again just 9,900 marks. Now if for example a quantity tax of 2 marks per unit is imposed, the most profitable price will lie at 11 marks (above production cost), for at this price the monopolist’s net profit after taxes are deducted will still be 900·(11-2)=8,100 marks, whereas at the old price it would now come to just 1,000·(10-2)=8,000 marks, and at a price of 12 marks (above cost) it would similarly be just 8,000 marks. If one draws up the geometrical figure suggested above (see Figure 5.1) the monopolist’s gross earnings are represented by a rectangle whose sides express the price level and sales quantity in each case. If one draws a parallel to the sales axis at a distance k from the origin (where k stands for the cost of one unit of the commodity), then the part of the rectangle to the right of this line represents the net earnings. The surface area of this rectangle as is well known is at a maximum when the sides of the triangle in which it is inscribed are halved. The most profitable monopoly price is therefore k+10 marks. Now if a tax of 2 marks per unit is levied, this obviously has the same effect as raising the cost per unit by the same amount, and one has to draw up a similar rectangle in the triangle that is bordered by the dotted vertical line plotted at a distance from the origin of k+2 marks, and so on.

In this case, therefore, the additional charge will come to precisely half the tax rate. But one would be very much deceived if one thought for a moment that the producer and the consumers now each bear a half of the tax amount payable. In fact, the consumers lose precisely 900 marks as a result of the price rise (not counting the loss of consumption utility); the net earnings of the monopolist, however, are evidently curtailed by 1,900 marks, while the total sum flowing into the tax treasury only comes to 1,800 marks. Here, therefore, a sum of money of 1,000 marks, i.e. more than half the tax, goes to waste without any use whatsoever.11 If the monopolist had held firm to the old price he would clearly have lost all of 2,000 marks. By means of the price rise he consequently realizes a relative profit of 100 marks. This profit would, however, have turned out much higher at a higher tax rate. If for example a tax of 10 marks is imposed on each unit of goods—which would obviously swallow up the entire net earnings if the price remained unchanged—it is most profitable to raise the monopoly price by 5 marks. Of course, since this means that sales will be reduced by half, the monopolist’s net earnings before taxes will fall to just 7,500 marks, but at the same time the tax sum payable falls to just 5,000 marks, so that he is left with a net profit after taxes of 2,500 marks. Here, however, the added loss to the (remaining) consumers and to the monopolist 67

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himself would come to 2,500 marks each and would therefore when combined be equal to the total tax amount. If on the other hand the tax rate falls, then it can readily be recognized that the relative profit we have talked about diminishes not just at a constant but at a quadratic rate. At a tax rate of 1 mark this profit would not as one might suppose come to 50 but rather only to 25 marks. At a tax rate of 20 pfennigs, the monopolist would lose 200 marks if the sales price of his commodity remained unchanged, but he would still lose 199 marks if the price were raised by 10 pfennigs (which in theory would now be the most profitable price for him). Here, therefore, his relative profit would come to just a single mark. He would probably hardly go to the trouble of raising prices in order to achieve this tiny advantage; hence, this method of raising taxes might appear unobjectionable in this case. However, if he does go through with the price rise, then in order to earn him this 1 mark the consumers will have to suffer a pecuniary loss of no less than 99 marks—and in the process the public treasury will none the less lose 2 marks. It is worth emphasizing that this theoretical result is entirely independent of the law governing the connection between price and sales, in other words of the form of the demand curve, since in general, when small changes are involved, each function can be substituted by an expression of the first degree and each curve by a straight line. There doubtless lies in the circumstances described above at least a partial explanation of a fact that people often claim to have observed, namely that a production or consumption tax of a moderate amount has occasionally led to absolutely no change in price. This is supposed to have been the case, for example, when the Bavarian malt duty was raised, especially in the larger cities, according to the investigations of G.Schantz (Schmoller’s Jahrbücher, 1882). Now it may be pointed out that, as Schantz himself emphasizes, precisely in the larger cities of Bavaria the beer breweries possess a monopolistic character. For this reason the possible relative profit which they could 68

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realize by raising prices would probably be utterly negligible if the tax rate is low, or, which amounts to the same thing, a small increase is made to an existing tax whose effects have already settled. If, however, under such conditions a price increase really does occur as a result of the tax, the tax must necessarily be regarded as a failure, since the consumers’ sacrifice, as we have seen, then occurs completely in vain.

With direct taxation of net earnings, this consequence would fail to occur. But the question here arises whether one could not go a step further in this regard. Suppose that instead of imposing a tax on monopoly goods the state were to grant the producer in question a bounty of 2 marks for each unit of his commodity consumed (in the home country). Then it would be most profitable to the producer to lower the sales price by 1 mark, by which means the demand would grow to 1,100 units. The monopolist’s net profit would consequently now be 11·1,100=12,100 marks, while to be sure, the subsidy paid by the state would amount to 2,200 marks. But the growth in the monopolist’s net profits caused by the state subsidy could be collected back into the state treasury without infringing on his interests by an appropriate increase in the taxation of his income. This would mean that the state would be left with a loss of just 2,200-2,100=100 marks, at most, but against this loss would be set a savings of 1,000 marks for the previous consumers, as a result of the price reduction. In addition, there would be a certain increase in utility for the new consumers. From the point of view of the common weal, therefore, this procedure would undoubtedly have a great deal to recommend it. To be sure, I do not claim that it is applicable in practice, and indeed, the intended purpose—to make better use of a private monopoly without infringing on the interests of the monopoly owner—can in general be attained in many other ways. What I have said is only intended to draw attention to a circumstance that, as we shall see later, is also of far-reaching significance for other parts of fiscal and economic theory.12

APPENDIX Let the annual demand for monopoly goods be represented by a function F(p) of the unit price p, a function that we assume to be completely continuous. The total gross income will then be expressed by p·F(p). Now if the monopolist’s (annual) overhead costs are denoted by K and the running costs per unit of goods by k, then the net profit is obviously (p-k)·F(p)-K. As is well known, this expression reaches its maximum value when its differential quotient relative to p disappears, i.e. when 69

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(p-k)F’(p)+F(p)=0 or

This relation, incidentally, is capable of a simple geometrical interpretation, as the expression to the left represents the subtangent of the demand curve at the point in question (if p is plotted as the abscissa and F(p) as the ordinate of the curve). As our formula shows, and as is also self-evident, the monopolist’s overhead costs, which are independent of the volume of sales, have no influence on the formation of the most profitable price, nor will any tax of a fixed amount be able to bring about any price shift whatsoever. If a tax of this kind were to swallow up the entire net profits previous to its imposition, it would make the business as such impossible. Matters are just as simple in the case of a tax that takes away a set fraction of the net earnings. Such a tax, too, as is immediately obvious from our equations, would leave the setting of prices completely unaffected; it would only curtail the monopolist’s net profits by the amount of the tax, no more and no less, and would not affect the consumers. Similarly, a progressive tax rate, which approaches asymptotically a set percentage as net earnings grow, would, as is easily seen, have exactly the same consequences. If, however, the tax is imposed at a fixed rate for each unit of the sales quantity, then this obviously has the same effect as if the running costs were raised by the rate of the tax. If the tax rate is s, then the most profitable price will now occur at

which, as can be proved without difficulty, always signifies a price rise. If, in contrast, the tax is assessed at a set percentage, e.g. of the gross receipts, or, and this comes to the same thing, of the sale price of each unit of goods, then obviously the monopolist’s net profits are now expressed by

and this quantity reaches its maximum value when

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Evidently, this level of prices will be the same as with the fixed rate quantity tax just discussed, as long as this rate comes to precisely of the running production costs per unit of the goods in question. For example, an ad valorem tax that comes to a tenth of the gross earnings whould lead to the same price level as a quantity tax that came to a ninth of the running costs. An ad valorem tax taking away half the gross earnings would be equivalent in every respect to a quantity tax equal to the running costs, and so on. This quite peculiar relation, too, is evidently completely independent of the form of the demand curve. On the other hand it can easily be shown, using the equation above, that the amount of the ad valorem tax in this case would be greater than that of the quantity tax. For since the expression to the left is always positive, obviously we have

and therefore

and so on. But then, by the same token, if the same amount of tax is to be raised in one way or the other, the price increase must necessarily be smaller in the case of the ad valorem tax than in the case of the quantity tax. The former tax will therefore be more to the consumers’ advantage than the latter—yet it will also be more advantageous to the monopolist himself, since he obviously loses more the higher he has to set his prices as a result of the tax. (Here it is self-evident that Seligman’s claim, mentioned above, is wrong. It would in fact only be correct if the monopolist’s running costs completely fell away.) The general proof of the second of the theses advanced in the text, namely, that the relative profit the monopolist can realize by means of increased prices declines at a quadratic rate relative to the tax rate, if this is sufficiently small, will be easy for any reader with a training in mathematics. Incidentally, as already stated, it is possible here without detracting from the general validity of the proof to substitute the demand function in the vicinity of the monopoly price in question with an expression of the first degree, such as F(p)=a-m·p, which makes the formulation of the proof exceedingly simple. 71

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III TAX INCIDENCE UNDER CONDITIONS OF FREE COMPETITION. SIMPLEST HYPOTHESIS. INTEREST AND WAGES As indicated above, in a theoretical discussion of tax incidence the distinction between producers and consumers can be completely ignored if the entire economic life of a country is understood as a single production process, the result of which, after an exchange of products has taken place, is represented in a certain real income for each person. In viewing the economy in this way, we disregard the occurrence of monopoly incomes as well as any entrepreneur’s profits that would denote something other than recompense for the labour of management. Instead, we assume that in economic terms the entire economic capital of the country is a single, undifferentiated mass, all parts of which are equally capable of employment in one type of production or another. The more precise definition, or rather the necessary limitation of the concept of capital will become evident of itself from the following observations. In order in general to give the matter as simple a form as possible and thereby to allow the essential point that we should like to expose to emerge clearly, we shall in the first instance permit ourselves the assumption that there exists in an economic union, e.g. in a country, which is equipped with a certain quantity of capital, labour and land, only a single branch of production, i.e. only a single object of consumption (W) is produced, while everything else that is consumed in the country is acquired from outside by means of direct exchange, and to be precise under conditions of exchange that can be regarded as determined by the state of the world market. This means that the capital of the country consists essentially partly in stocks of the finished commodity (W), partly in equipment and raw materials for its production. One could even think of the income of each individual in the first instance as drawn directly in (W). Clearly, a tax affecting domestic production under such conditions could give no cause for any changes in the price of the commodity (W) or of other consumer goods. Rather, its effect will be seen exclusively in the altered income of the various producers, the capitalists, the labourers and the landowners. For the time being, however, we shall ignore the productive powers of land by assuming them as free, though in the next section we shall drop this restriction. Judging the influence of any tax on the level of interest and wages, that is, on the remuneration of the various classes of workers, would be a relatively easy task under such conditions, provided only that it was known how and by what causes those two economic quantities in general are determined. But until recently one could have searched through the whole literature on economics without receiving an answer to this quite elementary question of economic theory that was at all satisfactory. 72

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We can probably leave out of account here the answer that the older economists gave to our question, referring to the tendency of the population to multiply, namely that in the long run the labourer draws just precisely what is necessary to maintain his own life and that of his family, while the capitalist retains the entire remaining output for his own account. Even if it is still only too true, unfortunately, that a large part of the world’s working population lives close to the subsistence level or even below it, this can none the less not be considered a completely general phenomenon, still less an economically necessary fact—and incidentally, the latter was never claimed by Ricardo, for instance. There is also good reason for ignoring the well-known variant of this doctrine presented by Karl Marx. He claims, for instance, that the employer buys the commodity labour at its cost value, i.e. the food necessary for the maintenance of one working-class family, but sells it (in the form of finished products) at its consumption value, and that the difference is surplus value, and so on. Further, this depressed price of labour is arrived at not by means of natural population growth, but rather by creating a kind of artificial surplus in the working-class population, an ‘industrial reserve army’. The facts confirm neither of these views. In our day, there are countries where for several decades the wages even of unskilled labour have almost without exception stood far above the subsistence level. As to Malthus’s law of population in particular, its significance lies in the fact that it teaches us about the nature of the various ‘checks’ that have the function of counteracting the physiological tendency of the population to increase, and that it shows the relative necessity of these checks, but not in the eternal inadequacy of these checks having been proved or ever asserted by Malthus. All that really remains to be discussed, therefore, is the wage fund theory, which attempted to make the level of wages dependent on the ratio between the size of the available capital intended for the payment of wages and the number of workers. This argument was, of course, accompanied by the conclusion that the level of interest, conversely, tends to rise when capital grows in relative terms (or the working population decreases in relative terms), and tends to decline in the opposite case—and this incidentally is very probable in itself. With reference to the theory of tax shifting, it would follow from the opinions of the older economists that a tax, no matter how it was imposed, could always successfully be shifted from workers to employers, but never from employers to workers. According to the wage fund theory, in contrast, it would only be possible to shift a tax if either the size of the capital or the number of workers (i.e. the supply of labour) changed as a result of the tax, but given such a change, the tax would then be shifted irrespective of how the tax was imposed. This theory has remained the dominant one, although the wage fund theory itself, as is well known, is no longer as highly regarded as it used to be. 73

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These days, the wage fund theory is considered a false doctrine, yet I do not think I am overstating the case when I claim that most of those who have criticized it have not quite hit on the point where it is really in error, which is also why nobody has yet succeeded in putting a more perfect theory in its place. It is hardly worth polemicizing against authors who join Macleod, Karl Marx or Henry George in simply denying that the workers are maintained by the capital. One can only be amazed that sensible men have let themselves be misled by such superficial scholarship. Karl Marx even goes so far as to claim that it is rather the workers themselves who advance the capitalists the amount of their wages, since after all in common practice wages are often not paid out until a week or several weeks after the work in question has been done.13 Of course this is merely splitting hairs. It is true that the workers do advance the wage during this week or these weeks, and in doing so they themselves can be regarded as capitalists with respect to this sum. But this falls far short of what is required, for of course in the broader economic perspective the wages of labour have to be advanced up to the moment when the finished consumer goods, the goods of the first order (Menger), can be exchanged for other consumer goods, and this period of time on average amounts to not weeks but years. If the workers were able to support themselves for this entire period of time, then in fact no other capital would be necessary. It can of course occur in exceptional cases that the wages of labour are not paid out until after the completion and sale of the product; but if this is the case then the capitalist as such can make no claim to any part in the product of labour either. In his review of my work Über Wert, Kapital und Rente (Schmoller’s Jahrbuch, vol. XIX, 1, p. 336) Professor Lexis observes that to be sure the worker ‘can for the most part only turn [his labour] to account by participating in the production of future goods’. But this, he writes, is ‘not the decisive point, for even if, like for example the baker’s apprentice, he produces a good to be consumed on the day of its production, he is none the less forced, because he is unable to exploit his labour independently,…to sell it for a more or less adequate means of subsistence while renouncing all claims to the product of his labour’. But how does Lexis know that the worker in this case has to renounce his claims to a part of the product of his labour? For in general, the value of his work cannot be independently ascertained, but can rather only be assessed in combination with the other labour employed in production, and this must for the most part be paid for in advance. That the capitalists as such—ignoring monopoly incomes and the like—on average draw more than the interest on the aggregate wages advanced directly or indirectly by them, does not seem to me obvious in itself, but rather self-contradictory.

The other objections to the wage fund theory mostly come down to the view that it is not certain in advance how large a part of his property the capitalist wants to employ in production. That may be true, but it surely hardly constitutes a sufficient reason to reject the theory in question. After all, at 74

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any given moment the wealth employed in production has a specific magnitude, and as the level of annual savings, or any possible increase in the unproductive consumption of capital, is mostly small relative to the size of the total stock of capital, this stock can even be considered virtually constant over any period of time that is not too long. The real error in the wage fund theory probably lies instead in the fact that the wage fund itself only represents a part of the entire productive capital, and indeed, a part that for the present is completely undetermined. It has usually been identified more or less with the ‘circulating’ portion of the capital, as distinct from the portion ‘invested in more or less fixed ways’—though, incidentally, neither of these concepts is very specific. Now if it is asked what determines the division of capital into ‘fixed’ and ‘circulating’ parts, then in general the answer given is that the state of the technology is decisive. This answer, however, does not contain the whole truth; rather, alongside the purely technological element an element of economic practice can also be clearly distinguished. It is a well-known fact that the introduction of certain technical improvements, machines and the like, is often only profitable when wages have already reached a certain level, whereas on the other hand if the level of wages is low it is more profitable to the entrepreneurs to use predominantly manual labour in spite of its technical inferiority. We will return in a moment to the explanation for this; if we assume it to be an established fact, then the dilemma results that on the one hand, given a certain total capital, the level of wages is supposed to depend on the distribution of this capital into fixed and circulating portions, but on the other hand, this distribution (all other things being assumed equal) is supposed to depend on the level of wages in each case. Now in itself, this is not in the least surprising. In other areas of economics, too, similar phenomena occur—e.g. in a market economy supply and demand are dependent on the price, but the price in turn is dependent on supply and demand—but here at least it emerges that we are dealing with two mutually dependent quantities. In order to be able to determine them, we then obviously have to know not just one but two relations connecting them. Of these two the wage fund theory in fact delivers one; but its main mistake is to have regarded this one relation as sufficient. In order to become more closely acquainted with the second necessary relation, one needs to know above all why it is that increased prices for manual labour regularly lead to the introduction of mechanical equipment. This occurs not just indirectly by spurring on the spirit of invention, but also directly, in that inventions already made only become economically viable at a higher level of wages. This phenomenon requires explanation all the more since at first glance it even appears rather paradoxical. For in fact the machines themselves are products of labour; if therefore labour becomes more expensive, then it might 75

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at least appear that the machines must become correspondingly more expensive, too. However, in general, as Ricardo has shown, this will not be the case.14 For the price of the machines, says Ricardo, includes not only wages but also profit, namely above all the interest on the capital by means of which the labourers employed in producing the machines were maintained. Now if wages rise over the whole line of production, and if in consequence—all other things being assumed equal—the rate of profit sinks, then this means that the price of the machines becomes cheaper relative to manual labour. Ricardo even claims that the price of the machines should not go up at all, though this is not shown by his argument. Incidentally, according to his well-known principle, wages could only go up as a result of a rise in the prices of foodstuffs, though this is of no relevance here.

If one pursues somewhat more precisely this line of thought, which Ricardo has merely explained by a numerical example, it becomes clear that the heart of the matter lies in the fact that the entire process of production is lengthened by means of the introduction of the machines in question. In Ricardo’s example this process is lengthened from one year to two, which means on the one hand that the same original quantity of labour produces a greater quantity of finished products, but on the other hand that the capital employed in the maintenance of the labourers is invested for a longer time, say, for two years instead of one, and must therefore ultimately be compensated with two-year instead of just one-year interest. This then necessarily leads, as we shall soon show, to the longer-term capital investment (the introduction of the machine) only becoming economical at a quite precise level of wages. It is reflections of precisely this kind that have enabled Böhm-Bawerk— though to be sure the relevant passage in Ricardo probably never occurred to him at the time—to succeed, in the first instance for stationary conditions, in setting up a real, consistent theory of the reasons determining interest and wages. The only earlier attempt known to me to find out by rational enquiry in what way interest and wages are related (disregarding the misguided speculations of Thünen on the natural wages of labour) occurs in an article in vol. I of the Danish Nationaløkonomisk Tidsskrift (Copenhagen, 1873). The essay, which, significantly, was written not by a professional economist but rather by two mathematicians, F.Bing and Julius Petersen, bears the title, ‘Bestemmelse af den rationelle Arbejdsløn samt nogle Bemærkninger om Økonomiens Methode’ [Determination of the rational wages of labour, with some observations on the methodology of economics]. A few objections can perhaps be made to the details of this study, but its fundamental thought is closely related to that of Böhm-Bawerk, and if developed further would doubtless have led to a theory very similar to his. However, I cannot find any trace of the essay having been paid any attention by Danish economists. In a note, the editors of the journal reserve to themselves the right to respond to the article, but as far as I know, such a response has never appeared. 76

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In my work Über Wert, Kapital und Rente, published in 1893,15 I have endeavoured to give Böhm-Bawerk’s theory a strict mathematical form and to supplement it in certain respects. For a fuller understanding of the following elaborations, perhaps I may refer the reader both to that work and to the fundamental work of Böhm-Bawerk. However, since the fundamental idea of Böhm-Bawerk’s theory has not yet found general acceptance and has recently been energetically attacked by leading authorities, I think I have good reason to present and defend it briefly once again. This will also give me the opportunity to improve my earlier presentation in a few particulars. In place of the conventional but hardly tenable division of capital into fixed and circulating capital, following the procedure of Jevons and BöhmBawerk the entire stock of capital should be conceived of as mobile, i.e. as circulating more or less slowly. In virtual terms it is regarded as it were as a single sum of finished consumer goods, which was originally intended for the maintenance of the workers but has for the most part already been exchanged for labour and then continues to exist in the form of previously performed labour (tools, raw materials, preliminary products, etc.) until it is again replaced by the proceeds of the sale of the final products. However, when looking at things in this way, in my opinion it is better to exclude extremely durable capital items, such as buildings, roads and the like, from the concept of capital. Under stationary conditions, which as the simplest hypothesis we want to make the basis of our argument here, only very small additions are made to the stock of such objects, whereas the other capital items such as tools, machines, raw materials, etc., have to be renewed from time to time. In the first instance, therefore, those durable items can be placed alongside land as ‘rent-generating goods’, whose connection with the problem will not be considered until later. The time that passes between the investment of an individual piece of capital in the purchase (payment) of labour and the restitution of this capital by means of the sale of finished consumer goods (goods of the first order) is called the circulation or investment time of the small portion of capital in question. Now if, as is usual, labour is employed in the production and sale of a commodity, and in consequence capital has to be advanced at various points in time, then we say that the capital sum involved has an average investment time. If, for example, a week of labour is applied today, and another week next year, and so on, until the finished commodity is sold after four years, years, and if no other then on average the labour pays off after expenses had to be incurred in the production of the commodity, the price it is sold for minus the four weeks’ wages, which thus constitute the entire invested capital in this case, will represent the interest on that capital over 2 years (of course, we are only using simple interest in our calculations here). 77

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If on the other hand a piece of work is performed today that only pays gradually over a longer period of time (such as, for example, the manufacture of a machine that takes several years to pay its costs), here too it will always be possible to calculate the average investment time of the capital advanced. If, for example, a capital investment k brings in receipts of p each year for four years, and then nothing more, the present value of the four revenues (calculating with simple interest) is obviously

where z signifies the rate of interest that is still to be worked out, and this expression must exactly equal k. If z can here be assumed to be sufficiently small, then the expression can ultimately be simplified to: p(4-10z)=k, whence we derive

But now, if t denotes the average investment time of the capital, we have

i.e. after eliminating z,

Since 4p is necessarily greater than k, the investment time of the capital will accordingly be somewhat longer than the average length of the interval that passes between the expenditure of the capital and its full reimbursement,* for of course in our case this interval is also

In a similar way, all production processes, which are often quite complicated, can always be reduced to a specific investment time of the portion of capital involved, and thus there ultimately emerges a specific average investment time for the total capital of the business involved. Of course in this calculation one always has to imagine the various stages of the same production process as belonging to a single business. In other words, for the purposes of our study, the capital remains invested even if the capital item in question (e.g. a machine) passes from the possession of one entrepreneur to another. 78

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I have felt it advisable here to revive the older expression ‘investment time’ used by Jevons in place of the concept introduced by Böhm-Bawerk, ‘production period’, i.e. the time that passes between the beginning and end of the production process. Of course the two concepts are closely related. If, for example, the same number of workers is employed with no variations for the whole of the production period and their wages are paid out gradually, then, as can easily be discovered, the average investment time of the capital is precisely half the production period. If, however, as is usually the case, the quantities of labour employed are distributed quite unevenly over the production period, then it is not so easy to find out the ratio between the investment time and the production period. In general, the concept of the ‘production period’ is somewhat unclear, and sometimes cannot even be precisely defined. But ultimately in dealing with the questions to be discussed here, what matters is not the length of the production period but rather only the length of the investment time of the capital, and this is always easy or at least easier to grasp and to define. There therefore appears to be every reason for using only the latter concept when exact relations are at issue.

Now the main point of Böhm-Bawerk’s theory consists in the assumption that it will always be possible to raise the average productivity of the labour employed by interpolating where appropriate one piece or another of preparatory labour—which ultimately is equivalent to a lengthening of the average investment time of the capital applied. He means this, of course, not just in the sense that more labour yields more products, but rather in the broader sense that a given quantity of labour spread as it were over a longer period of time will prove more productive than the same quantity of labour employed in a shorter production process of the same kind or still more in (capital-free) immediate production. This would in fact be a perfect counterpart to the phenomenon known by the name of division of labour. If several workers together carry out the production of a certain kind of commodity while dividing up the labour as far as possible, each of them will be able to deliver more products using the same amount of labour than if he worked under conditions where the division of labour were less developed, or still more, if he worked on his own. I have used the word ‘assumption’ above, as I completely agree with Lexis when he says that ‘the thesis that there is a functional connection between the length of the production period and the productivity of labour…has to be proved’, and proved ‘in concreto and separately for all different kinds of goods production’.16 Admittedly this proof will require both comprehensive and difficult statistical enquiries for differing periods and countries. However, it seems to me that Böhm-Bawerk has demonstrated the inherent probability of the thesis not just ‘by means of a few general observations’, but rather very thoroughly. In his review of my work Über Wert, Kapital und Rente, mentioned above, Lexis believes himself able to prove that, on the contrary, Böhm-Bawerk’s thesis stands in contradiction to the facts. However, his argument shows in my opinion that he has probably failed to arrive at a quite clear idea of what is really involved. 79

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Lexis ‘would like to maintain that since the beginnings of civilization, technological progress has had a twofold tendency, which has been marked by increasing success: on the one hand, certainly, it has tended to reduce the number of labourers supported by an equal capital in different economic enterprises, but on the other hand, at the same time it has tended to shorten the production period’. In a way, this claim already involves a contradiction in terms, for at least if the number of workers supported by an equal amount of capital has been reduced more than the average level of wages has increased, then according to the concept of capital used above, this is evidence that a lengthening of the average production period has taken place. This follows easily if one thinks of the existing capital broken down into labour. But let us hear how Lexis continues. ‘Consider the amount of time that has been saved in the course of our century, at every stage of production and the movements of trade, by means of new methods of transportation.’ Well now, just how certain is this? To be sure, the transportation of a given quantity of commodities over a given distance demands far less time today than it used to. But on the other hand, we must consider that the portion of total production entrusted to any means of transportation at all at the beginning of the century was utterly negligible. Most products, by far, were consumed at the place of production itself or in its immediate vicinity. These days, however, the populations of entire countries are supplied with their most important consumer goods from the most distant parts of the earth, and it is almost an exceptional case when any commodity comes to be consumed at the place it is produced. If one takes this into account—and the point is, here one really has to pay due attention to everything—and if one considers further that the labour employed in the manufacturing of ships, railroad equipment, etc. (not to mention the construction of the railroads themselves) has to be paid for several years in advance, before the capital involved is reimbursed, then there can hardly be any doubt that modern means of transportation have not in themselves led to a shortening, but rather to a very substantial lengthening of the entire production process. Lexis continues: ‘Making a sharpened stone axe with a hole in it for the shaft must have cost neolithic man many times as much time as making an iron axe requires today, even if all preparatory labour is included in the calculation’, since ‘given modern mass production only a very small part [of this labour] could be attributed to a single axe.’ Now of course this is obvious. But here Lexis is evidently mixing up two very different concepts—the length of the production period (or of the investment time of the capital), and the working time needed to make one unit of the commodity. The latter has unquestionably been reduced, otherwise of course no technical progress would have been achieved. With the same total expenditure of labour—say, x days of labour—that a stone axe required at that time, it may be possible to make ten, twenty or more iron axes today. But those x days in neolithic times—as far as can be guessed from the workmanship—were applied in an unbroken sequence, whereas today for the most part they span a period of several years, so that on average only a few minutes of each calendar day in this period are used in the production of precisely those ten or twenty axes. This is the real difference, and this is also the reason why present-day production can usually only be carried out by capitalistic methods. Something similar probably applies in the other examples Lexis adduces. But here, finally, it must be pointed out that Böhm-Bawerk has never denied, indeed, he has explicitly emphasized, that there are undoubtedly some kinds of technical progress that in every respect have caused a shortening of the previously customary production process. However, in doing this they did not demand any new accumulation of capital; on the contrary, at least in the long run they set free capital—which, incidentally, always directly benefits the workers. 80

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But if such inventions had really made up the majority of cases of technical progress, the inevitable consequence would have been that the total capital fund relative to the number of workers (or actually to the total sum of the workers’ annual wages) would gradually have declined. But Lexis himself admits—if I have understood him at all correctly—that the contrary is the case, and by this admission, as was observed above, he has invalidated his own argument from the very outset.

Now if, however, this general postulate of Böhm-Bawerk’s theory is conceded, then it might at first glance be supposed that the capitalist would always strive to progressively lengthen the investment time of his capital, at least for as long as the interest that might be lost during the transitional period can be ignored. However, this will not be the case at all; at any given level of wages there is rather one investment time that is the most profitable, as the following example will show.17 For the sake of simplicity we assume that finished products are only completed at long intervals, so that the capital invested in the business all becomes free at the same time. In reality this is generally not the case, instead production occurs in stages, but this makes no essential difference here. Now with a three-year investment time, for example, the capital advanced, i.e. the sum of the wages paid out in instalments might be reimbursed by selling the finished goods with a mark-up of 25 per cent; the annual profit on capital is consequently 25 : 3=8 per cent. Let us suppose that with a four-year investment of capital it is possible to reimburse the wage sum advanced with a mark-up of 32 per cent, which is equivalent to an annual interest rate of just 8 per cent. Consequently, the three-year investment is the more profitable one for the capitalist. But if wages rise by one-tenth, then in the first case the mark-up will only constitute approximately 14 per cent (15 :110) of the present wage sum, which corresponds to an annual interest rate of 4 per cent. With the fouryear investment, on the other hand, the remaining profit margin would still be 20 per cent (22:110) of the wage sum, and the annual interest on the capital would therefore be 5 per cent. That means that the four-year period is now the more profitable. The length of the most profitable investment time will consequently be greater when wages shift upwards. This result has general validity, as long as we can assume that though every lengthening of the investment of capital raises the productivity of labour, the increase in productivity is not directly proportional to the increase in time, but instead the returns increase on a declining scale, which seems entirely consistent with reality. The most profitable length of the investment of capital is therefore in fact determined by the level of wages. However, it is equally true that the latter quantity is dependent on the average length of capital investment, and this we see as follows. Any capital whatever—always assuming the productive powers of land to be free—can only find productive employment in one way, namely by hiring labour. But 81

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until it is reimbursed by production, it can only ever pay off labour once. Consequently, if K is the capital of a business or a country and if the average investment time of this capital comes to t years, then K:t denotes precisely the annual wage fund and, when divided by the average rate of wages, shows unambiguously the number of workers employed. This statement is axiomatically clear and it constitutes, as Böhm-Bawerk has emphasized, the true meaning of the much-discussed wage fund theory. Now the number of workers determined in this way must obviously in the long run tally with the number of workers really present. If not, then either the working capital itself would be excessive and wages would necessarily have to rise by competition between the capitalists, or on the other hand not all workers would be able to find employment at the rate of wages concerned, which would have to lead before long to reduced wages. Consequently, when equilibrium has been reached, the relation K:t=A·l or K=A·l·t, where A denotes the number of workers and l the rate of wages, must necessarily be satisfied. The level of wages and the length of the investment time therefore determine one another reciprocally, and if the law were known by which the productivity of labour grows with the length of the investment time of the capital, then it would be possible to determine not only these quantities, but also the level of capital profit with mathematical precision, i.e. to express all these things in terms of the quantities K and A presupposed here as knowns.18 Given this situation, if K grows while A remains constant, or conversely A grows while K remains constant, then in theory after some fluctuation to and fro a new position of equilibrium will eventuate. Thus, a relative expansion of the national capital will always lead to a rise in wages, even if this rise will never be proportional to the expansion of the capital. Conversely, a relative contraction of the capital (e.g. as a result of an excessively rapid increase in the population) will lead to a reduction in wages, though this reduction, too, will not occur at the same rate as the contraction of the capital itself. In the process, the rate of interest always changes in the opposite direction to the size of the national capital (it should be observed that here we are always dealing with essentially stationary conditions, so that new inventions and the like can be disregarded). In fact, in the most extreme cases the rate of interest may even decrease or increase at a greater rate than the total capital itself increases or decreases respectively. Now if, as I believe, the law of the relative compensation of the two production factors, labour and capital, has been correctly laid out in its fundamentals, under the assumption of stationary conditions, by the above 82

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theory, then from this follows as a simple corollary the decision as to the incidence of a tax on production. In the first instance, it is clear that a tax on the income of the capitalists or of the workers would not have the least influence on the relations between the interest on capital and the wages of labour, if these, as assumed, are determined under free competition on both sides. The highest possible interest will always be the highest possible, even when the state takes away a certain part of it in the form of taxes. But a tax on wages would be equally incapable of causing any change in the most profitable length of the investment of capital. In so far, therefore, as these taxes do not exercise any influence on the formation of capital or on population trends (or, to put it better, the supply of labour), with which we do not want to concern ourselves at present, wages will in all probability remain at the same level as just stated. But production arises out of the combined effect of both these factors; it is the result of labour maintained by capital. If the tax affects production, e.g. by taking a certain part from the value of the product sum or, which in our case is the same thing, from the product sum itself, then both factors of production will necessarily be directly or indirectly affected by it. The entrepreneur cannot completely recoup himself by reducing wages, the lending capitalist cannot demand the same interest as previously. Otherwise, obviously, part of the available capital would become surplus, precisely as a result of the reduced wages, and this free capital would strive to find new employment, which would lead to a renewed rise in wages. However, the workers will be equally incapable of maintaining wages at their previous level, as Smith and Ricardo thought. To be sure, it might seem that there would be nothing to prevent them in so far as the capital is assumed unchanged. But under such conditions the previous investment time of the capital would no longer prove the most profitable; rather, in order to realize the greatest profit on capital now possible the investment time of the capital would have to be lengthened, which would mean that wages would have to decline.19 This emerges with full generality from the mathematical treatment of the problem that we shall undertake in the appendix; but the result can also easily be checked using the numerical example given earlier. If the production figures there—125.5 for the three-year capital investment and 132 for the four-year capital investment (the aggregate of the wages paid out, i.e. the capital in both cases, being set at 100)—are reduced by the tax by, for example, a tenth each, i.e. to 113 and 118.8 respectively, then it becomes clear that the annual interest rate in the first case would now come to 13:3=4 per cent, but in the second case 18.8:4=4.7 per cent. Consequently, the four-year investment will now be the more profitable, instead of the three-year investment, as previously. Evidently, the effect of the tax is exactly the same as if the productivity of labour had declined in proportion to the tax. One could therefore alternatively imagine that in the beginning everything—including the size of the capital 83

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and the level of wages—had declined at the same rate, while both the investment time of the capital and the interest rate on the reduced capital remained completely unchanged. Now if the capital returns to its previous higher level, then in line with our previous discussion the wages of labour must rise, but not in proportion to the expansion of the capital, i.e. in this case not to such an extent as to attain the level they originally had before the tax; the interest rate on the other hand will fall, but not so much as to oblige the capitalist to bear the entire burden of the tax. Therefore undoubtedly not only capital but also labour is affected by the tax—the relative effect depends on the particular circumstances of production, that is on the law according to which the productivity of labour will increase as a result of any lengthening of the investment of capital. If the scale of added returns mentioned above is a rapidly declining one when the capital investment period is lengthened just slightly compared with the previous investment time, then the tax will chiefly affect the capitalist and spare the workers, relatively speaking. But if, on the contrary, each additional lengthening of the investment time yields virtually the same added returns, then the capitalist will be able to shift most of the tax to the workers in the form of a wage reduction. Let me emphasize that here we are always dealing with the effect of free competition on both sides. If the employers combine against the workers or the workers against the employers, then completely different conditions can arise. Among other things, in the first case a lengthening of the capital investment (expansion of the fixed capital) even in excess of the economically optimal period would become a terrible tool in the hands of the employers for suppressing the wages of labour and so procuring greater profits for themselves (cf. Über Wert, Kapital und Rente, pp. 104f).

Further details can hardly be elucidated in any other way than by means of a mathematical analysis. Before we undertake this, however, attention may still be drawn to a peculiarity of the tax on production. As a consequence of the longer investment time that in theory, as we have seen, must always occur with this tax, the productivity of labour and consequently also the volume of total production will have to increase by a greater or lesser amount. Consequently a part of the tax will be compensated by the expansion in production, and therefore evaded, in the sense proposed by Hock and Wagner. However, this will not happen in such a way as to diminish the sum flowing into the treasury, but rather so that this sum increases somewhat—a result of the theory that at the very least does not stand in contradiction to certain observed facts. It is tempting to perceive in this a gain for the national economy, which would give the (general) production tax a certain advantage over the direct income tax, which according to what has been said above would lead to no changes in terms of the national economy. But this conclusion would be somewhat premature. 84

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For our argument, if looked at more closely, rests on the assumption that the entrepreneur is able to adapt his production a good while in advance to the new conditions arising from an anticipated tax. Otherwise he himself would have to bear the entire amount of the tax without any reduction during the first years after the imposition of the tax. But if he makes the adaptation in advance, then in fact by their diminished wages the labourers pay the part of the tax that falls on them for several years (namely, for as many years as the average investment time of the capital) before the sum of taxes involved is collected by the treasury. If they had done this by paying direct taxes then obviously the state itself would have become stronger in capital terms by this amount, the capital of the country would have been expanded, and the raising of total production we have talked about would perhaps also have been able to occur under these circumstances. In the following section we shall proceed to incorporate in the scope of our reflections the third factor of production, the productive powers of the land (together with the other sources of rent), which have so far been left out of account. First, however, I shall attempt in the appendix to endow the theory set forth above with the exact mathematical form that is its due. APPENDIX In my work Über Wert, Kapital und Rente (pp. 95ff) I have endeavoured to give an account of Böhm-Bawerk’s theory of interest both in the form of algebraic formulae and by means of a simple geometrical interpretation. I shall repeat the latter interpretation briefly here, but with the emendation that in place of the length of the production period the average investment time of the capital is used. So let us regard the latter quantity, which we shall denote t, as the abscissa of a curve whose ordinate represents the annual production, p, of finished consumer goods corresponding to the investment time, calculated for one of the workers taking part in the entire production process involved. Then, obviously, the trajectory of this curve will always have to rise, but concavely with respect to the axis of the abscissae. Of course, in fact no practical limit can be stated beyond which the productivity of labour might not possibly rise, given enormous investment of capital. But it is equally impossible for the (annual) added returns to grow in proportion to the investment time; this would lead to absolutely absurd consequences. The curve will therefore necessarily become flatter and flatter as its distance from the axis of the abscissae increases. Since strictly speaking no production is possible without capital, we allow the curve to begin at the intersection of the co-ordinate axes, though this is not essential. Now if the level of wages, l, is regarded as given for the time being, then we arrive at the most profitable investment time by drawing a tangent to the curve from a point on the axis of ordinates at a distance of l from the origin and locating the abscissa of the point at which the tangent meets the curve (cf. Figure 5.2). For whatever the 85

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Figure 5.2

investment time is assumed to be, the straight line connecting the corresponding point on the curve with the point mentioned on the axis of ordinates will cut off a piece on the left-hand side of the axis of abscissae, and the size of this piece is expressed by

where z signifies the annual interest rate. The size obviously becomes a minimum, and consequently z a maximum, when the connecting line is a tangent to the curve. But if equilibrium is to be reached between the supply and demand of labour, then, as explained in the text, the equation K:t=A·l must be satisfied, or, which is the same thing, it must be true that

The rectangle bordered by the sides t and l must therefore have the constant area K:A. Now by these conditions both t and l and therefore also z are fixed unambiguously, as soon as K and A are known, together with the equation of the curve. Now the effect of a tax that takes away a specific portion, e.g. a tenth, of the gross returns will obviously be the same as if the productivity of labour 86

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had been reduced by a tenth, i.e. as if the curve mentioned above had been replaced by another whose ordinates had a value of only of the corresponding ordinates of the original curve.20 The same procedure therefore now has to be applied to this second curve, and it can easily be shown—e.g. by using the fact that the tangents of both curves, whose points of contact lie on the same ordinate, always intersect one another on the axis of abscissae—that as a consequence of the tax the length of the investment time must be increased, while the level of wages, in contrast, must be diminished, and finally the reciprocal value of the interest rate must be increased, and the interest rate itself must therefore be reduced. All further points now depend on the form of the original curve in the vicinity of the equilibrium point, in the following way. Let us denote by v and -w respectively the two differential expressions and, of which the first, evidently, must always be positive, though <1, while the other, in accordance with our assumptions, is always negative. Then it follows without difficulty that in consequence of a tax that takes away a (small) fraction from the gross yield of production, the most profitable investment time of the capital must grow from t to t+∆t, where approximately

By this means the annual output per worker increases to p+∆p, where with an equal degree of approximation

The wages of labour, which of course are always inversely proportional to the investment time given constant capital, are reduced in this process to l-∆l, where

Finally, the rate of capital interest will decline to z-∆z, where

A full discussion of these expressions would lead us too far afield here. But the facts stated in the text can easily be proved using them. If w is very large compared with 1-v, e.g. if the productivity curve is nearly flat at the original equilibrium point, so that a further lengthening of the investment time would soon cease to raise the productivity of labour noticeably, then the tax will only be able to induce a very small lengthening of the previous investment 87

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time of the capital, ∆t: t and therefore also ∆l: l becomes small, wages remain virtually undiminished, and the entrepreneur-capitalist himself bears most of the tax. But if on the contrary w is relatively small, if for example the curve at the point involved is very steep, so that each successive lengthening of the investment time of the capital would lead to a virtually identical increase in the productivity of labour, then the tax will result in a relatively substantial lengthening of the investment time, and wages will be reduced to such an extent that the workers bear most of the tax; ∆z: z on the other hand becomes small, i.e. the capitalist draws virtually the same income as before the tax. In the intermediate cases the capitalist and the workers divide the tax between them more or less equally. For example, one could assume that the productivity curve in the vicinity of the original equilibrium position is determined by the (general) parabolic equation p=atm, where a is a positive constant and m some proper fraction or other. Then our formulas become very simple, because as can easily be appreciated, for v and w we get the constant values

and

from which it follows that

Here, therefore, the income of the workers and that of the capitalists would be curtailed by the tax to an equal degree, and by means of the expansion of production that would occur, in the most extreme case (when m=1) as much as half of the tax would be ‘evaded’, at least on the face of it (cf. the final remark in the text). 88

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IV CONTINUATION. THE INCIDENCE OF TAXATION ON THE REMUNERATION OF PRODUCTIVE RESOURCES INCLUDING THE PRODUCTIVE POWERS OF THE SOIL The theory of land rent is usually still presented in substantially the same form in which it was handed down by Ricardo; and indeed, his way of explaining it must be said to be quite correct in its fundamentals. As is well known, it becomes particularly simple if we assume that the various classes of land constitute a constantly declining series in terms of their situation, fertility, etc., and can suppose that the last of these classes of land is (or are) not yet occupied at all, or at least do not yet need to be used. Then it is clear that labour and capital receive just so much of the yield of the land as could be gained by employing the same quantity of labour and capital on the next as yet uncultivated class of land, while the remainder of the actual yield becomes the property of the owner of the land involved. However, in those countries which are presently highly cultivated, there is no longer any land at all that is either without an owner or does not generate rent. Everything has already been claimed, every inch of land is employed in agriculture, forestry or some other way, and always generates a greater or lesser rent. Here it will therefore be possible to explain the difference in rent between various classes of land in the manner indicated,21 but the theory gives no information about either the absolute or the average level of land rent. In order to be able to determine the latter quantity, one has to have recourse to the second part of Ricardo’s theory of rent, which Wieser quite rightly termed the more important. As is well known, this second part is based on the fact that when capital and labour are applied in gradually increasing quantities to the same piece of land, the total yield increases, to be sure, but at a declining rate, so that each additional unit of capital and labour gives rise to a smaller increase in yield than the immediately preceding unit. Now the difference between the yield of the last unit applied and that of the previously invested, equally large amount will in each case accrue to the landlord as rent. However, this argument presupposes that capital and labour are always applied in the same proportions, or, which amounts to the same thing, that the average investment time of the capital remains the same, while its quantity increases, and of course in general this will not be the case.22 Furthermore, it is tacitly assumed by both Ricardo and the later advocates of his theory that rent does not need to be paid out until after the completion of production. John Stuart Mill even makes a peculiar, thoroughly unsuccessful attempt to prove ‘that rent does not really form any part of the expenses of production or of the advances of the capitalist’.23 The justification for this strange claim is supposed to lie in the fact that the person paying rent possesses in the superior quality of the land ‘an instrument of superior power’ and thereby ‘gets back the full value of the rent in extra 89

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advantages’. But of course one could equally well claim that wages, and especially the higher wages paid to the more-skilled workers, form ‘no part of the advances of the capitalist’. For anyone who engages a skilled worker (or any worker at all) has simply by doing so acquired ‘an instrument of superior power’, which in general will compensate him for the money he has paid out (and with interest at that). Whether rent forms a part of the advances of the capitalist or not depends of course quite simply on whether or not it has to be paid in advance. Now in general it is the case that it does have to be paid in advance. The fruits of nature, no less than those of labour, require a shorter or longer time, often even several years, before they are ripe for consumption. In many kinds of economic activity, in forestry, viniculture, fruit-growing, etc., this is clearly the case. Anyone who wants to plant vines or fruit trees on land belonging to someone else will obviously have to pay not just wages but also rent for several years24 before he gets back so much as a penny of the advanced capital from the sale of products. But it is frequently the case even in normal agriculture. A part of the land under cultivation is regularly used for the rearing or breeding of domestic animals, from which no output commensurate with the expenses can be claimed until one or even several years later. Or again, the fruits of the field sometimes require a long time after harvesting before they come to be sold and consumed; or they pass on into other branches of business in order to be processed there, and so on. In all these cases, even if it may change owners on the way, the capital advanced, which consists in part of rent payments, will remain invested from the point of view of the national economy until it is reimbursed and released by the sale of products ready for immediate consumption. Accordingly, it probably proves most expedient for a theoretical analysis always to take the view that land rent no less than wages is advanced by capital. Where things in fact proceed differently, the landlord himself should simply be understood as the capitalist providing advances in the amount of the rent involved. For the level of the rent is ultimately determined in exactly the same way, whether the capital strictly speaking is in the hands of the landlords themselves or of other people, indeed even if the landlord, capitalist and labourer are one and the same person. For the occasional landlord who runs his own business using his own capital will—all other things being assumed equal—never be able to attain a greater profit than the going land rent plus the going interest. But his profit could certainly easily fall short of this amount, and indeed, this would evidently have to occur both if he used more and if he used less capital than was customary. If he used more capital, then he would gain more by investing the surplus portion of his capital in some other way, but if he has too little capital, then his best course is to try to borrow what he lacks. On the whole it can probably be assumed that everyone really knows how to adopt the most profitable course for his business. 90

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Consequently, we can regard the entire capital employed in agriculture as a single fund from which both wages and rents are gradually advanced. If we do this, then the problem, which otherwise is almost hopelessly involved, becomes surprisingly simple, indeed it even becomes clear that ultimately we do not need a special theory of land rent at all, as the productive powers of the soil behave exactly like labour with respect to capital. In actual fact every acre of land is a labourer for whose work its ‘owner’ must be compensated, according to the present rules of the national economy. But what decides the level of this compensation is nothing other than supply and demand. This happens as follows. When a capital of a given size is to be used in the production of a certain kind of good, then it falls into two parts. One part pays the wages of labour, but the other the hire of the productive powers of the land required for production—and both these payments are made in advance. Now if conditions have become stationary, then the proportions of the two parts of the capital will be fixed, and at the same time each part will have acquired its own unchanging, average circulation or investment time. Note In my supplementation of Böhm-Bawerk’s theory (see Conrad’s Jahrbücher, Dec. 1892, or my work Über Wert, Kapital und Rente, pp. 121ff) I have assumed ‘as a first approximation’ that these two investment times are identical. But this does not turn out to lead to a very substantial simplification of the problem, so it seems far more appropriate to maintain the difference and relative independence of the two periods, and this assumption obviously comes much closer to real-life conditions.

The most profitable setting of these proportions, and of the length of each of the average investment times, depends, all other things being assumed equal, on the (absolute and relative) level of wages and rent in each case. How this process works, to be sure, cannot be stated in a few words, for the quantities to be determined depend reciprocally on one another in a rather complicated way. However, in general it can be asserted that a rise in absolute terms of wages and rent necessarily contributes to a lengthening of the investment of both portions of capital. A rise in relative terms of one of these quantities, in contrast, will influence above all the proportions in which labour and land are used in production. To be precise, if wages rise relative to rent, relatively more land and less labour will be used in production (more extensive production), while if on the other hand the land rent is high, relatively speaking, more labour and less land will be employed by the same capital (more intensive production). However, in fact every change, whether in wages or rent or both, will lead to a shift in all three of the quantities mentioned above. Now if it were known precisely how the productivity of labour and land changes in each of these connections, then at any level of rent and wages it would be possible to determine the most advantageous proportion and the most profitable investment times of the two portions of capital by solving an ordinary maximum problem with three independent variables. In reality it 91

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may probably be assumed that this problem is solved after a fashion by means of the so-called experimental method, especially if the economic conditions in society remain unchanged over a longer period of time. However, reversing the perspective, wages and rent are dependent on the proportions in which land and labour are employed, and on the investment times of the two portions of capital. If the demand for land becomes relatively larger (or smaller), land rent rises (or falls); at the same time, however, wages fall (or rise). On the other hand, with a longer investment time, the same capital will be able to hire less land (or labour) at a given level of land rent (or wages), and this will result in a fall in rent (or wages). When, finally, equilibrium has thus been reached, the following conditions will of necessity be satisfied. Let the proportion of the land area used to the number of workers employed be assumed as approximately equal within different businesses of the same kind. Then, obviously, this proportion must coincide with the ratio of the entire land area involved within the branch of business concerned to the total number of workers employed in that branch, or—if we keep to our assumption that only a single kind of good is produced in the country—with the ratio of the entire land area of the country to the total number of workers living there. Of course, putting it like this assumes for the time being that the entire land area is of equal quality and all workers are equally proficient. Consequently, if h denotes this proportion, A the number of workers and B the area of the land (in hectares), we have

Now of course this is self-evident. However, it should be observed that it must not be imagined that these proportions are set from the very outset in the businesses or the branch of business concerned. Rather, it represents the final result of universal competition among the workers, the capitalists and the landlords. Equally, it is clear that when equilibrium has been reached the capital must just suffice to employ all the labour available and rent all the land area available. Consequently, if K denotes the capital, l the average wage and r the average rent (e.g. per hectare of land), and if the average investment time of the two portions of capital is expressed by t and τ respectively, we have K=Alt+Brt. These two relations, which of course mean simply that capital, labour and land ownership always strive for employment and indeed are always by and large employed, are in fact sufficient to determine all unknown quantities, when taken together with the maximum conditions mentioned earlier. Of course, in dealing with all this the land and the workers should really be divided into largish sub-categories according to their varying quality or proficiency respectively; 92

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within each of these sub-categories an average rate of rent or wages can then be assumed or calculated. Admittedly, the practical treatment of our problem is made very much more difficult by this, but the principle of the solution is not changed in the least. It is also appropriate here to pay attention to those eminently durable capital goods such as roads, buildings, certain land improvements, and so on, that we have so far ignored. Under completely stationary conditions additional quantities of such goods are not produced at all, or only very sporadically; they are merely maintained. It is therefore better in this case not to view such goods as capital, but rather to place them in the same category as land as a special class of ‘rent-generating goods’. Their yield is in fact no longer interest, strictly speaking, but rather rent, and their capital value is no longer in any proportion to the original production costs. Nor are the reproduction costs usually decisive for them, or at least the capital value of such goods can be permanently below their reproduction costs and is then determined simply by their returns, like the capital value of land itself. The maintenance work, on the other hand, which those goods must periodically receive is of course to be seen absolutely as a capital investment with a corresponding investment time. In an advancing society, of course, this way of looking at things would no longer apply. It is rather precisely the chief characteristic of an advancing economy that a more or less substantial part of the liquid capital created by the annual savings is continuously transformed into eminently durable goods of the above kind—roads, railroads, canals, houses, and so on. But then neither the size of the aggregate capital nor the population can be regarded as an unchanging quantity, which is what we have assumed here as our simplest hypothesis. However, if the rate of growth of the capital and the population are known, then in the case of an advancing economy, too, we shall be in possession of all the data needed to undertake the theoretical solution of our problem. Cf. the relevant remarks in the final section of my book Über Wert, Kapital und Rente (p. 140), which Lexis appears to have overlooked in his critique of my conception.

If the question is now asked what the effect will be of a tax levied proportionally to the gross yield, for example, then to be sure, all that can be stated in general is that it will be distributed somehow or other among the capitalists, the landlords and the labourers, and additionally, the output itself will increase by a greater or lesser amount as a result of the tax, because of the lengthening of the capital investment. However, in our discussion up to this point we have become familiar with all the determining factors from which—provided only they themselves were known by experience—the distribution concerned and the amount of the ‘evasion’ (expansion of production25) could be calculated in each individual case. More particularly, here, exactly as in the case in which capital and labour were regarded as the only productive factors, the effect of the tax will be the same as if, to begin with, the productivity of the labour and the land, as well as the size of the capital itself had been reduced evenly in proportion to the tax, and then the capital had grown to its real size again. During the first half of this imagined process the investment times of the two portions of capital must, as one can easily convince oneself, remain the same as previously, and the rate of interest on the capital likewise remains completely unchanged. The wages and the land rent, on the other hand, are reduced proportionally to the tax. During 93

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the subsequent (imagined) growth of the capital back to its previous level, the wages and rent increase again, and the rate of capital profit decreases, but not to the extent that the capital would have to bear the entire tax. For at the same time a lengthening of the two investment times will have to occur, and this reacts against the direct effect of the growth of capital in all three respects.26 In general, therefore, when equilibrium is finally reached, both wages and land rent as well as capital profit itself will be reduced, i.e. they are all affected by the tax, but there is absolutely no need for them to be affected to the same degree. On the contrary, the theory shows that here, under differing assumptions, all sorts of ratios are conceivable, and this is surely an indication that in reality too, within a rather broad range, the incidence of a tax can vary greatly. If, for example, landlords persist in demanding as much rent as previously, in spite of the tax, then of course capitalists will attempt to respond to this by first lengthening the investment time of the portion of capital to be paid out as land rent, and second, also by working more intensively, i.e. by using relatively more labour on the same land. By means of these two processes the demand for land would decline, which would inevitably lead to the land rent being forced down. However, if production turns out not to be very elastic in both these respects, such a recourse is more or less closed off, and then at worst the capitalists and the labourers would have to bear the entire tax burden, without being able to shift the least part of it on to the landlords. The risk of this happening seems to be greater the more capital and labour are already used in agriculture, i.e. in countries that have long been cultivated. In the view of Ricardo and Mill, which is also shared by Seligman, a tax of the kind considered here would in contrast necessarily always have to lead to a proportional reduction in the land rent as estimated in corn. Mill’s proof for this assertion27 is seemingly very simple and convincing; but it is utterly dependent on the assumption that the land rent is not paid until after the completion of production, and consequently forms ‘no part of the advances of capital’. For the core of the argument lies in the principle that the difference between better and worse land (or between the yield of successive quantities of labour and capital used on the same land) is diminished by the tax, and it is supposed that this would necessarily lower the land rent by a corresponding amount. But if the rent is paid in advance, then obviously the capitalist no longer pays the full value of that difference, but rather only its value as reduced by the relevant interest. Now since the interest rate sinks in consequence of the tax, that reduction in value necessarily becomes smaller. Consequently, two causes with opposite effects influence the level of the land rent in this case, and they partially counterbalance one another and could even completely cancel one another out. On the other hand, as is well known Ricardo asserts that landlords would completely indemnify themselves for the lowering of the corn rent by raising 94

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the price of agricultural products. There is no need for us to delay over this claim here, since according to our assumptions no change in the price of the commodity would be possible at all. Now in so far as the case we have looked at must be considered at least possible and conceivable, even if abstract, it is clear that this thesis of Ricardo’s cannot possibly have general validity. This is probably in any case no longer claimed by anyone today. I shall now, first, attempt in the appendix to represent the theory proposed here, in exact mathematical form. Then, in the next section, we shall occupy ourselves with the modifications our theory must be subjected to when we proceed from the simplest hypothesis we have used as our basis here to the extremely complex facts of real life.

APPENDIX Under the simplest assumptions made in the text, let the average annual output of a business per employed worker be expressed by p. Then obviously p is to be understood as a function of the three variable quantities mentioned above, h, t and τ. Further, let us regard it as a continuous function. Of course this means that the individual businesses must be assumed to be sufficiently large and flexible that they can always make the changes in their operating procedures demanded by the theory, small though these often are. Now the annual output p needs, first, to cover the costs of the annual wage of one worker and the corresponding portion of the annual land rent, i.e. in sum l+h·r; the surplus forms the annual interest on the portion of capital concerned, and this capital obviously comes to l·t+h·r·τ. Consequently, if z is the annual interest rate, we have the equation p=l(1+z·t)+h·r(l+z·τ),

(1)

where p represents a function of the three independent variables h, t and τ, and is to be regarded as known. Now in so far as capitalists are entrepreneurs, they will endeavour at every given level of l and r to attain the greatest possible value of z. In so far as landowners are entrepreneurs (with borrowed capital), they will strive at every given value of z and l to achieve the greatest possible value of r. Finally, workers, conceived of as entrepreneurs with respect to their own labour, will attempt at every given level of z and r to make the value of l as large as possible. Now all these endeavours28 lead, as is easily seen,29 to the same result, namely to the satisfaction of the three conditional equations (2) 95

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(3)

(4) To these are added, when equilibrium has been reached, the two equations mentioned above in the text: (5) K=Alt+Brτ

(6)

Now by means of these six independent equations all six quantities h, t, τ, l, r and z can be ascertained, i.e. expressed in terms of the quantities A, B and K (which are assumed as known) and the constants of the function form p=F(h, t, τ), which is also known. The effect of a tax that takes away the fraction ε from the gross product is now seen when we substitute p with (1-ε)p, i.e. when we multiply the left-hand side of the first four equations by 1-ε. When we do this, the new values of the variables t, τ, r and z, and those of the function and its derivatives, in comparison with their previous values, can be denoted by t+∆t, τ+∆τ, l-∆l, r-∆r, z-∆z, p+∆p and so on, whereas h of course remains unchanged as B: A. Now if ε is not too big, then the differences ∆t, ∆τ and so on can be treated approximately as differentials, and they can be found, expressed in terms of ε and all the finite quantities, by solving a system of five equations, which are all linear with respect to the differences sought. The expressions involved can easily be represented in the form of determinants, but are too obscure to insert here. However, in order to illustrate the theory by means of a simple example, let us make the following assumptions as to the function form p=f(h, t, τ). In accordance with our assumptions it grows both with t and with τ, but at a lesser rate. It could therefore be assumed, for example, to be proportional to the product tn·τv, where n and v are any proper fractions, whose sum must evidently also be < 1. As for h, it is clear that our function must also exhibit similar behaviour with reference to this quantity. If a labourer has more land at his disposal, then under conditions that are otherwise equal his annual production will undoubtedly grow. However, it will grow not at the same but at a lesser rate than the land area concerned. Similarly, to take the opposite case, when more labourers are used on the same piece of land, the output, under otherwise identical conditions, grows at a lesser rate than the number of workers. 96

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Therefore, we make our function proportional also to hm, where m is then x obviously denotes the likewise any proper fraction. If we set number of workers used on each unit of land. The output of each unit of land would accordingly be proportional to x·hm or x1-m, where 1-m is also a then if the land area placed in the proper fraction. If, for example, use of one worker is enlarged at the rate 1, 8, 27, 64, 125, his annual production would increase at the rate 1, 2, 3, 4, 5. If however, on the other hand, the number of workers employed on each unit of the land area increased at the rate 1, 8, 27, 64, 125, then under the same assumptions the annual output of each unit of land would expand at the rate 1, 4, 9, 16, 25. Of course in this process each different class of land would actually demand a different exponent, and even then this exponent can only remain valid within certain limits. However, the assumption we have made appears to correspond much better to reality than, for example, the well-known Malthusian series, according to which, if the productivity of the land rises by the number x, the productivity of the labourers employed rises at the rate of just log x. (Of course, for very large values of x even the Malthusian assumption becomes too optimistic vis-à-vis reality, since of course as x increases even log x ultimately grows beyond all bounds.) We therefore set p=c·hm·tn·τv, where c means any constant. We then evidently get

If these expressions are inserted in our equations above, then suitable combinations of those equations yield the simple relations

and consequently

Further, we get

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and finally

where c denotes the previously mentioned constant, while c1 denotes an expression composed of the other constants in the equations (which incidentally can easily be calculated). Now if a tax is imposed that takes away the fraction ε from the gross yield, then all we have to do is substitute the constant c with c(1-ε). In this process t, τ, l, r and z are transformed into t+∆t, τ+∆τ, l-∆l, r-∆r and z-∆z, and as can easily be confirmed we get approximately

In this case, therefore, the wages of labour, the land rent and the interest on capital are affected at an equal rate by the tax. Of course this result has no general validity. In fact the function form considered here is still far too specialized to be able to account for all possible cases with the degree of approximation needed to determine the incidence of the tax. For evidently, to determine that we need to go by the values that the partial derivatives of the first and second order of p (with reference to t, τ and h) acquire in the equilibrium position. With the function form chosen here those quantities obviously cannot take on all possible independent values. However, the complete discussion of the general case would lead us too far afield. V UNEVEN TAXATION OF PRODUCTION. TAXATION OF FOREIGN PRODUCTS. THE DOCTRINE OF FREE TRADE AND ITS RELATIVITY If we turn from the simplest case discussed above, in which only a single commodity is produced and taxed in the whole country, to the motley diversity of the actual circumstances of production, then our conclusions would only continue to hold good under roughly the following conditions. First, taxation would have to be absolutely even, and second, within each individual branch of production, considered in isolation, the three chief factors of production would have to be affected by the taxes in the same proportions as in the other branches. Then there would in fact be no cause to transfer capital, labour or land from one employment to another, and the reciprocal exchange relations of the goods would remain unchanged. The burden of the tax would fall exclusively on the producers as such and their average distribution among the three chief categories of producer we have talked about would remain the same as that demanded by the theory within each individual branch of business, taken by itself. 98

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However, these conditions are not met with in reality, Even if taxation were intended to be absolutely even, its distribution among labourers, capitalists and landlords could, as we have seen, differ greatly from one branch of business to another. This would lead to a partial transfer of labour, capital and even land from one branch of business to another, and this would necessarily entail movements in the relative prices of goods. In the view of Ricardo and McCulloch, which is endorsed by Mill (Principles, book V, ch. iv, §1), a price shift of this kind would even be bound to occur as soon as one kind of production employs more fixed or durable capital, in relative terms, and therefore has a longer investment time, than another, because the same tax rate (imposed on the gross yield) would take away a greater part of the capital gains in the first case than in the second. This argument, however, presupposes that wages remain completely unaffected by the tax, which is probably hardly ever the case. If in contrast wages sink, then the entrepreneur whose capital had the shorter circulation period has obviously saddled his workers with a larger part of the tax, since of course be employs relatively more workers with the same capital. There is therefore nothing to prevent the reciprocal exchange value of the products remaining completely unchanged in this case.

Such shifts in relative prices are even more unavoidable if the tax is imposed from the very outset in an uneven manner, or even leaves a few branches of production free while others are taxed. However, if not only were all the circumstances of production known, but also the law governing the dependence of the demand for goods on their prices or, which comes to the same thing, the law governing the dependence of the marginal utility of each kind of goods for each individual or each class of consumer on the quantity of this and other kinds of goods consumed annually—then the theoretical solution of the question as to the incidence of taxation would always be possible even in this case. In this solution a theory of the values of goods such as the one given in the final section of my work Über Wert, Kapital und Rente would serve as a point of departure. In the equations advanced there on pp. 131ff, in the first instance for two commodities or groups of commodities, which in line with our present assumptions would take the form p1=l(1+zt1)+h1r(1+zτ1), p2=l(1+zt2)+h2r(1+zτ2), as well as in the equations derived from them, and finally in the equations of exchange put forward there, one would simply have to replace the productivity functions p1 and p2 with (1-ε1)p1 and (1-ε2)p2 respectively, where ε1 and ε2 denote the tax rates concerned. The new values of l, r and z arising from this substitution would then in fact represent the wages, land rent and interest respectively as reduced by the system of taxes involved, expressed using any one of the commodities concerned as the unit of value.

Now it may sound more or less as if the practical solution of the question is forever impossible. However, a conclusion of this kind would be unjustified. 99

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It has to be remembered that an exact solution can never come into question here; rather, it is always a matter of arriving at an approximation adequate for practical purposes, and that means separating what is essential from what is not. Admittedly, the necessary data even for an approximate solution of this kind are all but completely lacking. But if the theory can be said to be accurate in itself, then it will have indicated precisely the lines along which research would have to proceed in order to discover the necessary facts. In the case in hand it is probably a matter above all of studying more closely the connection between the productivity of labour (and land) and the length of the capital investment in each case—a connection on which so little light has yet been thrown, indeed, and until now has been almost overlooked. In a few cases—in fact, in some of the most important ones, from a practical point of view—where the amount of capital, labour and land used in production is very small relative to the amount of the tax, so that by far the greatest part of the tax has to manifest itself in the form of a price increase on the products concerned, the conventional manner of dealing with the problem of tax shifting is of course completely adequate. This is the case, for the most part, with regard to the taxation of spirits and tobacco. In other cases, however, where a considerable part of the tax—perhaps the largest part of it—is undoubtedly borne ‘by the producers’, it is obviously most unfortunate that until now there has been an almost complete lack of any theory as to its distribution among the various productive factors. As to the labourers, the most widespread view has been that they are affected by the taxes concerned ‘only as consumers’, or that they would otherwise suffer at most as a result of a possible reduction of the capital. Meanwhile, a change in the investment time of the existing capital in consequence of a tax on the product, which seems much more obvious, has been left completely out of account. When it comes more specifically to the taxation of foreign products that is so important in actual systems of taxation, the question as to their incidence can naturally only be decided by means of a thorough study of production and exchange relations in international trade. Research in this area is not yet very far advanced, although in theoretical respects the subject is actually easier than that of price formation on the domestic market. However, in approximate terms this problem too could be explained in the same way as the problem of the taxation of domestic products, if, that is, we may assume that a similar trade and tax policy is followed on both sides. For in that case, the sum total of the import duties imposed by the home and the foreign countries on the goods exchanged can be regarded as equal on both sides, and the average exchange rates of the goods in international trade can also be thought of as approximately unchanged, although of course the quantities of goods exchanged are reduced by a greater or lesser amount 100

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in consequence of the duties imposed by each side. Accordingly, for the country under consideration the result of the reciprocal taxation will be the same as if the foreign products were produced within the country, with the same expenditure of labour, land and capital as is used in reality in producing the goods that go in exchange for them, but were then taxed at the rate of the duty actually imposed on the imported goods. In this way, international connections can be completely disregarded, and each country pays its own duties, since the decline in the price of the domestic commodities together with the increase in the price of the foreign commodities exactly equals the total sum of the duty—precisely on account of the reciprocity of the customs tariffs. But even if the foreign country is more pro-free trade or more protectionist than the home country, there is probably still some justification for continuing to look at the problem in this way. The only difference is that then, instead of the entire amount of the duty, only a larger or smaller part of it will appear as a domestic tax, or, which is the same thing, the prices and terms of trade will shift to a greater or lesser extent to the advantage of the ‘protected’ country. The difference has to be regarded as a pure gain for the latter—which of course does not prevent the possibility of this gain being more than counterbalanced in reality by the diminution of trade as well as by the costs of levying duties and the other disadvantages they bring.30 We cannot go into any further detailed discussions of the incidence of the various kinds of taxes. Our task was merely to clear the way for a new understanding of the foundation of the whole problem of tax shifting. If at some future time the necessary data should be available to determine with sufficient certainty the incidence of the simplest forms of indirect taxes, like the proportional taxation of the gross yield of production considered throughout here, it will be relatively easy to ascertain the incidence of the more complicated kinds of taxes. Indeed, in general the difficulties of the problem of incidence lie far less in the field of the theory of public finance than in that of general economic theory. It is only on the taxation of capital transfers (e.g. the trade in real estate) that the theory developed here is obviously incapable of shedding further light, since of course we have so far regarded the capital and the land each as one homogeneous fund, without taking into account the individual owners of the various capital items and pieces of land, and have in general directed our attention merely to the distribution of taxes among the various social and economic income classes—a limitation that we intend to retain in the following, too. Finally in this section we shall attempt, using in part what has been elaborated above, to answer a question that is of the utmost significance both for the theory of public finance and still more for general economic theory, 101

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namely whether the doctrine of free trade has universal or only relative validity. Previously, in the introduction, we observed that the incidence of a tax in general comprises rather more than the mere distribution of the actual amount of the tax, in that an injudicious tax can sometimes occasion very substantial economic sacrifices, without any advantage at all to the public treasury. A striking example of this was subsequently provided by the taxation of monopoly profits in section II. But the same thing is true to a greater or lesser extent of every partial taxation—e.g. a tax on foreign products that is not accompanied by an equivalent tax on domestic products. A tax of this kind therefore means a useless squandering of the country’s productive resources. At least this is what was always claimed by the adherents of the free trade doctrine, and, indeed, it is what forms the real essence of their theory. The reasons advanced by the economists of this school in support of their theory are common knowledge.31 Couched in terms of the modern theory of value it would be possible to summarize them roughly as follows. If the productive resources of a country can be deployed freely over all branches of production, they will always distribute themselves in such a way as to bring about, by their aggregate effect, the greatest possible satisfaction of existing needs. This will be achieved either directly or indirectly by means of exchange for the products of other countries; or, which is the same thing, the quantity of each kind of goods produced is exactly such that the utility of the last unit of such goods (the marginal utility) is always proportional to the difficulty of production in each case. In fact, here already—and it is precisely this, as we shall see, that forms the weak point of the argument—the population of the country is regarded as a corporation engaged in economic activity for a common account, or alternatively, it is assumed that the productive resources (capital, land, etc.) are distributed just as evenly as the needs.

Now if some amount or other of taxes is raised, for example by the direct taxation of each person’s income, then ultimately this means the same thing as a part of the existing sum of productive resources being reserved for the purposes of the state. The remaining part will then be used as previously in the production and consumption of the private economy. Hence, ignoring public needs, the extent to which individual needs are satisfied, though smaller, to be sure, will still be the greatest possible, relatively speaking, since also, further, the proportionality of the marginal utility of one unit of goods to the measure of productive resources used will be preserved. An absolutely even taxation of production would also have the same consequences. But the situation is different if a partial taxation of production occurs. Then the price of the taxed goods relative to that of the untaxed goods has to 102

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rise so high that even after taxes are deducted the production of the taxed goods remains profitable. Since, however, the price always remains proportional to the marginal utility, consumption of the taxed goods will be cut short at a higher marginal utility (less-complete satisfaction of needs). At the same time, of course, the consumption of the untaxed goods will be driven to a lower marginal utility than previously, but this, as can easily be proved generally, cannot afford full compensation in terms of total utility. So if the same amount of taxes is demanded in both cases, the quantity of productive resources absorbed by the state is about the same as previously. However, the portion of these resources remaining for private production and consumption is no longer distributed over the whole domain of production in such a way that the greatest possible total utility is achieved: the members of the national economy suffer a certain loss of utility, but this loss benefits neither the state nor anyone else. It should be observed here that this consequence is not so to speak physically necessary, it depends purely on the effect of free competition. If the members of the society were engaged in economic activity on their joint account, then in their own interest they would carry on with the production and consumption of the taxed objects exactly as previously; then the sacrifice of utility would remain limited precisely to the amount of the tax. However, since each person’s economic activity is governed solely by self-interest, he will attempt partially to escape increased expenditure on the taxed goods by reducing his consumption of them. But in the end, the tax amount has to be raised in any case, so on average each person will have to bear the same tax burden anyway. Ultimately, therefore, the sacrifice in utility will have been completely in vain. This is usually not the end of the disadvantages of indirect (partial) taxes. In place of the taxed articles surrogates of poorer quality but lower price (since they are free of taxes) soon force their way into consumption, or, which at bottom is the same thing, articles that until now were imported from abroad are now manufactured at home, but at greater costs (more labour and expenditure of other productive resources) than were previously required to acquire them by the indirect means of exchange. The result will be that now, alongside and over and above the loss of utility discussed above, there will also arise a more or less sizeable wastage of money or, put more correctly and more simply, of labour and other productive resources: in sum, therefore, a still greater sacrifice of total utility. Say it was possible without the tax to acquire the foreign commodity with a days of labour, i.e. a days were used in the production of the goods given in exchange—for the sake of simplicity we shall disregard the other production resources. In consequence of the tax, the commodity’s price, if it is still acquired from abroad, rises to a+b days of labour.32 But now the commodity is manufactured in the home country itself, at a cost of a+c days of labour, where c is always somewhat smaller than b, though perhaps only very slightly smaller. Consumption turns to the ‘cheaper’ 103

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domestic commodity, and the consumers believe they have made a saving of the amount of b-c. But of course b here represents a tax, a state revenue, which has to be raised in any case. The end result will therefore be that the members of the national economy concerned, instead of reducing their expenditure in this respect by a+b to a+c, have rather increased it by the full amount of c, i.e. to a+b+c. In other words, alongside the tax amount of b days of labour which has to be surrendered to the state in any case, there occurs an additional useless wastage of c days of labour. All in all the partial taxation of production and more specifically the system of protective tariffs consequently appear to be a sad self-deception on the part of the nations. In my opinion, the significance of this thesis, which is to be regarded as the fundamental doctrine of the free trade school, can hardly be emphasized enough. However, it seems to me that it can only be conducive to its being understood more fullly, and therefore more generally acknowledged, if attention is drawn to its necessary limitations and relativity. The argument presented, along with the doctrine of free trade in general, presupposes that each member of society is provided with the various resources of production (land, capital, etc.) exactly in proportion to his or her own needs, in other words, it presupposes an even distribution of the national wealth. Otherwise the above conclusions are more or less invalid, as I shall now show. And indeed, the deviation from those conclusions will be manifested not just in the fact that under certain circumstances a disadvantage for the national economy can very often turn out to be to the advantage of certain classes in society—a fact that is of course obvious and denied by nobody— but rather, given the actual distribution of wealth, processes that under other conditions would lead to a general gain for the national economy not infrequently turn out to be to the sole advantage of certain classes, while for the mass of the people they entail not just no advantage but even a disadvantage.33 To give the matter its simplest possible form, let us completely ignore for the time being the role of capital by assuming that both landlords and labourers are provided with enough capital to support themselves until the completion of production. Then they simply divide the sum of products produced among themselves, and this is done in accordance with the law of diminishing marginal returns (the Ricardo—Thünen law of rents), so that the returns brought in by the ‘worker hired last’ determine the average level of wages, and the residual yield of production accrues to the landlord as rent. Let us now assume that originally, e.g. in a colonial country, under the regime of free trade, agriculture is the only profitable employment, and all manufactured commodities are imported from abroad. The workers are able to satisfy their needs for manufactured commodities with, say, a quarter of their present incomes, while for example a third of the existing labour force 104

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would be required to produce the same quantity of manufactured commodities in the home country. But now a tariff is imposed on foreign products that is so high that domestic manufacturing becomes just profitable enough. If all other things remain equal, then of course the workers would suffer in the process: they would now necessarily be less well supplied either with food or with manufactured commodities or with both, than they were before the introduction of the protective tariff. But the point is, all other things will not remain equal. The transferring of some of the workers into the production of manufactured goods will without fail, by virtue of the law of diminishing marginal returns, lead to a rise in wages at the expense of rent. According to circumstances, the increase in wages will be greater or smaller; however, if we merely assume that the loss of a third of the workers employed in agriculture raised wages (estimated in corn) by somewhat more than 12 per cent—certainly a very modest assumption—then the supposed disadvantage of the labourers has turned into an advantage. For now, as can easily be demonstrated, somewhat more than a third of the workers will be able to turn to manufacturing, while the remaining (nearly) two-thirds will earn more than three-quarters of the previous wage sum, that is, more than was previously left to all workers for food supplies after exchange for foreign products, under the regime of free trade. Therefore, ultimately the workers will now actually be better supplied with both manufactured commodities and food than they were previously, and this result is reinforced still further when we consider the fact that demand for domestically manufactured goods is now bound to arise on the part of the landlords, too, and this will raise wages still more, directly and indirectly. I cannot help thinking that it has been largely reflections of this kind that, more or less consciously, have dictated the foreign trade policy of the colonial countries, which are mostly governed very democratically. More precisely, the impulse to protect domestic manufacturing by tariffs will manifest itself as soon as the country is sufficiently densely populated to allow the introduction of any land rent, while wages still stand considerably higher than in the old countries. Let us take as an example the tariff policy followed until now by the United States of America, which has prompted such lively debate. This policy was defended by most Americans on the grounds that, given its workers’ relatively high standard of living, America could not compete with the ‘poor labour of Europe’ without tariffs. Of course the European free traders replied that such competition in general was an absurd ambition, and that the United States would perform an economic service of the most splendid kind not just to Europe but also to itself, if it were content to limit itself merely to those branches of production in which its natural superiority over the older parts of the world is undisputed. 105

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Now formally speaking this is quite correct, at least if we ignore the more dubious gains arising from the United States having currently imposed tariffs on the products of other countries, without its own products being consistently taxed by those other countries at an equal rate. But if it is asked who would reap the benefits of a freer trade legislation, the answer is not so easily delivered. It is clear that it would be to the advantage above all of the landowners, first because the price of agricultural products would rise compared with the price of manufactured commodities within the territory of the United States, but in addition because the landlords would obtain in land rent a larger proportion of the output (absolutely and relatively speaking), if a significant part of the labour and capital now employed in manufacturing were driven away from this area and had to turn to agricultural production. But whether capital and labour would gain anything at all in the process is less apparent. Instead, at least as far as labour is concerned, the contrary seems probable; at any rate this has so far remained an open question. Indeed, ultimately in such cases it is not even certain that a nation can gain any advantage in any sense of the word by adopting a policy of free trade. For it can happen that a considerable part of a country’s land area is in the hands of foreign owners: then a policy of free trade would actually only increase the annual tribute that the people are forced to pay to foreign countries. As is well known, this condition applies in no small degree in the United States, where very extensive areas of the most fertile land are in the hands of foreign, particularly English, capitalists; but this is true in a still higher degree of one of the European countries, namely Ireland. If Ireland itself controlled its tariff legislation, then it would quite likely be able to secure an advantage for the country by a well-considered system of industrial tariffs. To be sure, Ireland has neither coal nor ores and would only be able to produce domestically those industrial commodities that it now imports from England by means of a much larger outlay of labour and capital. However, in the process the land rent would fall, and the sum of perhaps a hundred million marks that the Irish people today has to pay out each year in the form of agricultural products, i.e. that it has to ship to England, without receiving anything at all in return (except rent payment receipts from the landlords), would necessarily be reduced, and it may very well be that this gain would more than outweigh the loss mentioned previously. From this example it becomes obvious to how high a degree even questions as to the incidence of taxation are dependent on social and political conditions in the countries involved. If the people themselves owned the land area of their country, then obviously the observations made here would be superfluous, and free trade would be the only policy that could be recommended from the point of view of the entire people. It is surely hardly necessary to emphasize expressly that the above reservation does not hold true for the policy of protective tariffs followed by most European countries. These countries are mostly provided with an 106

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industrial output far exceeding their own needs, so that their industry can only be ‘protected’ in a very loose sense of the word. The protection of agricultural products is usually all the more effective. However, it goes without saying that this yields an advantage only to the landlords at the expense of all other classes of society, and a disproportionately high expense at that. Whether their interests are or appear to be sufficiently important to be maintained at such a price is therefore the decisive question here—but this question no longer belongs in the theory of the incidence of taxation.

VI THE TAXATION OF WAGES AND THE CLAIM THAT IT CAN BE SHIFTED On account of its great practical and socio-political significance, I hope I may be allowed a few additional observations on the question of the direct or indirect taxation of wages. A presupposition we have consistently adhered to in the previous sections was that the total supply of both labour and capital (capital formation) remains completely unaffected by the tax. That this is the case can of course not be claimed in general, and so our previous conclusions require modification in this respect. Among other things, under changed conditions it can no longer be maintained that it is completely impossible to shift direct taxes on income (or net returns). However, the question as to the influences of taxation in this area forms a problem that is all the more difficult because, under differing circumstances, the same cause could have diametrically opposite effects. Of course, the reduction of capital income in consequence of a tax will make the formation of new capital more difficult, or, in the most extreme case, impossible. In addition, it often induces an unproductive consumption of existing capital, and, finally, also causes some of those now living at leisure to cross over into the ranks of the workers. The consequence of this would be a diminished supply of capital and an expanded supply of labour. On the other hand, however, it is precisely a moderate reduction in incomes from rent that in many cases leads to enhanced capital accumulation, among all those, that is, whose main priority is to guarantee themselves and their dependants adequate means of support for the future. Which of these opposite consequences would have the upper hand under given conditions cannot be decided without empirical observations that are very difficult to conduct. The curtailment of income from labour, if sufficiently large, will also undoubtedly lead to a diminished supply of labour, both by means of a gradual lessening of the numbers of workers (increased mortality, later marriages, emigration) and on account of the lower efficiency with which labourers who are worse nourished are capable of working. 107

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On the other hand, it is precisely the families of workers who live in the neediest conditions who frequently have the most children. As for the labour supplied by individual workers, as von Falck among others remarks,34 it is by no means a rare phenomenon that when their incomes are reduced the working class ‘make every effort they can to cast all their remaining capacity for labour into the market, to sacrifice the last remnant of their leisure, just to get back up to their previous standard of living’. Consequently, in this case, instead of a diminished supply of labour, there would be an increased supply as a result of the tax. Now of course, it is more or less certain that in the long run, when taxes affect wages directly or indirectly—as long as these taxes are sufficiently high, or the average level of wages sufficiently low—the first-mentioned consequence will predominate, so that the workers really will shift on to others that part of the taxes that they cannot possibly bear. But it is sad and hardly credible to the generation now living that people have been capable of making this the basis for claiming that the taxation of the working class is relatively harmless. Yet it was actually done not just by the older economists but also by many of their successors. It is worth emphasizing, however, that alongside the theory outlined here, Ricardo, for example, also presents an alternative theory, which, though much more open to attack, was less pessimistic. However, precisely on that account it was all the more suited to justify a practice of taxation that was disastrous for the working class. Of course, it is quite obvious—and this was also conceded by Ricardo—that a tax on labourers, e.g. in the form of higher duties on necessary foodstuffs, could only produce gradually the effect described above, after a longer or shorter interval, during which the labourers would have to suffer a great deal. Ricardo therefore attempts to demonstrate that there would also be an immediate wage increase as a consequence of the tax. He does this in the following somewhat daredevil manner: ‘A tax on corn’, he says,35—and of course the same argument would, if correct in itself, remain valid in the majority of similar cases—‘does not necessarily diminish the quantity of corn, it only raises its money price; it does not necessarily diminish the demand compared with the supply of labour; why then should it diminish the portion paid to the labourer? Suppose it is true that it did diminish the quantity given to the labourer, in other words, that it did not raise his money wages in the same proportion as the tax raised the price of the corn which he consumed; would not the supply of corn exceed the demand?—would it not fall in price? and would not the labourer thus obtain his usual portion?’ ‘In such case, indeed’, Ricardo continues, without noticing that he is invalidating his own argument, ‘capital would be withdrawn from agriculture; for if the price [of corn] were not increased by the whole amount of the tax, agricultural profits would be lower than the general level of profits, and capital would seek more advantageous employment’. And having thus, obviously, refuted his own presupposition that the quantity of corn produced cannot change, he immediately goes on, ‘In regard then to a tax on raw produce…, it appears to me that no interval which could bear oppressively on the labourer, should elapse between the rise in the price of raw produce, and the rise in the wages of the labourer; and that therefore no other inconvenience would be suffered by this class, than that which they would suffer from any other mode of 108

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taxation, namely, the risk that the tax might infringe on the funds destined for the maintenance of labour, and might therefore check or abate the demand for it.’ Ricardo’s theory quoted here is characterized by Seligman as ‘too absolute’ and ‘dependent on the wage fund theory’.36 However, it is not clear how the assumption of the wage fund theory, even in its very strictest form, could lead to conclusions of this kind. For that would entail the assumption that ‘the funds reserved for the maintenance of labour’ grow in consequence of the tax, which Ricardo never claims, and which in itself could hardly be explained. Rather, his conclusions on this subject must be characterized simply as unfounded, both formally and materially. Von Falck criticizes Ricardo’s opinions in detail, but already in the few words with which he summarizes them37 there lies so palpable a self-contradiction that any further refutation appears superfluous. All that is left, then, is the theory of tax shifting based on the doctrine of the ‘natural’ wages of labour. This theory, of course, is quite correct as far as its assumptions hold—but certainly no further than that.

In more recent times, the attempt has been made to lend this theory a somewhat more amiable aspect by making the standard for the level of wages not the necessary means of subsistence of a working-class family, but rather a certain standard of living which the workers would hold on to in spite of the tax. But in this case, too, it is surely apparent and is now almost universally admitted, that after the imposition of the tax the original level of wages cannot be restored quickly, and indeed cannot always be completely reestablished. In the interval, labourers would not be spared from the tax burden, particularly since of course it is precisely the suffering and discomfort arising from that burden that are supposed to be the motivating forces prompting the workingclass population to reduce its numbers. In addition, however, the question can surely be raised whether there is actually any justification for talking about tax shifting at all in this case. In the most important cases of tax shifting it is a matter of a process that will only occur or succeed as a result of the tax, so that the tax itself as it were partially compensates the direct taxpayer. So, for example, without the tax there would be no economic basis at all for raising the price of a taxed commodity. In contrast, the working class could of course equally well bring about the necessary reduction in the supply of labour without the tax, and by doing so they would naturally realize a corresponding improvement of their position in this way, too. In other words, if reducing the numbers of the population or at least moderating its present growth is advisable in the interests of the working class—and I for my part have little doubt as to the correctness of this view as far as most European countries are concerned, above all in the face of the closing of the North American continent to immigration that threatens us in the future—then the workers should surely be directly warned about the dangers of having too many children and called upon to limit the size of their families. Given the present-day level of education among the majority of workers there is probably no fear that such encouragements would necessarily fall on deaf ears. But to impose a tax on them in the hope that its pressure 109

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will gradually be neutralized and counterbalanced by its effect on population trends means attempting to force the workers by necessity to do something they should best do of their own accord. In addition, of course, in the process they would be deprived in advance of the fruits of their action, for after all their privations and suffering they would merely arrive back at the conditions they were in before the tax concerned was imposed. But the theory that a tax on labourers is harmless was always far too convenient for the ruling classes for them not to defend it by means of popular sophistry, even after it had gradually been abandoned by the champions of science. The argument was made that the workers would gain nothing if their taxes were transferred to the shoulders of the wealthier, for as the incomes of the latter diminished, so too would the demand for labour, and so, consequently, would the wages of labour. On the other hand, however, it would not do the workers any harm either if they had to surrender a part of their incomes to the state in taxes, for the demand for labour on the part of the state would then be added to the general demand, wages would rise, and so on. Already John Stuart Mill came out in opposition to popular errors or excuses of this kind, but in my opinion not always with sufficient clarity and rigour. He investigates in succession the following two questions: (1) whether it is more useful to the workers that a certain sum of money be taken away from the wealthier in order to be used for the purposes of the state, or that the same money be spent by the well-to-do themselves in their private businesses, and (2) whether on the other hand it is more useful to the workers that the state impose a tax on them in order to utilize the money concerned for its purposes or that the tax amount in question should not go to the state at all.38 But neither of these issues is the question to be decided here. However much significance the application of public revenue may have for the question of the justice and expediency of taxation, it has absolutely nothing to do with the theory of tax shifting. When a decision is to be made as to the incidence of one tax or another, the appropriate and necessary point of departure, as I have already pointed out, is the assumption that the sum of money concerned will always flow into the public treasury in any case. In other words, the way in which the tax is used by the state is a common factor for all cases and can simply be eliminated. In the case concerned, the correct formulation of the question would therefore be the following: assuming that a certain sum of taxes is required for the purposes of the state, will it in all probability be more useful to the workers if this money is taken from their pockets or from the pockets of wealthier people? Put in this way, the question surely requires no answer, by and large. I deliberately say: by and large; for in so far as the taxation of the wealthier 110

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should be to the detriment of capital accumulation, ultimately, of course (as frequently remarked), the workers too would feel the consequences. But it must not be forgotten that if their incomes were treated more leniently, the workers themselves could also put something aside. There is not even any proof that they would do this to a lesser degree than the better-off classes now do. However, even if this were the case, it is surely obvious that a smaller capital in the hands of the workers themselves, the full fruits of which they could enjoy directly, would be of far greater use to them than a much larger capital in the hands of the wealthy, which would only partially benefit the workers quite indirectly in the form of an expanded demand for labour. In any case, Mill himself has occasionally become caught up in the web of fallacies he wanted to tear apart. He says: ‘If the government took a tax of a shilling a week from every labourer and laid it all out in hiring labourers for military service, public works, or the like, then it would, no doubt, indemnify the workers as a class for all that the tax took from them. That would really be “spending the money among the people”.’39 It should be observed that what is being talked about here is not, as might be supposed, the significance of state activities as such for the workers. Rather, the state, by putting the labourers in a position to earn back their own money by means of more work, is already supposed to have ‘indemnified’ them, and fully at that. It is tempting to ascribe this strange claim of Mill’s purely to an oversight. However, that would be incorrect. In this, as in so many other parts of his work, Mill refers to his well-known ‘fourth theorem respecting capital’ (book I, ch. 5, §9), or the theory that the workers are supported only by the capital, but not by the sale of the goods produced by the quantity of labour concerned (‘demand for commodities is not demand for labour’). In itself this theorem, as emphasized above, is absolutely correct and true, but Mill, caught in the prejudices of the old wage fund theory, has sometimes applied it in an overhasty, indeed completely incorrect way. It may be true that the state has expanded the existing capital and the demand for labour in the assumed case by means of the tax. However, it cannot be assumed at all (as Mill implicitly does) that this expansion of the capital would bring about a corresponding rise in the average wages of labour. This might perhaps happen at first. If it did, it would be at the expense of the average profit on capital, but for this very reason the increase in wages would not last long, not just on account of the possible effect of diminished capital profits on subsequent capital formation, but rather more directly because the capitalists would react immediately against the wage increase that had occurred by introducing more machinery and transforming liquid capital into ‘fixed’ capital. By this means, the portion of capital available each year for the payment of wages would again be reduced. 111

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Finally, however, and even if one could otherwise concur with Mill’s argument, the chief objection to it, which has already been mentioned several times, remains in place: that the state decides to spend taxes in this way not in order to benefit the labourers, but rather because it suits its own purposes. Hence, this way of using tax revenues would benefit the labourers in a quite similar way no matter from what source the sum of taxes at issue were to flow.

For good measure, let us touch on one more question, which certainly belongs more to the practical than the theoretical doctrine of public finance: whether there is not an unconditional guarantee for at least the lowest stratum of the working-class population that any taxes which may be imposed on them will be shifted—namely to poor relief. As late as 1872 this was still the opinion of Adolf Held, for he writes: ‘In a healthy country, apart from the poor, who after all are amply [sic] indemnified for any taxes they may have paid by welfare payments, there can exist no class of persons who are obliged to starve because they satisfy their sense of duty towards the state by paying a small tax.’40 Let us not go into the question as to how far Held would be inclined to characterize present-day countries as ‘healthy’. In fact, however, alongside the poor who actually receive support, there exists almost everywhere a very broad stratum of the population—created in part by the poor laws, in part perhaps also by the labourers’ self-respect—consisting of people who are without doubt needy. The examples of this that could be cited are legion, but I shall make do with just one, which I take from a small study of the way of life among Swedish agricultural labourers which has recently been carried out and published by the Lorén Foundation for the Promotion of the Social Sciences.41 Among the working families studied there, one occurs which could serve as a shining example in every respect, as far as industriousness, thrift and frugality are concerned. Both the father (an ordinary day-labourer, who was employed on Sundays to work the bellows of the church organ) and the mother, as well as the two oldest of the seven children who were still young had incomes of their own. However, on account of the large number of children in the family their combined earnings were scarcely adequate, in spite of a dietary regime that was more than Spartan—during the year of the study only a single kilogram of butter and the same amount of beef was consumed by the entire family. The chemical analysis of the year’s consumption of food (in which the allowance for each child under the age of ten was calculated as half that of an adult person) revealed a significant shortage of all major nutrients (fat, protein and carbohydrates), in short, as is emphasized in the printed inquiry, these people undoubtedly had to go hungry. 112

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Now this family had not received the least support from the department for poor relief—not even when the father was ill for three weeks—and they probably did not apply for any such support either. But they had to pay taxes. First, there was the poll tax that still exists in our country, which admittedly in this case was paid by the employer on the basis of a voluntary agreement, though in all probability in exchange for a corresponding curtailment of wages. Second, there were the indirect taxes that now affect almost all objects of consumption in Sweden (except, say, salt and petroleum) and are so amply assessed that the state budget, which has swelled greatly in recent years, depends on the taxation of items of mass consumption for by far its greatest part. Now what has become of the ‘ample indemnification’ here—and in countless similar cases? All in all, therefore, the theory that taxes on labourers can be shifted proves in the main to be based on an illusion. But in so far as it is correct, it is subject to an objection that is hardly less important. In most other cases of tax shifting—at least in the conventional view— what is involved is only a change in the occupation or a change in the consumption patterns of the persons affected by the tax, as the more profitable occupation is preferred to the less profitable; or a commodity that is cheaper, because it is either not taxed at all or is taxed less highly, is consumed instead of the expensive commodity that is burdened with taxes. When it comes to taxes on the wages of labour, in contrast, the possibility of freeing oneself from a part of the tax is supposed—according to the received doctrine, that is—to depend as it were on the choice between life and death, between marriage and celibacy, between remaining in the country and emigration. In other words, it is supposed to be dependent on circumstances that one may not be inclined to term (with Wagner) ‘worse than the evil itself, but which undoubtedly belong among the hardest kinds of human suffering. Put briefly, this obviously means that, in reality, the shifting of that tax that has been so highly celebrated could only occur when the amount of the tax has already long since ceased to be in any sort of reasonable proportion to the capacities of the labourers. This conclusion, which strictly speaking implies a self-accusation on the part of the theory concerned, finally leads us on to the topic that is to form the subject of the next major division of this work, namely the principle of the justice of taxation. NOTES 1 E.R.A.Seligman, On the Shifting and Incidence of Taxation, Baltimore, Md, 1892, pp. 106, 77, then pp. 107–28. 2 W.Vocke, Grundzüge der Finanzwissenschaft, Leipzig, 1894, p. 208, 113

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3 We should, however, gratefully acknowledge that the modern science of public finance has eliminated some instances of one-sidedness on the part of the classical economists. The most important of these, which at the same time concerns one of the most important questions in the theory of tax shifting, probably lies in the area of the taxation of labourers. Cf. section VI. 4 J.S.Mill, Principles, 1848; book V, ch. iii, §4. Cf. section VI of this thesis. 5 By means of Schäffle’s theory of the general phenomenon of rents—much praised by Held and of course in itself quite correct—it was of course possible to explain to some extent the difference between the wages of various classes of labourers, but not the average level of wages, which is surely the main thing. The same observation, incidentally, also applies to the theory of land rents itself once the entire arable area of a country has been occupied. 6 A.A.Cournot, Recherches sur les principes mathématiques de la théorie des richesses (1838). 7 Seligman, On the Shifting and Incidence of Taxation, p. 160. 8 To what extent this latter claim is correct, we shall investigate in a moment. 9 M.Pantaleoni, Teoria della traslazione dei Tributi, Rome, 1882, p. 77, where, however, the discussion of this point is perhaps somewhat lacking in clarity. 10 Seligman, On the Shifting and Incidence of Taxation, p. 162. 11 The objection should not be thought possible that the purchasing power of previous consumers who no longer contribute to current demand will, having thus become available, now benefit some other producer instead of the monopolist concerned. That assumption can certainly be made, but it can easily be recognized that an exactly equivalent reduction in the purchasing power of the remaining consumers and the monopolist himself takes place, and their purchasing power could equally well have provided work for other producers. 12 Cf. A.Marshall, Principles of Economics, 1890, book V, ch. viii, §8. 13 See, e.g., Karl Marx, Das Kapital, vol. II, pp. 197f. 14 David Ricardo, Principles, ch. 1, s. vi. 15 Jena: Gustav Fischer. 16 See the review cited above, p. 74. 17 The failure to observe this fact was the main reason why Jevons was unable to arrive at a consistent theory of capital in his Theory of Political Economy. 18 See the appendix at the conclusion of this section. 19 A tax imposed on the entrepreneur calculated according to the volume of the business in some other way, e.g. in proportion to the number of workers employed, would also have substantially the same consequences. 20 In the case of a tax that was proportional to the number of workers employed, and which therefore took a fixed amount from the average returns per worker, we would have to imagine the curve shifted downward by an amount corresponding to the tax rate, while remaining parallel to the original curve. Apart from this, the discussion of the problem would be very similar. 21 Incidentally, as is well known, this difference between various classes of land—at least within broader groups of classes—is increasingly being effaced as a result of progressive improvements of the land, as has been established, for example, for France by the studies of H.Passy. 22 The simplest account of this part of Ricardo’s theory is provided by von Thünen’s version, where no attention at all is paid to the influence of capital. The additional yield of the last worker hired is made the standard both for his own wages and (in consequence of the competition between workers) for the wages of all workers employed. The entire remainder of the yield accrues to the landlord. 23 Mill, Principles, book II, ch. xvi, §6. 114

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24 If he buys the land, he instead pays the capitalized value of these ground rents. 25 With respect to this expansion of production, of course the same thing applies as was remarked upon in the previous section. It cannot without further investigation be regarded as a gain for the national economy, since the land rent and wages will already have diminished some time before the tax revenue starts to flow into the public treasury. 26 This will at least be the course of events in general. However, very peculiar combinations can crop up in this context, and it would only be possible to shed light on these cases by carrying out a mathematical treatment of the problem. 27 Mill, Principles, book V, ch. iv, §3. 28 The possibility of combined roles—that one and the same entrepreneur can be both capitalist and landlord or labourer—was mentioned above. 29 Cf. my work Über Wert, Kapital und Rente, pp. 121ff, where however the terminology must be changed both in accordance with the assumption made here, that the two portions of capital have independent investment times, and with the substitution, mentioned above, of the concept of ‘production period’ by the average investment time of the capital. 30 An attempt was made by W.Launhardt (Mathematische Begründung der Volkswirtschaftslehre, Leipzig, 1885, pp. 80ff) to determine the smallest ‘decline in the price of the foreign commodity’ at which a protective tariff still ‘acts as a benefit to the national economy’, and to define ‘the most favourable rate for tariffs’. According to Launhardt this rate would come to exactly ‘one-third of the barrier tariff’. Of course in these calculations the necessary assumption, which, however, the author never mentions, is that no retaliatory measures are taken by foreign countries. If they are, his whole argument is untenable, and the ‘benefit to the national economy’ of protective tariffs remains an extremely questionable phenomenon even in Launhardt’s sense. 31 Cf., for example, Mill, Principles, book V, ch. iv, §5. 32 Assuming equal taxation of home products abroad, we can here, as indicated above, regard the price rise b (actually that price rise together with the price decline of the home products exported) as equivalent to the total amount of the tariffs. 33 This fact, though generally admitted by the liberal school, was hardly taken adequately into account. It has been highlighted all the more by socialist writers, e.g. by Karl Marx, though often, in my opinion, in a very exaggerated, fanciful way that has done more to hinder than to promote the acknowledgement of the actual state of affairs. 34 G.von Falck, Kritische Rückblicke, Dorpat, 1882, Nachtrag, p. vi. 35 Ricardo, Principles, 2nd edn, ch. ix, p. 97. 36 Seligman, On the Shifting and Incidence of Taxation, p. 36, no. 1. 37 von Falck, Kritische Rückblicke, p. 54. 38 Mill, Principles, book I, ch. v, §10 and book V, ch. iii, §4. 39 Mill, Principles, vook V, ch. iii, §4. 40 Adolf Held, Die Einkommensteuer, Bonn, 1872, p. 104. 41 Tjenare, statare och torpare, Skrifter utg. af Lorénska stiftelsen no. 6. So far, the study has encompassed only a few families, but to compensate for this, their living conditions have been investigated all the more thoroughly. * Editor’s note: This is an erroneous conclusion caused by a fatal approximation above. For details, see Bo Sandelin, ‘The Danger of Approximation: Wicksell’s Mistake on the Average Period of Investment’, History of Political Economy, Vol. 22, No. 3, 1990, pp. 551–555. 115

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The following excerpts from the lectures I gave on the above subject in Lund last autumn term are published in the hope that they may be of broader interest. Admittedly, the inheritance tax is still without any great significance in Sweden, even after the latest reforms, but here as in other countries a further development of this tax is likely to be suggested sooner or later, and that being so, it may be advisable to try to arrive at a clear conception of the direction such a development ought to take, and the purposes for which it should be used. Further, the inheritance tax in itself and the question of its place in the tax system are of unusual interest, in the first instance, certainly, for theoretical reasons, but also because of the intimate connections with the great practical and social issues that are the order of the day.1 Finally, it is of course well known that the remodelling of some relevant parts of the Stamp Ordinance that was undertaken in Sweden in 1894 contained various innovations from a purely legal point of view, about whose value and practicability opinions were very divided; it may therefore be worthwhile to see to what extent the hopes and fears voiced at that time have been confirmed during the period in which the ordinance has so far been in force, and also to scrutinize the failings or weaknesses that practice, that most incorruptible of critics, may have revealed. THE SIGNIFICANCE AND POSITION OF THE INHERITANCE TAX IN THE TAX SYSTEM The inheritance tax, i.e. the duties that are collected by the state in connection with a person’s death and at least in general are payable from the estate he or she has left, is a striking proof of John Stuart Mill’s well-known observation that in all human affairs, practice goes far in advance of systematizing science. This form of taxation is now found in the legislation of almost every country, and in some countries, particularly in England and France, as well as the Netherlands and Belgium, it provides a very substantial proportion of Originally published as ‘Om arfsskatten’, Ekonomisk Tidskrift, 1901.

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national (and local) government revenues. In England, as we shall see, it is very nearly as important as income tax, even though income tax is levied at such high rates there. In addition, in several countries a comparatively extremely steep graduation of the inheritance tax has either already been implemented or is in the process of implementation. This graduation, moreover, is applied with regard to two distinct factors: first, the degree of relationship, and second—though this is less common—the size of the inheritance share or the total value of the estate. In some countries, certainly, the second of these graduations has a counterpart in the income tax; but where graduation has been introduced at all, it is considerably steeper in the case of the inheritance tax, and it also occurs in some countries, such as Sweden, where the income tax is purely proportional or merely degressive (i.e. allowing exemptions or deductions only for smaller incomes). As for the first graduation, which is determined by the degree of relationship to the deceased, this has no counterpart at all in other kinds of taxes. These peculiar features of the inheritance tax have established themselves virtually simultaneously in several different countries, and of course that could lead one to believe they were the fruit of some thoroughly thought-out, generally recognized theory of taxation. However, this is far from the case; in fact, the theory of the inheritance tax is still extraordinarily deficient, and hardly a single one of its fundamental theses has won general recognition among fiscal theorists. Instead, it turns out that the theory in this case merely limps along after the praxis, trying to explain and justify it somehow or other, while the actual motives behind the reforms are to be found in another quarter completely than within the official science. Even when it comes to classifying the inheritance tax, defining its place in the tax system, the opinions of scholars of fiscal law vary greatly. Some want to make it a fee (compensation), a payment specifically for the utility a person derives from a particular public institution or branch of the activity of the state or, still more narrowly, for the expense he or she causes the public by making use of this institution. Others, on the other hand, want to see in the inheritance tax quite simply a tax in the usual sense of the word, i.e. a part of the general payment the individual is bound to make for the benefits he or she enjoys from the state, or, to put it another way, a part of the contribution to the maintenance of the state’s activities that is demanded of each and every person on the basis of their duty as citizens and in proportion to their tax-paying capacity. Finally, however, there are also those who are of the opinion—and in fact this is probably the most popular view at present—that the inheritance tax should not be regarded as a tax in the true sense of the word at all, at least not in its entirety, but should rather be seen as a share of the inheritance or a part of the property left by the deceased that the community (state or municipality) has certain reasons for claiming. Some people might think that the name, the terminology, makes no difference here. But that is hardly the case, for the issue of classification is 117

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intimately connected with the question as to the purpose of the inheritance tax, which of course cannot be without significance for its more precise organization, graduation and general level. If the inheritance tax is merely a fee, then at least if the concept of a fee is taken in the strict sense of the word, which we shall come back to in a moment, it should surely not be set at a higher rate than is required to compensate the state in full for the labour of transferring inheritances in general and the inheritance in question in particular. If on the other hand it is a tax in the true and customary sense of the word, and nothing more, then certainly a significant sum can reasonably and justly be demanded in tax, according as circumstances require. However, the most important of these circumstances is of course the public need for tax revenues. Consequently, the inheritance tax can only be raised if either all other taxes have reached an equivalent height, or there are very specific reasons for choosing this particular form of taxation. On the other hand, if it is not a tax in the true sense of the word but rather the expression of an independent claim to inheritance or ownership on the part of the state, then of course its level is dependent on circumstances that have no direct connection with public revenue needs. Whether these needs are large or small, the inheritance tax, or what is called inheritance tax, should then be payable at the same rate. It is beside the point that other taxes, i.e. taxes in the true sense of the word, can be partially remitted because of the revenues the state earns in this way— unless the society prefers to use these revenues to build up public ownership of capital (we shall return to this point later). In a word, the nature and significance of the inheritance tax—and therefore also its future development— can be said to be comprised in one of the three terms by which its possible position in the tax system can be summed up: remuneration (fee), contribution or confiscation. Is it a fee? Of course, it cannot be denied that the inheritance tax can reasonably be considered to include a fee element, namely a payment for the costs the registration and supervision of this particular transfer of inheritance occasion the state. But it is obvious that these costs nowhere near correspond to the whole amount of the inheritance tax, even at its lowest. Moreover, in some countries normal court fees are charged in addition to the actual inheritance tax. Even by making the total yield of the inheritance tax cover all the costs the state can be said to incur in the maintenance of its rules of inheritance, indeed in the entire civil legal system, it would only be possible to account for part of its sum, at least in those countries where this tax has reached its greatest development to date. In addition, if the concept of a fee is stretched so far, the distinction between a fee and other taxes essentially disappears, so that the whole debate becomes merely a quarrel about words. A still greater difficulty, if the inheritance tax is seen as a fee, is surely how to justify either of the two ways in which the tax rates are progressive, yet oddly enough, the demand for graduation sometimes tends to be made even by those who advocate this conception of the nature of the inheritance tax, e.g. 118

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Eschenbach in his well-known essay in Conrad’s Handwörterbuch der Staatswissenschaften and in a separate pamphlet. All in all, the stubborn persistence on the part of some authors in asserting such an inadequate basis for taxation as the fee principle appears to be in the main a desperate attempt to avoid disagreeable consequences. The concept of the fee becomes as it were an emergency anchor which some people use in an attempt to keep to the familiar roadstead of cameralism so as not to drift out on to the uncharted and troubled waters of social policy. Is it a tax? At first sight, the attempt to explain and defend the inheritance tax as quite simply a tax in the usual sense of the word, a part of the tax system or the ‘tax packet’, seems more promising. On this view, it should be set at such a level that in conjunction with the other parts of the system it approximately satisfies the conditions for equitable taxation for each individual. This means that from the point of view of the benefit principle it should bring about parity or equivalence between ‘Leistung’ and ‘Gegenleistung’, between what the individual does to benefit the state and what the state does to benefit the individual, the contributions on both sides being considered in their entirety. Alternatively, if the principle of ability to pay, or of equal sacrifice, as it is known, is to be decisive, the effect of the inheritance tax should be that the pressure of the tax burden or the relative sacrifice is equal for all, as far as possible. For since taxes on consumption, which everywhere make up a significant part of public revenues—in many countries, such as Sweden, by far the largest part—are undoubtedly inversely progressive in their total effect, i.e. take a larger percentage of small than of large incomes, virtually any graduation whatever, however steep, could be defended as a counterbalance when it comes to direct taxes. Even then, it might perhaps only bring about an approximation to a proportionate burdening of the income, or at all events of the part of the income that exceeds the bare subsistence level and is therefore all that can be subjected to taxation, so-called ‘free income’. And this is surely the least one is entitled to require, from whichever of the two theoretical perspectives mentioned here. However, it is difficult to see why, proceeding from these premises, inheritance tax should be treated or organized differently from any other income or wealth tax. Indeed, a separate inheritance tax seems rather superfluous from this point of view; after all, the heir still has to pay tax in future on returns on the inheritance, just as on all other income or returns on capital. To be sure, some people attempt to prove that receiving an inheritance endows a person with a special tax-paying capacity (thus Schall in his wellknown essay in Schönberg’s Handbuch, and Eschenbach from his own particular perspective): first, they say, the person receiving an inheritance has come into its possession through no merit or sacrifice of his or her own, particularly if the inheritance has passed to a distant relative; second, the tax is also felt less or not at all, in so far as the inheritance can be regarded as a pure windfall gain. The first of these arguments is quite convincing, but more 119

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as a reason for restricting the right of inheritance itself, particularly the rights of distant relatives. Of course in practice this might come to the same thing, in part, but it would still be a very different thing both quantitatively and conceptually. Incidentally, it is far from always the case that direct descendants earn their inheritance by greater sacrifices than more distant relatives—most frequently, probably neither actually make any sacrifice. In addition, even before inheriting, the children in a rich family have usually enjoyed ample support and received a careful upbringing, which is often effectively just as valuable as accumulated monetary capital. The argument that inheritance tax is felt less when the inheritance passes to a collateral branch of the family than to a direct descendant may also be true, but at bottom this is a rather petty and superficial point of view. The tax may be felt less at first if the inheritance itself comes more or less as a surprise, but of course afterwards it is felt in the same way in both cases, namely as a reduction of the fortune that would otherwise have been received. Besides, once the regulations for inheritance tax have been established, no heir has any reason to expect more than the property left by the deceased, or a certain part of it, minus the amount of the inheritance tax, and the ‘reasonable interest’—to use Nordling’s, or rather Bentham’s, term—that they may have attached to this addition to their wealth therefore goes no further for either direct descendants or distant relatives. Moreover, ignoring incidental factors, the pressure of the tax must surely depend on the inheritor’s total economic status, and of course this may be far more favourable and entail a far greater tax-paying capacity for an heir who is a direct descendant than for an heir in a collateral branch. Indeed, even a person receiving a small inheritance may have a greater taxpaying capacity than a person receiving a large inheritance if the latter—let us say, an invalid incapable of work—is dependent on the inheritance as his or her sole means of support. In passing, let me here also touch on Schäffle’s justification of the inheritance tax as constituting in the main a kind of supplementary taxation, a general payment in lieu of the tax contributions the deceased has managed to avoid in his or her lifetime, and which now in capitalized form would unjustly benefit the heirs—an argument G.Schanz (in the new edition of Conrad’s Handwörterbuch) calls ‘worthless, an argument of last resort’. Unfortunately, the state of affairs Schäffle’s reasoning builds on is probably only too real, but it seems to me that this should surely rather motivate measures to tighten tax controls. After all, to administer a wholesale flogging in order to make sure no criminal gets off free is not a very attractive idea, whether punishment or taxation is concerned, and besides, this method of course misfires in the many cases where the state has been deprived of otherwise lawful tax contributions amounting perhaps to significant sums, but where these have not been capitalized but rather quite simply consumed. In a word, if the inheritance tax is regarded as a ‘tax in general’, the special way it is treated can hardly be justified, and yet this special treatment, as 120

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found in actual tax laws, whether current or in preparation, is supported by such a decided body of opinion that to reject it as an abuse or an error would certainly be futile. The society’s right of inheritance. All that really remains, then, is the path taken by Bluntschli, among older authors, and von Scheel and especially Adolf Wagner among more recent writers, and which Schanz also joins in the essay mentioned above, namely to regard the inheritance tax at least in part as a portion of the property left by the deceased that belongs to the community (the state or municipality). The community stakes a claim to this portion independently of and prior to all rights of taxation, in much the same way as the state and municipalities lay claim to the returns on their forests and lands or other so-called private income. To dismiss this view, as Eschenbach and others do, with the argument that the state ‘is not related’ to the deceased and consequently cannot inherit from him, is much too superficial, of course; however, if one wants to frame the state’s claim in legal terms, it may be more appropriate to say that the society asserts a right of possession and that consequently, when it comes to this part of his or her property, the deceased should be regarded only as a person having the right of use and enjoyment, a usufructuary. But at bottom this is merely a matter of words. In our time, both the right of possession and the right of inheritance exist only by the sanction of the state, or at least cannot be imagined without this sanction. As for the right of inheritance in particular, it perhaps suffices to point out that the idea that all kinship as such constitutes a right of inheritance, unless closer relatives take precedence, is by no means ancient, but is rather a relatively modern idea—indeed, I am tempted to call it a piece of hair-splitting legal sophistry that will not last a moment longer than it has support in the written law. On the other hand, it will not do to treat the matter in too cavalier a fashion either, and instead of arguing the point, simply invoke the sovereignty of the state, drawing, from the undisputable fact that it is by the co-operation of the state and under its protection that succession takes place at all, the somewhat hasty conclusion that the state is therefore entitled to limit or restrict as it sees fit a right that only exists by means of the state. However, this was the substance of the line of argument with which Sir William Harcourt as Prime Minister pushed through the latest reform of the inheritance tax in England in 1894—and what is more, with the added claim that this view could be found in any textbook of economics, a claim from which Adolf Wagner dissents, with good reason. With arguments of this kind it is of course possible to defend any arbitrary intervention whatever on the part of society into rights that have gained recognition at some time in the past: after all, all these rights exist, as we have said, only because the state sanctions them, so of course the state can do whatever it wants with them. However, what was supposed to be proved was not that the state can do what it wants, but rather that in the case under consideration it ought to do just this. In actual fact, the much decried principle 121

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of utility, of expediency, is the only principle that can offer any guidance to the judgement in a case like this. If instead one takes the ‘collective will’, the authority of the state, etc., as one’s point of departure, one is forced logically to the final conclusion that might is right, a maxim our sense of justice nevertheless firmly declines to acknowledge. Wagner’s own justification of his position on the problem of inheritance tax (in Finanzwissenschaft, Part II) undoubtedly contains much sound and correct thinking, but still seems to me on the whole less than fully satisfactory. Wagner cites two reasons for the inheritance tax: one deriving from private property policy, the other from tax policy. Regarding the first, he points out quite rightly that the right of inheritance cannot be regarded as a necessary component or a corollary of the principle of private property, which instead merely comprises the right of use, the right to contract agreements and the right to make gifts—even this latter right, incidentally, is probably generally regarded as less absolute than the first two. The right of inheritance should rather, according to Wagner, be regarded as an independent institution of civil law. It has developed over time in its own way, alongside the developing right to own property, and in a still higher degree than this right it is a manifestation of the national will and the needs of the society. Now according to Wagner, the modern development of the family and of property law as it pertains to the family makes a restriction of the family’s right of inheritance and an extension of the state’s right of inheritance necessary and desirable. He points out, undoubtedly with justice, that the family’s right of inheritance was closely connected with the family’s far tighter cohesion in days gone by—he could perhaps have added, when it comes to really primitive conditions, the geographical isolation of the family or the tribe. In former times, says Wagner, a person appeared in public substantially only as a member of a family, whereas in modern times he or she appears as an individual. All this seems to me quite correct and convincing, but the specific argument to which Wagner then proceeds, namely that certain particular economic obligations—emergency aid, poor relief, etc.—have now passed from the family to the municipality or the state, undeniably seems rather weak. Poor relief, for example, is surely by and large more a substitute for the maintenance obligations of masters than of relatives; at the same time, a large number of the economic functions that used to be exercised in the main by families have now been taken over by voluntary organizations, relief funds, unions and societies, corporate bodies, etc. This fact would therefore be more of an argument for extending the freedom of bequest beyond its present bounds, at the expense of the right of inheritance, and this is what von Scheel, for example, advocates (Handwörterbuch der Staatswissenschaften, article ‘Erbrecht’). In terms of tax policy, in turn, Wagner bases the inheritance tax chiefly on the same grounds as generally apply to taxes on so-called windfall gains (profits from swings in the business cycle and the like), namely on the fact 122

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that capital has been acquired without personal economic effort (‘wirtschaftliche Leistung’) and for this very reason produces an enhanced tax-paying capacity (‘wirtschaftliche Leistungsfähigkeit’) on the part of the heir—and the more distant the degree of relationship, the greater this enhanced capacity, etc. We have already discussed this argument in its essentials; on the whole it seems to me not very pertinent. In many cases, e.g. on the death of the bread-winner, the survivors’ ‘Leistungsfähigkeit’ is usually anything but enhanced by his death; but at the same time, as I have said, the tax-paying capacity of a poor distant relation who has received a small inheritance is often far less than that of an heir who is a direct descendant. It is probably most accurate, as already suggested in the introduction, to see in inheritance tax legislation as it actually exists not a fruit of completely mature, thoroughly thought-out theoretical considerations or viewpoints, but rather a compromise between competing and contrasting views and interests. That this has actually been the case will probably be confirmed to the full by the following account of the positive law. Here, as in other cases, the contest has pitted a conservative aristocratic line on the one hand against a radical democratic line on the other hand. The former aims to keep property intact in order to achieve the greatest possible efficiency in wealth, power and also, according to the outlook of each epoch, culture, even if only for a minority; the latter’s goal, in contrast, is to disperse property in order to spread it and its benefits among the greatest possible number of people. Each of these lines no doubt has its justification, and of course it would be best if they could be reconciled. To do this would be to inaugurate general prosperity; its opposite, in contrast, general poverty, is perhaps the worst thing of all for cultural life. However, that the latter of these tendencies has made progress at the expense of the former in recent times, e.g. throughout the nineteenth century, is incontestable, though it must not be forgotten that this has been connected in part with the powerful economic upturn, the colossal new accumulation of fortunes, as a result of which the danger of a dispersal of property has at least apparently become less of a threat than in past times. Adherents of both these lines, however, probably share the view that once a personal right of possession has been recognized, it should not be interfered with—one consequence of this has been the absolute or relative lack of interference with the right to marital property in modern inheritance tax legislation. Further, they probably agree that at least under present circumstances, the head of a family ought to have the right, as he has also the duty, to give his children as good an upbringing as possible, and in the event of their minority, infirmity or otherwise deficient ability to earn a living, to attempt by other means to provide them with a secure position, more or less corresponding to the circumstances in which they have been brought up. This line of thought finds expression in the relative exemption of direct descendants from inheritance tax, as long as the inheritance does not exceed a certain moderate size. But beyond these two areas, there is an increasing 123

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disinclination in broader and broader circles these days to acknowledge any private right of inheritance at all, except perhaps in so far as considerations relating to the national economy, the risk of destroying productive capital, etc., are felt to have any force. In recent decades, the ideas about inheritance that proceeded from among the Saint-Simonians at the beginning of the nineteenth century, and for which John Stuart Mill was an almost entirely isolated representative among bourgeois economists in the middle of the century, have gained more and more adherents even outside the ranks of the socialists as such. Indeed, when it comes to land, which is essentially the most important class of possession, the inherent logic of things has brought matters to the point that the appropriateness of the private ownership of land has begun to be questioned in pretty well all classes of society.2 Looked at from this perspective, the modern inheritance tax with its two scales of graduation, according to relationship and according to the size of the estate or the inheritance share, can easily be explained, not as satisfying in itself in all respects the demands of a rational tax policy, but rather as a temporary concession to claims that go still further. But if we are right in understanding it in this way, and if we therefore undoubtedly have to anticipate a further development of this form of taxation, then it is also important to be alert in good time to the consequences such a development may bring in its train. One argument against the inheritance tax that was once very common and is probably still occasionally used was that on the one hand it would have the effect of destroying capital, and on the other hand it would deter people from saving and accumulating capital. A possible response to this argument would certainly be that if capital is destroyed in one quarter by the inheritance tax, i.e. if it is transformed by the tax from capital in the hands of the individual into current income and funds to cover current expenses in the hands of the state, then of course in some other quarter the incomes of individuals will be spared from taxation in an equivalent degree and can then in turn be used in the accumulation of fresh capital. Indeed, the attempt has even been made to make us believe—by Wagner, for example—that on the contrary, the inheritance tax would function as an incentive to savings, namely for those who wish to guarantee their descendants a certain amount of wealth after the deduction of the inheritance tax. Neither of these responses in defence of the inheritance tax seems likely to prove completely convincing. In all likelihood, as we should be able to demonstrate in greater detail by a theoretical analysis if space permitted, the compensating factors thus referred to will only make up the deficiency in the capital account caused by inheritance tax in part, but not in its entirety. However, as long as this tax only takes a few per cent of the total value of the inheritance or of the estate, and thus not even a thousandth of the entire total national wealth per year, it would naturally be mere pedantry to attach any great importance to this argument against the tax, given the accumulation of capital taking place at the same time, which is generally much more substantial; 124

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under such circumstances, after all, these losses of capital are not very significant in any case. But it is a different matter if the inheritance tax begins to grow to really significant proportions of inherited wealth. In England, as we shall see, it can amount to as much as 18 per cent in extreme cases, in France an even higher percentage was suggested as an upper limit by Minister Poincaré (with a much lower threshold for this top rate), in some Cantons of Switzerland it can come to 20 per cent, and there is no guarantee that even higher rates will not be imposed in a future reform of the inheritance tax in these or other countries. But of course, under such conditions, in just a few generations the inheritance tax could take a highly significant part of both fixed and circulating capital, indeed in some cases near enough annihilate it. And there is no reason to indulge in the hope that fresh capital accumulation would then always make good what was lacking—all the less so since abundant state revenues have an unmistakable tendency to mislead governments into a wasteful, more or less unproductive handling of the national economy, so that the option of using the inheritance tax to remit other taxes probably generally remains unexploited. In a word, the effect of the inheritance tax in devastating capital and inhibiting capital accumulation ought no longer to be wholly denied, and there are extremely good reasons for questioning the suitability of a tax form of this kind for the direct payment of the current expenses of the state or local authorities. The kind of case that occurred in Sweden a couple of years ago, when the state collected over 1,800,000 crowns in estate inventory stamp from a single estate (the Nobel estate)—more than for all other inheritances together during that year—has to be termed, and was also generally understood as, an anomaly. Why, it may reasonably be asked, should so large a quantity of accumulated capital be destroyed to pay for the expenditure of the Swedish state in that particular year? A still more striking example is said to have occurred in England when the fortune left by the well-known philanthropist Baron Hirsch was assessed for taxes: according to a newspaper report, the share taken by the British state amounted to no less than about 30 million crowns. If, then, the inheritance tax is to be retained at the level it has already reached in some countries, and still more, if we are to be able to contemplate undismayed the further development of this tax that is likely to be on the future agenda, then we ought to look for a specific application for it, corresponding to the true nature of this tax or source of revenue. This application can hardly consist in anything but the accumulation of capital on the part of the state and municipalities; the interest on this capital, of course, but only the interest, can subsequently legitimately be used for current expenses. By this means, first, the sting would be taken out of the fear of the effect of the inheritance tax in destroying capital, a fear that certainly does not lack foundation; the capital still retains its status as capital, it is just that it has been transferred from the hands of the private owner, who is now deceased, into the hands of the community. Second, it is also certain that 125

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private individuals who save money and accumulate capital would regard such an arrangement, by which they would come to be seen as a kind of public benefactor, with far greater satisfaction than if their property, which they may have accumulated at the cost of effort and self-denial, were merely to serve to provide other taxpayers with temporary relief in the year of their death, or perhaps merely to be thrown away on more or less superfluous public expenditure. Finally, we would possess in this measure a means that could not fully be substituted by any other for bringing the social issue closer to its solution in an organic way. As we have indicated, the acquisition of realty, particularly of woodlands, building sites, etc., by the state is becoming a problem that is debated more and more keenly with each passing day, and by no means only in extreme radical circles. There are many proposals for solving it in part or in its entirety, but it is doubtful that any of them can compete for simplicity, inexpensiveness and manifest justice with the proposal advanced here, which of course moreover by no means excludes, but rather can act as a supporting complement to, other measures to the same end. THE INHERITANCE TAX IN ENGLAND Space does not permit a detailed account of the history of foreign inheritance tax legislation, and a bare recital of current legal provisions without any mention of their genesis and interconnections would be of little interest for our purposes. A brief presentation of this kind regarding France, England, Prussia and Denmark, moreover, may be found in the Report of the Stamp Committee of 1893. Our intention is to give a fairly detailed account relating to just one country, namely England. After all, where the inheritance tax is concerned, England can be said to lead the way; it made a thorough reform of its legislation in this area as recently as 1894 (i.e. after the report mentioned above came out), and the historical development of its inheritance tax system, which at first sight is such a patchwork, from modest beginnings to its present colossal dimensions seems to me to constitute a striking example of the course this tax follows in its development, a course we have described as both actual and inherently necessary. In the main, I shall follow in my account the interesting and informative, though not especially readable, presentation of the subject given a couple of years ago by Inhülsen in Conrad’s Jahrbücher (vol. XIV, 1898). A tax on inheritance was first introduced in England in 1694, at a time when governments nearly everywhere were looking around for new sources of taxes. It was collected along with several other taxes in the stamp form that had recently become fashionable, and was set at 5 shillings, regardless of the size of the inheritance or other circumstances. Four years later it was raised to 10 shillings, but not until 1779, i.e. after more than eighty years, was it made variable according to the size of the estate. This stamp was known as ‘probate duty’ or ‘letters of administration duty’. The origin of this 126

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name was that if the decedent had appointed an administrator of his estate, the appointment had to receive the approval of the appropriate court, while if no administrator had been named, the court itself appointed one; the stamp was imposed on the court action by which either of these processes occurred. In Scotland a stamp was put on the estate inventory document itself, and there the tax received the name ‘inventory duty’; this is the real situation in England too these days, but the name ‘probate duty’ was none the less retained until the latest reform in 1894 introduced completely new terminology. The tax rates have been changed and increased several times. Before the latest reform, estates were divided into three classes: £100 to £500, £500 to £1,000, and over £1,000, paying a stamp of 2, 2 and 3 per cent of their value respectively. Estates under £100 were exempt from this as indeed from all inheritance taxes, and those with a gross value not exceeding £300 enjoyed the relief that if the heirs so desired, a fixed stamp of 30 shillings, all inclusive, could be paid. This fixed stamp covered, and still covers, other inheritance taxes, too. Originally the value of the estate was calculated gross, but in more recent times net, after the deduction of the estate’s liabilities. However, with this tax the total estate, not the size of the individual shares in the inheritance, has always been used as the basis for the calculation of the stamp, and of course this fact has significant consequences once the stamp is calculated progressively relative to the sum involved. A few years ago a supplement of 1 per cent known as ‘estate duty’ was added to the highest of the rates cited (making 4 per cent altogether), if the estate exceeded £10,000. Initially, this estate duty—which must not be confused with the ‘(new) estate duty’ introduced in 1894—was merely temporary, but before its term ran out the new reform came with its far steeper graduation. In addition to this tax, which was thus payable out of the estate itself and for more than a century was first proportional to and after that progressive relative to the value of the estate, there has also long been a tax on inheritance shares in England, the ‘legacy or succession duty’, which was and is organized in a quite different way. The origin of this tax was as follows. By English law, one person, the administrator or executor, always represents the estate towards the community. He is responsible for ensuring that the inheritors or beneficiaries all receive their due, and therefore quite naturally requires a receipt from them for portions of the inheritance paid out. A stamp was put on these receipts in 1780, and this stamp was assessed from the outset according to the size of the inheritance share. However, as this led to many abuses—executors and beneficiaries quite simply came to a mutual agreement and omitted to give and receive such receipts—the stamp was replaced in 1796 by a direct tax on the individual inheritance, which received the name ‘legacy duty’, although it includes both intestate inheritance and bequests. This tax was immediately made progressive with regard to the distance of relationship; the present rates are 1 per cent for ascendants or direct descendants, 3 per cent for brothers, sisters and their descendants, 5 per cent 127

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uncle, aunt, etc., 6 per cent great-uncle, etc., and 10 per cent for more distant relatives or non-relatives. However, the tax for ascendants or direct descendants is only payable in exceptional cases, namely when probate duty (or its modern replacement) is not payable for one reason or another. A surviving spouse is always exempt from this tax. This tax thus existed alongside probate duty, a state of affairs that still continues after the reform and renaming of probate duty in 1894. As a rule, we therefore have a case of double taxation here, which English politicians, particularly Sir William Harcourt, have defended with the characteristic argument that probate duty is not an inheritance tax, but rather a share of the property left by the decedent that is due to the state; the inheritance itself only begins after the deduction of this share. However, an additional, highly important fact was that both probate duty and legacy duty were payable only on personal property (and even then only in cases where the deceased had been able to dispose of his property freely). Here, to be sure, it must be borne in mind that personal property has a considerably greater scope both in its definition and in reality in England than in other countries. As for real property, according to English law it passed into the possession of the new owner or heir immediately on the death of the owner, so here the transfer of the inheritance did not come under the management of the law courts at all. For this reason, real property was exempt from the inheritance tax, a state of affairs that persisted as long as landowners continued to dominate in Parliament, or until the middle of the nineteenth century. Among the excuses offered to justify this exemption were the high local taxes payable on landed property in England, since the old principle of all local taxation there, as is well-known, is that tax is only collected on ‘visible property in the hand of the occupier’. Not until 1853 was a tax corresponding to legacy duty introduced for real property; this was called succession duty. However, there was still no equivalent to probate duty for real property; but as a kind of substitute Goschen forced through a measure in 1888 increasing the rates of succession duty beyond the equivalent rates of legacy duty. However, complete equality between the treatment of real and personal property was not achieved even then, and in addition, the tax on real property was calculated not according to the market value of the property but rather according to the value of the returns on the property over the prospective lifetime of the owner or occupier, even when the property was occupied with full rights of proprietorship. Another lacuna in English inheritance tax legislation consisted in the numerous and much exploited ways of avoiding probate duty even on personal property. One of these was, for example, donatio mortis causa, that is where the donee received the right of proprietorship, but not the right of disposal, even before the decease of the donor; another was the establishment of a coproprietorship, to become sole proprietorship for the survivor on the decease of the original owner; similarly, a gift where the right of retraction was 128

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reserved, or where the donor retained the right of use and enjoyment during his lifetime, and so on. Finally, there was life insurance. In 1881 the attempt was made to counter all this by a kind of complement to the individual inheritance tax, called ‘account duty’. Its rates fully matched probate duty rates, but it was imposed in connection with a sworn statement of the value of the property received, which was to be submitted to the tax authorities within a given time after the decease of the previous owner. It should be borne in mind here that England has long possessed something we unfortunately lack, namely, a central authority able to take the initiative in questions of taxation and invested with considerable power, the Commissioners of Inland Revenue, who come under the supervision of the Treasury. Of all these taxes—some of them complementary, though not always fully equivalent to one another, some of them payable cumulatively and concurrently—the only one that now survives in its old form is legacy duty, together with, I suppose, its equivalent for real property, succession duty, which however is now distinguished almost solely in name from legacy duty, since the rates have now been made identical again; in addition, the base for the tax on real property occupied with full rights of proprietorship has now been made the whole of its capital or market value. Probate duty, on the other hand, and its complement, account duty, have been combined into a single tax called (new) estate duty, which also covers both realty and property over which the deceased did not have full rights of disposal. This new estate duty, like its predecessor, is a tax on the estate, and like it, but in a far higher degree, it is progressive relative to the size of the estate (the net residue). The tax on small estates has been reduced: estates between £100 and £500 now pay just 1 per cent (previously 2 per cent), and those between £500 and £1,000 now pay just 2 per cent (previously 2½ per cent). In addition, a new stamp of 50 shillings has been added to the old fixed stamp; the option of paying this new stamp is available when the gross value of the estate lies between £300 and £500. In all other cases, the stamp form has been abandoned and the tax is paid directly in cash. Estates under £100 are still exempt. Estates between £1,000 and £10,000 pay 3 per cent, as previously, but after that the amount rises by degrees from 4 per cent all the way up to 8 per cent, this latter rate being payable on inheritances in the millions—in the English sense (i.e. inheritances exceeding £1 million). Now since legacy or succession duty amounts to 10 per cent in extreme cases (distant relatives or non-relatives), and this tax, as stated, is payable alongside estate duty, it is therefore possible for the property left by a decedent to be taxed at no less than 18 per cent of its value. As for the account duty mentioned above, it has been completely merged with estate duty, in that gifts and similar arrangements are treated in exactly the same way as inheritances or bequests whenever they can be regarded as having been made with the intent fraudulently to avoid the inheritance tax. 129

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A gift made with the retention of some kind of right for the donor, even if he has subsequently relinquished this right, and likewise any gift made during the last year of the decedent’s life are treated as if the property still belonged to the deceased. However, in contrast to the practice in other countries, e.g. France and our own country, there is no taxation of other, real gifts. We shall pass over a large number of details; most of them—among them a tax of 1 per cent collected in certain cases under the name of ‘settlement duty’—are connected with the entails established for both real and personal property that are so common in England. The yield of the tax has surpassed expectations. In recent years it has provided total revenues of £15–16 million, or about 300 million crowns, which, in passing, is about 200 times as much, and calculated per capita of the population over twenty times as much, as our own inheritance tax yields. In the fiscal year 1899–1900—though this may have been somewhat abnormal on account of the war—the inheritance tax yielded no less than £18 1/2 million (336 million crowns), or virtually as much as the income tax in that period, which was assessed at a little over 3 per cent and yielded £19 million. Detailed statistics show that in spite of their small number, the larger inheritances provide a highly significant proportion of this total sum of taxes; real property, on the other hand, though now in principle treated in the same way as personal property, merely accounts for a minor proportion of the total. However, it must be borne in mind that what is called personal property at bottom often represents real property, particularly in England, as the rights of use and enjoyment or leases for longer terms (99 or even 999 years) that are so common there are counted as personal property. A considerable part of the inheritance tax, at present somewhat more than a quarter, is transferred to the local authorities. THE SWEDISH INHERITANCE TAX Inheritance taxes are quite old in Sweden, though in bygone days they were mostly collected for certain specific purposes; this was also the case with other taxes, incidentally. The ‘paupers’ per cent’, for example, was a tax of this kind. It was first imposed as part of the Begging Ordinance of 1698 and was subsequently adopted into the National Law Code of 1734, in which it had priority in accordance with Chapter 17 of the Commercial Code, but it was abolished in 1863. It was payable at per cent of the gross value of the estate, which is justified in the original ordinance by the claim that even if the property left by the decedent goes to the payment of debts, this constitutes ‘good fortune for those affected’—an argument that failed to impress the liberal parliamentary majority of 1862–3. In the same ordinance, it had also been decreed that per cent should be paid on all bequests for the same purposes, and this was to be handed over to the poorhouse supervisor on receipt of the bequest; but this duty seems to have been short-lived. According 130

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to Dahlberg (Fattigvårdslagstiftningens historia [The History of Poor Relief Legislation]), as early as 1663 the government had drawn up a proposal by which considerably higher inheritance duties, amounting to 2 , 3 and 5 per cent according to the degree of relationship, would have been payable for the purposes of poor relief; but this proposal failed to win the approval of the Estates in the following year’s session of the Riksdag, since, according to the notions of that era, all poor relief ought to be a voluntary matter. The estate inventory and distribution duties levied by urban municipalities and intended for the payment of the salaries of the magistrates are also ancient, and are still collected in some places. It was decreed in a Royal Ordinance of 1756 that in all cities except Stockholm and Gothenburg they should be assessed at 1 per cent of all real and personal property comprised in the estate, plus per cent for the partition of the estate. In Stockholm, by special statute, per cent of the total inventory was payable, and this assessment seems also to have been followed in Gothenburg, though there was no special statute there. Now, of course, there are new laws in this area, and in numerous cities these duties were completely abolished in 1868, a move that had already been urged generally at the 1862 parliamentary session mentioned above. Another fee of this kind was the ‘estate duty’, which according to the commitment made by the Estates in 1752 was to be paid at per cent of the net value of the property left by all members of the nobility and the clergy, and by persons of rank and burghers in the cities, and was to be used to pay the salaries of the ‘judicial establishment’, i.e. of the Svea and Göta Courts of Appeals. In 1835 this duty was also extended to Stockholm and Gothenburg, where instead an annual per household duty had previously been collected for the same purpose, but five years later, at the 1840 session of the Riksdag, this tax was abolished, together with its rural equivalent, the chief and district judge annuity, and others. For the general purposes of the state, on the other hand, the inheritance tax long remained without much significance. To be sure, the first Charta Sigillata Ordinance of 1660 already decrees that ‘all wills of common and poor people are to be registered at 16 öre, but the wills of persons of rank at 2 dalers in silver coin’ (about 1 and 4 crowns respectively, in our currency), and these regulations were subsequently extended to estate inventories; but it was not until 1803 that the estate inventory stamp was made at all proportional to the size of the residuary estate, and even then it was extremely low, since it could not exceed 2 dalers 32 shillings (in silver coin) per sheet of the estate inventory, however large the inheritance might be. In addition to this form of tax, which thus still remained a kind of court fee, we had acquired a new inheritance tax in 1789, when general taxes had been raised many times over on account of the war, and legislators were searching high and low for new sources of public revenue. This new tax was a levy on bequests to anyone other than a spouse or heir of the body. In 1789 this tax was set at 131

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just 1 per cent, but in 1800 it was raised to all of 6 per cent and was extended to all bequests, in addition to which all inheritors except spouses, heirs of the body, parents and siblings had to pay 2 per cent (subsequently 3 per cent) of the net property received. At the start of the nineteenth century, then, under the undoubted influence of contemporary English legislation, we had acquired both a probate duty (at least in embryonic form) and a legacy duty. Unfortunately, in our country they both remained stuck at the embryonic stage, which, as far as the levy on inheritances and bequests was concerned, was probably due in the main to the besetting sin of our Swedish tax legislation, inadequate supervision. The history of the estate inventory stamp in the nineteenth century is rather uneven. In 1810 it was set at per cent of the residue of the estate, and the stamp for wills and entails was set at per cent; in 1812 the former was raised to per cent, the latter to per cent. The numerous stamp ordinances of the following years brought no changes; in 1848, on the other hand, the estate inventory stamp was made progressive, rising from to per cent, the latter rate applying to estates with a net value of 50,000 dalers; wills and entails remained at per cent. In 1857 the graduation was increased both upwards and downwards, so that for the smallest residues, 100–200 dalers, the stamp was reduced to per cent, but for residues over 80,000 dalers it was payable at 1 per cent. The next stamp ordinance, in 1860, brought no changes except that the lowest tax rate was extended to residues of up to 1,000 dalers, in addition to which wills and letters of entail were now completely exempted from the stamp—presumably they had not brought in much revenue. In the stamp ordinance of 1863, graduation disappeared again, and the estate inventory stamp was fixed at per cent of residues over 1,000 crowns. In the stamp ordinances of 1874 and 1875, two separate attempts were made to make the estate inventory stamp progressive in rural districts, in order to compensate for the supplementary charges payable to all city and higher courts in the form of service charges. This attempt was abandoned in 1879; the stamp was now set uniformly at per cent of the residue, but instead deductions for service charges were allowed in the cities, and these deductions are still allowed. Finally, in 1884 these taxes were given the form they had at the time of the most recent reform, which we shall soon proceed to talk about. The estate inventory stamp was kept at 50 öre in cases where heirs of the body survived the deceased, but was increased in all other cases to 60 öre, in both cases per 100 crowns of residue; at the same time, for bequests and gifts of real property, which had previously only drawn a title registration stamp of 60 öre, a further 1 crown per 100 had to be paid in stamp, if the donee or beneficiary was more distantly related to the deceased than certain categories, listed subsequently. These amendments seem odd, but they were intended to compensate for the levy on inheritances and bequests that was abolished at the same time. 132

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For in the meantime, this form of tax had developed in precisely the opposite way to its English model. To be sure, the rates set in 1800 were raised in 1810 such that the levy on inheritances was to be paid at 3 instead of 2 per cent, and on newly established entails a tax of no less than 10 per cent of their value was due; however, if the 1859 Committee of Ways and Means is to be believed, this charge seems never to have been paid. On the whole, the supervisory measures related to the levy on inheritances and bequests that were issued in a special ordinance of 1811 were rather unsatisfactory, which is hardly surprising considering that even until very recent times it was permissible to submit estate inventories under seal, and that as a rule, the distribution of an estate is a private matter occurring without any public supervision, and not at any set time, either. However, the high rates continued at least nominally right up to 1861, when at the urging of the Committee of Ways and Means they were reduced, though only to 5 and 2 per cent respectively, instead of 6–10 per cent and 3 per cent respectively. Four years later, however, a further, significant reduction was carried out, namely to just 1 per cent for both bequests and inheritances, with exemptions in the first case for relatives in the directly ascending or descending line, and in the second case also for siblings and their descendants, in both cases for amounts under 1,000 crowns. It was at the 1862–3 parliamentary session that this radical change was decided on; at first sight, it seems to have happened extremely casually, as the result of a motion proposed by a single member from the ranks of the nobility and gentry, who had declared quite frankly in his motion that these taxes lacked any basis in law and were merely a product of ‘envy’, and so on, or, as another speaker in the House of Lords put it, ‘demonstrated an inclination on the part of the state to meddle in the affairs of private citizens’. Although the Committee of Ways and Means was unwilling to subscribe to this assertion unreservedly, it none the less conceded that the proposer of the motion was essentially right, and in this view it was followed by all four estates of the realm. However, the true reason for this radical change must be sought elsewhere. In connection with the tax reform of 1861, in which, as is well-known, the income tax was reduced to just 1 per cent instead of the much higher amounts nominally payable previously, the principle had been introduced that real property was to be assessed at its actual value, which as is generally known was far from the case previously. If the old rates had been retained, the inheritance tax would therefore in many cases have come to several times its previous amount; this was probably also the main reason for the reduction of the estate inventory stamp at the same time. Additional factors were the many cases of tax fraud, which could scarcely be prevented under the regulations then in force. In the 1880 Tax Ordinance, the tax-exempt sum was raised to 5,000 crowns; four years later, as we have already mentioned, the tax was completely removed. The great Tax Adjustment Committee had proposed its abolition in connection with a thorough reform of the Stamp Ordinance; although this reform was dropped, 133

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together with the proposal on the organization and funding of the standing army, the levy on inheritances disappeared for good, and was replaced merely by the small increase in the estate inventory stamp mentioned previously. This, then, was the situation in the middle of the 1890s. The reform of the inheritance tax that then ensued was, like other changes in the Stamp Ordinance, a consequence of the so-called ‘Extraordinary Pledges’, indeed, almost the only part of them that received lasting implementation in a way that at least to some extent, even if imperfectly, accorded with the original tenor of these pledges. Previously at the ordinary session of the Riksdag in 1892, a motion had been proposed, in the First Chamber, for a significant increase in the estate inventory stamp rates then in force, so that for larger estates they would rise to 3 per cent in the first tax category and 6 per cent in the second.3 At the extraordinary session of the Riksdag, this motion was reintroduced by a second proposer, and a further motion was brought concerning the elaboration of proposals for a progressive inheritance tax on more or less the same basis. These motions led the Riksdag to express as its opinion in the well-known communication of 27 November 1892 that, among other things, the inheritance tax was the tax category most suited to the application of the progressive system of taxation; whether it was desirable to go quite as far in applying graduation as had been suggested in the motions mentioned above, the Riksdag was not yet prepared to say definitely—in actual fact, as we shall soon see, the measures taken did not go anything like as far. However, the Riksdag considered that justice and fairness required, first, that smaller fortunes should be exempted, and second, that other factors affecting tax-paying capacity should be given due consideration, such as the number of part-owners in the estate of the deceased and the like, as well as the degree of relationship to the deceased. The Riksdag had thus in fact staked out quite precisely the frame and limits for the future proposal, which in turn did not go further in any regard than the Riksdag had suggested; indeed, in one respect, namely the exemption of small fortunes, it was to prove more niggardly than the Riksdag itself. In connection with the communication of 27 November, a committee was appointed by the Treasury, consisting of Mr Cavalli, Mr Johansson of Noraskog, and the then under-secretary of state Mr Wachtmeister, who is now the Treasurer, which was to elaborate a proposal for the extension of the inheritance tax and for a broader application of stamp taxation as a whole. In the course of this project, three lawyers, Mr Bruzelius, Mr Hasselrot and Mr Restadius, were also commissioned to join the committee members in examining the constitutional proposals that were worked out in connection with the inheritance tax. The committee members received their mandate on 24 May 1893, and submitted their rather lengthy report on 27 October 1893; they had therefore worked with laudable dispatch, but at the same time this haste explains certain weaknesses in the proposal, which we shall point out further on and which unfortunately were not all remedied in the subsequent public debate. 134

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In accordance with the parliamentary statement we have just mentioned, the committee decided to base the tax rate without exception on the value of the inheritance share, the rate being progressive according to its size, up to a certain limit. The closer or more distant degree of relationship was taken into account by introducing three separate tax schedules, one for each of the three degrees of relationship drawn up by the committee. Our inheritance tax was thus supposed to implement within a single tax the two graduations included separately in England’s two inheritance taxes, (new) estate duty and legacy duty. However, a unique difficulty arose here, connected with Swedish family law, according to which the distribution of an estate as a rule is a purely private affair, which, moreover, can be postponed indefinitely if the inheritors agree to do so. Under these circumstances, to attempt by means of taxation to assess accurately the true size of the inheritance shares or bequests would therefore require either far-reaching and costly changes in our civil legislation or else elaborate tax returns from the inheritors to the tax authorities; besides, the latter measure, of course, would not be able to prevent the inheritors from delaying the division of the estate, and thereby escaping taxation at least for the time being. There was therefore no alternative to continuing to have the tax paid in the form of an estate inventory stamp, but to determine the amount of the stamp on the basis of the inheritance shares as computed by the judge at a kind of preliminary distribution of the estate, and this was in fact the solution the committee decided on. Here, however, a further difficulty cropped up, namely that, as we have already pointed out, according to the wording of the Inheritance Code then in force (chap. 9, §4), the estate inventory or a transcript thereof could be submitted to the court under seal, so that its content remained a secret to the judge. So the question arises, how could the stamp be imposed? Well, §14 of the Stamp Ordinance then in force directed that a certificate from the officiators should be attached to an estate inventory submitted under seal, attesting that it had been stamped at the due amount—in passing, this was not a very strict check, since in rural areas and in numerous cities, absolutely anybody could be such an officiator. For this reason the committee members proposed that these regulations be abolished, and that is what in fact happened, so that in the current wording of this section of the Inheritance Code (chap. 9, §4) there is no mention of sealed transcripts of estate inventories. The contents of the estate inventory are therefore always known to the judge these days. If in addition, by way of exception, the distribution of the estate has already taken place before the estate inventory is submitted and is detailed in a document drawn up in due order and adjoined to the estate inventory, then in the view of the committee, which is also now the law, this distribution of the estate should be made the basis for the imposition of the stamp, with the sole reservation that the sum of the distribution of the estate may not be less than the sum listed as the net residue of the estate, together with the adjustments in that sum that the court has to undertake in certain 135

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cases, according to particular regulations. If, on the other hand, as is usually the case, the distribution of the estate has not yet occurred, then the judge— and this was the key point in the proposal—must draw up a simulated, or rather, a hypothetical distribution of the estate on the basis of the information concerning the family affairs of the deceased given in the estate inventory. This distribution is calculated on the basis of the legal provisions and observing the same simplification already in force in previous stamp ordinances, namely that the right of a surviving spouse to half the marital property, together with the benefit of an undivided estate, plus, where applicable, in the case of a wife, the morning gift, are computed at precisely half the residue in the estate, whether they would come to more or less than that in reality. The only real difficulty for an estate distribution of this kind is that the number of distant relatives who are co-inheritors may not be known. In such cases the committee proposed, and the law now decrees, that the tax be computed as if the portion of the inheritance involved went to a single person, i.e. in general at a somewhat higher rate. If, further, a will is adjoined to the estate inventory, or has already been proved and is thus known to the judge when the estate inventory is submitted, then he is required to pay due attention to this will, too. However, it can happen that a will that is not adjoined to the estate inventory is subsequently proved or is accepted as genuine by the heirs without being proved; in such a case, the heirs ought of course to have the right to claim reimbursement from the beneficiaries under the will of the excess payments they had to make when the estate inventory was stamped. However, it can easily happen in such cases that, if the beneficiary belongs to a more distant kinship category, the state receives less in stamp charges in this way than it would have received if the will had been taken into account when the estate inventory was stamped. For this reason, the committee members proposed that when a will that it has been impossible for one reason or another to take into consideration when the estate inventory was stamped, subsequently comes into force, the beneficiary shall not only reimburse to the estate with interest the amount the other inheritors have paid in excess, but shall also make good to the state the underpayment it has received. The latter sum is collected by the state in the following way: if the will is proved after the submission of the estate inventory, then the report of the probate proceedings should be provided by the judge with a stamp that is paid by the beneficiary when he pays for this report. If a will is applied without having been proved and without it having been taken into consideration when the estate inventory was stamped—a case that is incidentally less important—the only solution possible is to propose that within a certain time after the beneficiary’s claim has been accepted by the heirs and the term for probate has expired, he shall himself of his own initiative provide the will—a written will is therefore assumed—with a stamp of the amount due, and shall pay fines if he fails to do so. All this has passed into law and is found in our current Stamp Ordinance. 136

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However, since a will is thus generally stamped before it has yet had time to acquire legal force, in cases where the will is challenged and ultimately declared null and void, repayment must of course be granted of any excess payments the heirs may have had to make because of the difference between the original and final tariffs. For this purpose, as well as to provide recourse for other possible errors, the committee proposed a new article (the present article III) in the Stamp Ordinance: Recovery of Paid Stamp Fees. If we add that the committee proposed, chiefly for technical reasons, that entailed real property should not as previously be listed in the estate directory (though any right of use and enjoyment of the property provided to anyone other than the new holder of the entailed estate should be listed) but was to be stamped separately when an application was made for the registration of the title to the property, then we have probably covered the most important innovations proposed by the committee concerning the organization of the inheritance tax itself, nearly all of which passed into law without modification. However, the committee was less successful when it came to the regulations by which it thought it ought to safeguard and uphold the effectiveness of the proposed enactments. The committee proposed, for example, that for each rural judicial district and for each city that is the seat of a court, special official valuers of the estates of deceased persons should be appointed on an annual basis; the part-owners in the estate were then to be allowed to select whichever of these valuers they wanted. Second, the committee suggested that it should be possible for the estate inventory oath mentioned in chap. 9, §1 of the Inheritance Code to be demanded at the request of the public prosecutor, too. Third, it proposed that chap. 22, §20 of the Criminal Code should also apply to a person causing detriment to the Crown by deliberately concealing any object when the inventory of the estate of a deceased person is drawn up, though this offence was only to be punishable by fines. To be sure, the second and third regulations were introduced, though in the Stamp Ordinance itself (§54, subsection 8), rather than in the general legal code, but the first recommendation was not approved, except in so far as Parliament considered it necessary to introduce some regulations (Stamp Ordinance §15) to guarantee that certain kinds of personal property were valued correctly. As I have already pointed out, another necessary condition for ensuring that an inheritance tax law is effective is that the various ways of getting around the law, e.g. by donatio mortis causa or other gifts, should be prevented as far as possible. In what we have already said we have seen what detailed regulations it has been found necessary to enact in England in this area; the most simple and most consistent course for Swedish law would surely have been to subject gifts, at least when made in connection with death, to exactly the same tax rates as transfers of property by inheritance, as in England. For some unknown reason, however, the committee confined itself to proposing for gifts of both real and personal property three fixed 137

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tax rates, corresponding approximately to the average of the progressive rates for inheritance within corresponding kinship categories, in addition to which, for gifts of real property, the lower of the two title registration stamps previously payable was to be retained. Where a gift of personal property was concerned, however, the tax was to be payable only when the gift had written form, in which case the letter of donation itself should be stamped when it was drawn up. All this naturally reduces this tax form and still more its effects on the prevention of fraudulent evasion of the inheritance tax to a minimum. From the wording of the committee’s motivation it becomes clear that it did not consider it at all possible to subject to tax gifts of personal property made without the use of written form, even though England’s experience has indicated that this is wholly practicable. The tax rates proposed by the committee, moreover, were not accepted, as we shall see. The treatment of gift tax in fact constitutes a substantial lacuna in our inheritance tax legislation and must absolutely be changed, particularly if this legislation is to be capable of further development. This is the chief content of the committee’s proposal. Technically, in spite of certain weaknesses, it has to be described as acute and well thought out; it contains a number of fiscal innovations for which there was no model in the legislation of other countries, and several stratagems that, though bold, have proved successful in their subsequent application and have put the fears that were expressed to shame. In these respects, the praise expressed by a member of the Supreme Court for their work a couple of years ago in the Riksdag was probably no exaggeration. However, if we ask to what extent the committee succeeded in solving the task of fiscal or social policy laid before it, the answer can hardly be so favourable. Only in a single case did the committee dare to go as far as had been proposed in the original motion, namely in the case of inheritances or bequests to those in the third kinship category, where it proposed that the highest tax rate, for inheritance shares of 40,000 crowns or more, should be 6 per cent, the rate at which it was subsequently set. In the second kinship category (parents, siblings and half-siblings and their descendants), however, the committee stopped short at just half the tax rate proposed in the motion, a maximum of 3 per cent, applicable to inheritances of 50,000 crowns or more. Similarly, in the first kinship category (heirs of the body and their descendants, or surviving spouse), where 3 per cent had been proposed in the motion, the highest tax rate according to the committee was again to be just half that, 1 per cent, applicable to inheritances of 75,000 crowns or more. (The lowest tax rate was made per cent in all categories.) To be sure, the committee claims to hold the opinion that there are good reasons for the progressive tax form in a tax of this kind, but maintains it is obvious that graduation should be introduced with great caution: ‘graduation ought probably to remain moderate and thus take on a degressive form; this is probably what accords best with the general way of looking at things in our 138

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country and is also recommended by prudence, since a tax that is suddenly raised very high can easily be resented and always involves the risk of fraud’. It can hardly be denied that in saying this the committee members exhibited a good knowledge of ‘the general way of looking at things’ in the Riksdag, since the rates proposed were accepted by it with a single small exception. However, since the Riksdag itself had expressly emphasized the desirability of implementing the progressive form of taxation in this particular case, and had even held up the original motion as a model, even if it did not desire to commit itself to those particular rates in advance, the committee’s caution seems somewhat exaggerated to us, at least a priori. In this caution it went even further in one respect than the Riksdag itself was inclined to follow. In its communication, as we recall, the Riksdag had expressed the view that ‘small fortunes ought to be exempted’. The committee considered it had satisfied this demand by making the threshold for tax liability an inheritance amounting to 200 crowns, in all three categories. If someone’s entire inheritance from his father or mother comes to just 200 crowns, or even a bit more, we do not usually say that he has inherited a ‘fortune’, unless we are being ironic. At any event, it would surely be called a ‘small’ fortune; and when we consider that the point of the whole reform was supposed to be to find a rational replacement for a tax on wealth that was to be discontinued, namely the land tax and landowner’s army maintenance contribution, regulations by which penury itself would come to contribute its mite hardly seem appropriate. However, the Riksdag did not follow the committee on this point, but instead, as is wellknown, fixed the lowest taxable sum in the first kinship category at 400 crowns, which at least was some improvement, after all. Because of the low maximum rates, the committee was unable in this part of its report to offer any very substantial contribution towards meeting the tax needs arising from the discontinuation of the land tax and the implementation of the new system of army organization and funding. The committee’s own computation in its proposal reached a sum of 1,378,000 crowns, and since the estate inventory stamp then in effect had on average yielded 372,000 crowns, that led to a computed surplus of about 1 million crowns, or just a tenth of the combined yield of the land tax and landowner’s army maintenance contribution. Moreover, the committee’s calculation was rather over-optimistic; only in the last few years has the calculated sum been reached and even somewhat exceeded. The subsequent fortunes of the proposal before it was elevated into law in all substantial respects make short reading. The customary study by the ‘civil service departments’, here the Agency for Administrative Development and the Administrative Court of Appeal in combination, was probably carried out with undue haste and did not add any improvements to the proposal except in a couple of purely formal details. However, this should not lead anyone to believe that the study was favourable to the proposal in other respects; on the contrary, it was purely negative, but for precisely this reason 139

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it remained without any influence on the final outcome. The civil service departments shuddered at the thought of the terrible innovation of a ‘provisional distribution of the estate’ and recommended its utter rejection, assuming that it would be far too difficult and arduous for the judge to carry out. Indeed, this subsequently became the chief objection to the proposal; but the Treasurer had shrewdly already taken the sting out of it in advance by having the committee’s work undergo a preliminary examination by two lower court judges and one judge of appeal. The civil service departments suggested instead that the stamp should be payable out of and calculated according to the total residue of the estate, as previously, but with progressive rates ranging from per cent to 2 per cent of the total value; where there were no heirs of the body these rates were to be doubled and thus range from 1 per cent to 4 per cent. The civil service departments’ argument, incidentally, is rather strange, since it aims above all to show the unsuitability of the progressive tax form, but in spite of this they themselves suggest—progressive rates. In this connection they also emphasize the possibility of tax fraud, but cannot think of any remedy other than a reduction of the tax rates, and for good measure they suggest that there should be no increased taxation at all on gifts, but rather that everything should remain substantially unchanged, a combination that at all events was not exactly suited to prevent fraud. One member, Justice Östberg of the Administrative Court of Appeal, dissented in certain respects and proposed, without giving much reason, a revival in modernized form of the levy on inheritances and bequests discussed previously; as an alternative, he urged still lower stamp rates than the civil service departments had proposed. Except for a few quite minor modifications, the government, on the other hand, concurred in all respects with the committee’s proposal, as far as the inheritance tax itself was concerned, that is; the law proposed by the committee concerning official valuers for estate inventories, which of course would have meant a significant guarantee of an accurate valuation of the estate, also met with the approval of the government, but not of the Riksdag. As for the tax on gifts, the government attempted to steer a middle course between the proposals of the committee and the civil service. According to the committee’s proposal, as the civil service had not failed to point out, the gift tax would have been higher than the tax on bequests where minor sums were concerned, but the reverse where large sums were involved. The government thought it could avoid this objection by partially reducing by half the rates proposed by the committee. But another problem remained, which the Standing Committee of Ways and Means subsequently pointed out and which had probably come into being by an oversight, namely, that with gifts of real property the tax was to be payable on the basis of the gross value of the property, without the deduction of debts, whereas it was to be calculated on the net value in the case of inheritance and bequests. Chiefly for this reason the entire proposed added tax on gifts was dropped, and as far as the actual rates were concerned, 140

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everything ultimately remained as it had been, except that at the suggestion of the civil service the degrees of relationship were somewhat altered, so that the first group came to include only relatives in the direct line of descent. In addition, the category of gifts of personal property, which under present conditions is not very significant, was added. This outcome is regrettable, and was apparently a consequence of the committee’s failure to present a fully reasoned, consistent proposal in this area from the very beginning. It cannot be excused on the grounds that there is no suitable occasion for imposing a stamp on a gift of real property other than at the registration of the title, for in accordance with the committee’s own proposal and current law, the same thing is true of real property held in entail. In the latter case, however, the inheritance tax, though collected in connection with the registration of the title, is calculated according to the net value of the property. The Standing Committee of Ways and Means, which had to comment on the government’s bill, except those parts that concerned the proposed changes in the general legal code which were sent to the Standing Committee on Civil Law Legislation, also concurred in the main with the committee’s proposal (which was now the government’s proposal), with just a few changes. On the whole these may be termed improvements, though small ones. The most important was the raising of the lowest taxable sum to 400 crowns in the first degree of relationship; this we have already mentioned. Another improvement, in my view, is the addendum to article III of the Stamp Ordinance, which we have already discussed, that was proposed by the Standing Committee and subsequently adopted by Parliament—namely, that if the deceased has debts that come to light after the estate inventory has been submitted to the court, reimbursement of the excess stamp duty calculated is expressly granted. The Standing Committee’s report was virtually unanimous. A partial reservation raised by Mr Fredholm, with the intention of saving the tax on gifts by reorganizing it in a more or less rational way, was not taken into consideration. A reservation raised by Mr Rudebeck of the First Chamber had greater significance. It took the form, first, of a letter to the government requesting a new proposal to the effect that the actual distribution of the estate should as a rule be made the basis for the calculation of the stamp, and second, of a provisional inheritance tax law, much the same as that proposed by the civil service, and whose yield would probably have come to a good deal less than that calculated by the committee. This reservation became the watchword of the minority in the First Chamber. However, the Standing Committee’s proposal won, having been adopted shortly beforehand by the Second Chamber without a vote. The debate in the two Chambers of the Riksdag offers little of interest. In the First Chamber, Court Marshal Reutersvärd put his influential voice behind the proposal of the government and the Standing Committee, though 141

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not on the basis of any conviction as to its merits; on the contrary, his intention was that by its failings it should serve as a terrible warning against further taxation of wealth. ‘It can do no harm’, he said, ‘for people in this country to see that when the government wants to impose on us new, burdensome direct taxes, it does not feel particularly pleasant.’ At the same time, in his view, the acceptance of the proposal would prove that the First Chamber was prepared to make sacrifices. At the opposite pole to this position, a statement can be cited of a well-known radical speaker in the Second Chamber during the discussion of the latter part of the Stamp Ordinance. On the whole, a powerful assertion of the justice of the proposed stamp taxes, invoking the promises made in the Extraordinary Session, this speaker’s argument ultimately shot way beyond the mark by claiming that all taxes, however they were imposed, must ultimately fall upon the working class. ‘Labour’, he said, ‘is the source of all capital and all wealth, and no matter how or where you levy taxes, in the end it is still this source of taxes, productive labour, that has to pay them.’ The extremes meet—if the situation were such as this speaker thought, then at bottom, of course, all debates about tax issues would be superfluous and one might as well, once and for all, go along with those who wish to collect all taxes in the form of duties on necessities consumed by the workers. The result of this legislative work, then, lies before us in the 1894 Stamp Ordinance, with which the 1899 Ordinance now in force agrees in all essentials. In externals it is no different from previous stamp ordinances, and the regulations for inheritance tax in particular cannot be found in connected form, but are instead scattered throughout the ordinance. Indeed, in one instance, namely in order to calculate the deduction from the stamp that is supposed to take place when the estate inventory is submitted to a city court, one even has to consult a completely different statute, the ordinance concerning administrative fees enacted by the government without a hearing in the Riksdag (7 December 1883). A compilation and codification of all the relevant regulations has not yet taken place, in spite of the request to this effect expressed in the Riksdag’s 1894 communication. A thorough account of and commentary on the relevant paragraphs of the Stamp Ordinance, which was one of the chief purposes of the lectures mentioned in the introduction, would of course be of no interest to the readers of this journal. I shall confine myself to drawing attention to a few points on which a difference of opinions is either conceivable in theory or has in fact manifested itself in the practice of the courts. If real property is included in the estate, then according to §10 it may not be listed at a lower value than its taxable value in the previous year. Here, then, the question arises, what is understood by ‘real property’? As is generally known, our present Tax Ordinance, as applied in practice, takes this expression in a rather broader sense than our civil law: in civil law, buildings on another 142

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person’s land are classified as real property only in certain cases (cf. the law of 24 May 1895), whereas in the Tax Ordinance they always are. Now which of these conceptions is to be applied here? In support of the narrower interpretation it could of course be argued that the regulations of the Tax Ordinance, like all special provisions, should receive a narrow interpretation, so that, for example, holiday homes built on someone else’s land in general should be excluded from the regulation in §10 mentioned above. But I think this argument is rather too far-fetched. The point of the regulation is surely that the valuation should be based on the true value of property as long as this value can readily be ascertained; there are similar regulations in §15 for certain kinds of personal property—stocks, bonds, and the like—and only where common chattels personal are concerned is the estate inventory compilers’ valuation definitive by law. At the end of §10 it is also stated that notices of tax assessment drawn up as prescribed by the current Tax Ordinance are admissible in evidence where the taxable value of real property is in question, and to a degree this can of course serve as evidence of the close connection intended between this paragraph and the Tax Ordinance. If the property is transferred not with full rights of proprietorship but merely with the right of use and enjoyment, then there is one case in which it is none the less to be stamped according to its full capital value, namely when the property is entailed. This is explicitly directed in the law. Otherwise the stamp is payable according to the capitalized value of the right of use and enjoyment, and the same thing applies to the analogous right to a certain annual income, etc. Regulations for these cases are found in §17 with its six subsections. Usually an annual income of this kind is paid out over a person’s entire lifetime, and then it is capitalized according to the life annuity tables appended to the ordinance. If it is to be paid out simultaneously or successively to several persons over their lifetimes, then the age of the youngest is made the basis for the calculation. All this is simple and clear. However, it can happen that an annual income of this kind accrues to one person, but is directed to be paid out over the lifetime of another person; indeed, it could even happen, even if it probably does not often occur, that the right in question is linked to the lifetimes of two or more (other) persons. The simplest thing here would probably be to apply exactly the same rules, but the relevant passage in the law (§17, subsection (d)) has been framed in a rather unfortunate way. The first half, where only one person’s lifetime is at issue, is formulated in such a way that it can be applied equally well whether the right is to be paid to this person himself or not; the second half, in contrast, where two or more lives are under discussion, seems to assume that only persons are involved who themselves will come into the use and enjoyment of this right, either simultaneously or successively. If we choose to follow the letter of the law, then if a right that accrues to one person is linked to the lifetimes of two or more other persons, subsection (d) would not apply at all, and so neither would the life annuity tables. Instead, the next subsection would apply, which 143

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directs that where the enjoyment of the right is otherwise of indeterminate duration, its capital value is considered to constitute ten times the annual value of the right. This interpretation seems rather unnatural to me. Depending on the circumstances, it could mean the stamp being considerably lower than if even the lifetime of the oldest of the persons involved had been made the base, or, alternatively, higher than if the lifetime of the youngest had been made the standard. However, as I have said, this case probably does not arise very often. Another, connected case is of greater importance. Here the purport of the law appears to be quite unambiguous, but in spite of this, considerable controversies have arisen in court—indeed, two contradictory precedents have been set in the Supreme Court, the latter in a plenary session, recorded in the minutes. If a person has received a certain property (or right) by inheritance or bequest, but another person is also to enjoy certain benefits in it, then subsection (f) directs that the stamp fee shall be calculated merely for the value of the property (or right) that remains after the deduction of the estimated value of the benefit accruing to the other person. The application of this ruling presents no difficulties except in one case, namely, if the benefit in question consists of the right of use and enjoyment of the entire property over a certain period or for life. This would of course lead to the at least apparent injustice of the definitive owner having to pay inheritance tax on property of which he has not yet taken and perhaps never will take possession. This was criticized previously during the discussion of the proposed law in the Riksdag, and the considerations of fairness mentioned then were probably at bottom the real reason for the peculiar treatment given this case by our courts when it first arose. Mrs. L. af G. died in 1895 leaving her estate to her nephews and nieces, and to an unmarried half-sister E.T. It was directed in her will (which gained legal force) that E.T. should receive the returns on the deceased’s fortune until her death, after which the property was to devolve to the nephews and nieces mentioned ‘to be divided among them as the law directs, as their inheritance’. The public prosecutor in the Svea Court of Appeals (to which the estate inventory was submitted because the deceased was a member of the nobility) considered that E.T. should have to bear stamp duty according to §17, subsection (b), i.e. for her right of use and enjoyment, while the other heirs should pay stamp duty according to subsection (f) of the same paragraph, which we have just discussed. However, the Court decided by three votes to two to stamp only E.T.’s right of use and enjoyment, capitalized in the way prescribed. The minority was of the same opinion as the public prosecutor, namely that §17, subsection (f) should also apply. The public prosecutor appealed to the Supreme Court and demanded that the case be remitted to the Court of Appeals for restamping. The Court of Appeals argued in its statement to the Supreme Court that according to the will only E.T. had received any right to the estate; the other inheritors were excluded from it in E.T.’s lifetime. Only when she died, when the property, to the extent that it remained intact, was to be distributed as the law directed among those heirs of the body of L. af G.’s siblings that were still alive, and when the property in consequence would be listed in E.T.’s estate inventory after her death—only then ought the shares of these heirs to be 144

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stamped; this was all the more essential since the size of these shares could not yet be calculated, as it was impossible to know in advance which of L. af G.’s heirs would survive E.T. If the public prosecutor’s interpretation of the law were applied, the Court of Appeals argued, it could happen that if the property were misappropriated or went to waste in some other way, the heirs would already now have to pay taxes on property they would never possess. The same situation could arise even if the property were maintained in unchanged condition, by changes affecting the persons of the heirs. In the opinion of the Court of Appeals, §17, subsection (f) of the Stamp Ordinance only bore upon cases where a person received a certain property or right by right of inheritance or bequest, but another person was also to enjoy certain benefits in it. A statement was also solicited from E.T., who concurred with the opinion of the public prosecutor. In her view, the total sum of the estate inventory was the direct object of taxation, and not the portions of the individual heirs. The stamp could not be collected after her death since the inventory of her estate could not list property she had never owned. If such stamping were to occur at that time, a case of double taxation would arise, since the heirs would then have to pay taxes on the entire residue of the estate.4 Two of the part-owners of the estate, on the other hand, urged ratification of the decision of the Court of Appeals. The Supreme Court (ruling of 10 September 1897) was also divided, but for somewhat different reasons. Three members found no cause to alter the decision of the Court of Appeals. One member considered that the suit brought by the office of the public prosecutor was not in conformity with the law—in effect then agreeing with the first three members. However, the last three members were of the opinion that the property had been given to E.T. ‘in the form of an estate in entail’ and ought therefore to have been stamped according to §18, as if it had been given with full proprietorial rights; they therefore found there was legal cause to remit the case to the Court of Appeals for supplementary stamping, within the limits of the sum argued for by the public prosecutor. Judgment was passed in conformity with the opinion of the first three members.

In this case, then, the Supreme Court unambiguously expressed the view that if the right of use and enjoyment to a certain property is awarded to one person, but the right of proprietorship to another, to take effect on the death of the first person, then only the capitalized value of the right of use and enjoyment should be stamped in the first instance, and nothing more. However, just six months after this ruling a plenary session of the Supreme Court (11 May 1898) set a precedent which, as far as I can see, is based on an interpretation directly opposed to the one which dictated the outcome in the previous case. In this case a person who had died leaving his estate to his widow and children had directed in his will that his widow should ‘retain undivided possession of the estate’, i.e. enjoy the returns on the estate until her death. The judge in the court of first instance had put a stamp only on the widow’s right of use and enjoyment, which when capitalized of course amounted to less than the husband’s half of the estate; he had thus refrained from stamping the remainder of that half. After proceedings initiated by the office of the public prosecutor, the Supreme Court declared that according to §8 of the Stamp Ordinance, the estate inventory should have been stamped for the total sum to which the husband’s portion of the residuary property in 145

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the estate had amounted, and that the judge’s procedure had thus ‘not comprised a correct application of the relevant regulations in the said Royal Ordinance’. (However, because of the supposed lack of clarity in the regulations, no liability to pay compensation was imposed.) A third related case was decided on 20 February 1900. This case involved a joint will, according to which the surviving spouse was similarly to ‘retain undivided possession of the estate’, then when both spouses had died a certain sum of money was to be delivered to the city council for the creation of a charitable fund. The will was proved by the city council, but not by the surviving spouse, and when the stamp was imposed the will was completely disregarded by the city court. The Göta Court of Appeals stated after proceedings brought by the office of the public prosecutor that the city court should have applied §17, subsection (f) in this case, and ordered the mayor and councillors to make good the missing stamp. The Supreme Court on the other hand found that the mayor and his colleagues ‘have not been guilty of any misconduct in this respect’—an expression that seems susceptible of opposing interpretations, depending on the circumstances, and for precisely this reason provides no guidance for future judgements. We thus find that great uncertainty and obscurity prevails even in everyday cases such as this. However, here it would be unfair, in my opinion, to put the blame on the Stamp Ordinance, the relevant regulations of which hardly require any clarification. The problem is rather in our civil legislation, which has failed to draw up with sufficient precision the boundaries between such concepts as proprietorship, the right of use and enjoyment, the right of disposal and the right of entail, and leaves in the dark what ought or ought not to be counted as part of the estate of a deceased person, or what legal consequences follow on the very common directions as to ‘retention of undivided possession of the estate’, with or without a joint will. By making these failings fully apparent, not just to the parties affected but also to the judges themselves, our present Stamp Ordinance may perhaps provide the impetus for necessary reforms in this area, and will then have brought in its train a great good, though one that was not foreseen by the legislators. One question on which the Stamp Ordinance observes a complete silence is whether or not Swedish citizens’ assets in other countries, which have already been subjected to inheritance tax in accordance with the rules in force there, can be excepted from the residue of the estate for the purposes of stamping, and, if they may not be excepted, then whether at least the tax paid in foreign countries may be deducted from the residue. In the absence of positive regulations, the former question can hardly be answered in any way but in the negative; international legislation is an urgent desideratum here as in most areas of private law. The latter question, however, seems to be a quite reasonable demand: what falls to the heirs before they have paid tax is after all merely the original residue minus the foreign inheritance tax, and the latter could probably then best be regarded as a debt of the estate 146

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alongside its other liabilities. It would probably also be possible to adduce various analogies from other areas of taxation in support of this interpretation. However, in the celebrated case of the stamp on the Nobel estate, both questions were answered in the negative by the Supreme Court (10 April 1899), though the latter by just four votes to three. Even the former question received at least one yes-vote in the course of the case, namely that of the President of the Svea Court of Appeals. As is generally known, a motion has been proposed in the present session of the Riksdag by Mr P.Leman for a change in the relevant regulations of the Stamp Ordinance. Another question that came up for discussion on the same occasion is whether stocks and bonds can be stamped by the judge at a lower value than that at which they have been listed in the estate inventory if the latter value can be proved to have been too high. This was what the administrators of the estate urged; they argued that the estate inventory had merely been provisional or nominal, for the purposes of confirming the actual amount of the foreign tax, and that the bonds had in fact decreased in value since their valuation abroad. However, the Supreme Court disagreed. In this connection it may be mentioned that according to a precedent of 6 September 1898, when the valuation of bank shares was at issue, a statement from the board of the bank certifying the value of the shares at the time was considered to take precedence as evidence over the records of the Stockholm Stock Exchange for the same date. With the exception of the cases discussed here, no difficulties in calculating either the residue of the estate or the individual shares in the inheritance— and consequently in calculating the amount of the stamp—have arisen as far as is known.5 So far there has not been the least report of the difficulties in making these calculations that it was predicted would defy the acuity of lower court judges. Only in one further respect has a certain difference of opinion been revealed, and as it concerns a question of great social significance, and also in my view a real error or oversight has been committed on the part of the legislators, I think it necessary to discuss it in somewhat greater detail. In Swedish law, so-called illegitimate children have no right to inherit except in some cases from the mother. However, there is nothing to prevent their being remembered in a will, at least as long as this does not encroach on the ‘lawful portion of heirs of the body’. Now the question is how a will of this kind should be stamped: according to the lowest schedule of rates, which applies to heirs of the body and persons on an equal footing with them, or according to the third and highest schedule, which applies to more distant relatives or non-relatives? On 5 February 1897, the Supreme Court pronounced itself in favour of the latter alternative, without the least hint of any differences of opinion, and undeniably general linguistic usage supports this line, since of course a person who by law is precluded from inheriting, at 147

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least in the absence of a will, can hardly be termed an heir of the body. However, the following points should be observed. In the Stamp Ordinance in force before 1895, there were identically worded regulations for bequests and gifts (of real property), to the effect that when the property in question was presented for title registration, it was to be stamped at 60 öre per 100 crowns when the property had been given or bequeathed to a surviving spouse, relatives in the direct line of ascent or descent, siblings or their descendants, and certain public foundations; in all other cases, the stamp was to amount to 1.60 crowns per 100 crowns of the property’s value. This statute still remains in place for gifts (now of both real and personal property), except that the first of the two categories, as mentioned in our discussion above, has been restricted to just relatives in the direct line of descent. Now in a judgement of 2 February 1892, the Supreme Court declared that illegitimate children should also be considered relatives in the direct line of descent, and that this is still the opinion of the Court can be seen from a recent judgement of 13 November 1899. Now on the basis of these precedents, gifts to illegitimate children will therefore be stamped at just 60 öre per 100 crowns, whereas bequests to the same children may be stamped at as much as 6 crowns 60 öre per 100 crowns, i.e. at more than ten times the amount; and while illegitimate children are entered in the most-favoured category where gifts are concerned, ahead of the sibling degree, when it comes to bequests they are placed in the least-favoured category. It cannot be supposed that the legislators have created such a serious and almost absurd inconsistency on purpose—it has, rather, obviously come into existence through an oversight. Of course, the members of the committee are not to blame, for in the original proposal, as we saw above, the gift stamp was given exactly the same three relationship categories as the estate inventory stamp. The committee members are also fully aware that, by their proposal, illegitimate children are placed in the outermost group. They themselves concede that ‘this may seem harsh’, but consider it ‘inappropriate to deviate here from the foundations on which civil inheritance legislation rests’. However, a ‘deviation’ of this kind, or whatever it should be called, had already occurred in the precedent of 1892 cited above, and in order to avoid the ‘harshness’ they regret, the committee members would consequently have needed only to retain the terminology that already occurred in the old Stamp Ordinance, namely, ‘relatives in the direct line of descent’ instead of ‘heirs of the body’. It is therefore the committee members themselves who, whether wilfully or not, have here given occasion to a reactionary step in our legislation, a step antithetical to public opinion that is becoming more and more unanimous. Let us hope that the ‘change in the civil law’ that the committee imagines may be possible in this connection may not be too long in coming, but pending that change, a small editorial amendment to the relevant regulations in the Stamp Ordinance, pointing in the right direction, would certainly not be a bad thing. 148

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This probably covers most of what may be of any general interest as far as the legal aspects of the inheritance tax law are concerned. All that remains is to express a few desiderata concerning its future form, from social and fiscal perspectives. As we have already mentioned, the yield of the tax is comparatively low. Over the first four years after the passing of the law, the estate inventory stamp itself, which is the main form of the inheritance tax, amounted to just under 1,300,000 crowns on average, after the deduction of ‘administrative charges’. As far as I have been able to check them, all the other forms by which inheritance tax is collected combined, including taxes on estates in entail and gifts (of which a part, moreover, has to be regarded as title registration fees), together came to less than 150,000 crowns per year, so that the total revenue brought in by the inheritance tax is presently less than 1 million crowns. In comparison with the sums collected by this form of taxation in other countries, particularly in England, this is of course a mere bagatelle, and even compared with other tax sources in Sweden, the inheritance tax must be said to be one of the least profitable. Of course this is partly because of the country’s lack of capital wealth, but another major factor consists in the tax rates, which remain extremely low, particularly within the first two degrees of relationship. Perhaps a further circumstance is also of significance. As will be recalled, a few years ago a motion was presented in the First Chamber to the effect that the inheritance tax stamp rates ought to be revised and in general lowered. The motion did not exactly win much support either in the Riksdag or elsewhere, and probably did not deserve much support either, as far as its chief purpose was concerned. However, it included, as did also the subsequent parliamentary debate, several useful hints as to the ways in which the inheritance tax law can be evaded, particularly by means of gifts, e.g. in their most modern form: placing the property in shares and giving away the shares inter vivos. That these and similar ways of evading the tax in fact are used to a not insignificant degree seems to be confirmed, among other things, by the fact, which was also pointed out in the First Chamber, that it is precisely the two more distant categories of relationship, where the tax is highest, that have provided far lower tax revenues in both absolute and relative terms than was calculated by the committee. One speaker in the Second Chamber tried to explain the unexpectedly low yield of the inheritance tax by the fact that smaller inheritances are treated more leniently under the new Stamp Ordinance than previously. For this argument to hold, the average number of inheritors in the second and third kinship categories would have to be considerably more than five for each estate to which there are no surviving heirs of the body. It is possible that this is the case, but even so, it can hardly be a reason to reduce still further the very moderate tax-exempt sums allowed; instead, an increase in these sums would be very desirable, at least for the first degree of relationship. Above all, the rules ought to be relaxed where 149

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minors or other persons unable to work are involved; it can even be assumed that something of the kind was the intention of the Riksdag from the outset, since in its communication it had added after ‘the number of part-owners in the estate of the deceased’ the words ‘and the like’. Nonetheless, if graduation were increased to the level that has either already been introduced or has been proposed in several other countries, our inheritance tax ought to be able to bring in at least four or five times its present yield. Even then, it would still be one of the least productive in Europe—though no longer, as now, the least productive of all. Its yield would, for example, be not even a quarter as large as in England, calculated per capita of the population. However, in my view a still more radical remodelling of the inheritance tax or the right of inheritance would be desirable from the point of view of social policy. Such a development would also be quite free of risks if, as I have already elaborated, the yield of the tax were not used in its entirety to pay for current outlays but were rather for the most part employed as a means to accumulate capital in the hands of both the state and the municipalities. But it is obvious that any further development of the inheritance tax necessarily requires stricter controls on its collection and increased safeguards to prevent evasion. As far as the former are concerned, the measures proposed by the committee for a dependable valuation of the estates of deceased persons probably deserve more attention than they have received. At present no punishment is prescribed even for intentional false valuation of an estate, since the regulations in §54.8 for fines to be imposed on a person deliberately concealing an asset or giving other false information when declaring the estate of a deceased person can probably not be applied to the compilers of the estate inventory. Concerning the second point, the principal requirement is a rational and consistent treatment of the tax on gifts. As we have already emphasized, this tax was left as it were in status quo when the new stamp law was enacted because of inconsistencies in the proposal. Possibly it might be appropriate when remodelling this tax to limit its application, as in England, to cases where the gift has been made within a certain period prior to death, or else under such circumstances or conditions that it is obvious that the intention is to get around the inheritance tax law. But in that case it must be demanded all the more emphatically that all kinds of such gifts, including gifts of personal property where no written deed of donation has been drawn up, be made the subject of taxation. What is feasible in England can surely not be considered impracticable in Sweden; but the sine qua non of this as of all effective tax supervision in general is the introduction or, if it is preferred, re-introduction—for it was first introduced in 1809—of an institution whose opponents have managed to keep it out of our direct taxation for a century, much to the detriment of our system of direct taxation, namely the personal income tax return. Whatever arguments may be brought against the personal income tax return, they weigh feather-light against the axiomatic truth that equality and justice are the supreme principles of taxation, and that the 150

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realization of these principles has in fact proved impossible without the aid of this supervisory measure. It is also revealing that the English nation, which has shown itself to be more sensitive than almost any other when it comes to personal liberty and respect for the sanctity of private life, has precisely on this point led the way with a measure for tax supervision that intervenes more deeply in the affairs of private life than perhaps any other country. In return no efforts should be spared to adapt the payment of the tax as far as possible to the nature of the different kinds of transfer of property it is intended to reach. This would fulfil the third of Adam Smith’s well-known maxims of taxation, which is by no means the least important, namely that a tax should always be made as convenient to pay as possible. Thus, in the case of inheritance tax on real property, it ought to be permissible, as in England, to pay the tax in a series of annual instalments. The same thing applies, to an even greater degree, to estates in entail, where the newly installed holder of an entailed estate, who moreover often has to go into debt to acquire stocks, does not even have any guarantee that the sacrifices he has to subject himself to in order to pay the inheritance tax and the title registration stamp can be fully recouped before the property at his death perhaps passes to a very distant branch of the family. To be sure, it is true that in this and similar cases the object of taxation generally has a considerably higher ‘mathematical’ value than the actual tax, so that the taxpayer ought to be able to protect himself from losses by appropriate credit and insurance operations; but this is not completely certain, and at all events it seems most appropriate that the state, which has the broadest shoulders, should also be the party that bears the risk. Finally, I wonder if it would not be possible to simplify the public accounts by dropping completely the venerable tax on morning gifts, which has been payable for nearly a century at a constant per cent of the gift’s value, but at present does not yield the state more than about three crowns per year, and indeed in one year (1896) did not even exceed the modest sum of—25 öre.

NOTES 1 My views on this topic have undergone certain changes in recent years (cf., for example, my Finanztheoretische Untersuchungen, pp. 146ff), though the differences are not very substantial. 2 An amusing example of the confusion that these conflicting opinions can give rise to in the thoughts and ideas of one and the same person is provided by the German author Eschenbach, whom I have already mentioned. In his little work on ‘Erbrecht und Erbschaftsteuer’ [The Right of Inheritance and Inheritance Tax]—incidentally, as he himself concedes, a rushed job—he energetically argues against the maxim advanced by Montesquieu that, although parents have a natural duty to bring up their children, they have no duty to leave them a rich inheritance, a maxim whose general application according to Eschenbach would ‘debase man below the level of the beast’. But surprisingly enough, the same Eschenbach declares himself 151

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convinced that the private ownership of land, as a cause of great and manifest evils and injustices, must sooner or later come to an end. Hence it must actually be the private ownership of personal property, stocks, bonds, etc., that distinguishes man from beast… 3 The proposer of the motion, District Judge H.Claesson, declared in the debate that he personally wanted to go still further, namely to a maximum of 5% for the first and 10% for the second category of relationship. 4 What the author of this plea meant by this argument is not quite clear to me. If the stamp were purely proportional, there could hardly be any question of double taxation here, for the higher stamp due after E.T.’s death would of course mathematically speaking be precisely counterbalanced by the gains from interest that had accumulated in the meantime. However, as the stamp rates increase progressively for higher sums, full compensation would not be attained, and possibly this is what E.T. or her lawyer meant. 5 In the report of the Parliamentary Ombudsman for 1900, which has just come out, there is mention of a relevant case in which no final judgement has yet been reached. However, here too what is involved is at bottom a lacuna in our civil legislation that could not have been remedied even by the most precise directions in the Stamp Ordinance.

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In a pamphlet published not long ago by Professor J.Thyrén, entitled Swedish Politics (1911), which is a summary of the author’s campaign speeches last autumn, there is a statement (on page 10) that should not go unchallenged by the economics community. It reads as follows: In passing, I should like to point out that the constant emphasis on the incontrovertible fact whereby in addition to direct taxes, workers pay quite considerable amounts in indirect taxes, particularly through price increases due to tariffs, is all too seldom supplemented by asserting the equally incontrovertible fact that workers’ wage standard could no more be envisioned as having come anywhere near what it is, were it not for tariffs, than it could be expected to be maintained, if they were abolished. This must surely imply that workers do not once and for all have to bear the entire amount of the indirect taxes which, levied on the dutiable necessities they consume, accrue to the state, but are at least partially compensated by the wage increase which tariffs are said to generate; hence workers would, as the term is phrased, shift their taxes to other social classes or, in any case, to some extent shed them from their own shoulders. As regards this conviction, Professor Thyrén can, of course, refer to very eminent authority. Adam Smith and David Ricardo are names which are uttered with respect by every economist, although both Smith and Ricardo were convinced that taxes levied on workers’ basic necessities are, in reality, not borne by the workers themselves, but are shifted on to others. However, Smith’s line of argument relies wholly on physiocratic doctrine, according to which workers’ wages more or less invariably remain at a subsistence level. If the purchasing power of wages began to fall below this measure, as a result of higher prices of basic necessities due to taxation, then, says Smith, the consequence would be higher mortality (in particular higher infant mortality) or a declining rate of matrimony and increasing emigration among the workers’ Originally published as ‘Tullar och arbetslöner’, Ekonomisk Tidskrift, 1912.

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ranks; according to the law of supply and demand, wages would gradually rise until, even at these higher commodity prices, they reached a subsistence level. If, instead of bare subsistence, one wished to set some accustomed standard of living, tenaciously adhered to by the workers, the argument would be the same, except that the former reason for a relative decrease in the labour supply (higher mortality) would then have less latitude, whereas the other two (postponed marriage and emigration) would increase in importance. So, in any case, ‘compensation’ could not take place until after an interval of more or less grievous suffering by the working class; in addition, it may be questioned whether such a procedure can measure up to being termed tax incidence; because precisely the same wage increase would surely have arisen if, at unchanged commodity prices (that is, without tariffs or domestic consumption taxes), the number of workers had been reduced to a corresponding degree. At all events, the effect of these indirect taxes has become a lucrum cessans [an unrealized gain] for the workers, even if not a damnum emergens [a newly arising loss] (not counting, of course, the unavoidable ‘damnum’ of the transition period itself). However, in Chapter 10 of his Principles, Ricardo, who on the whole agrees with this theory of Smith’s, attempted to show that a wage increase, corresponding to the higher price of basic necessities due to taxes, could also arise immediately, without any preceding reduction in the number of job applicants. But his argumentation in this context is so unclear and to some extent even self-contradictory, that it can hardly be accepted; nor has it, to my knowledge, been adopted by any latter-day economist.1 If one simply adheres to the theory of marginal productivity, according to which wages are in general determined by the ‘extra product of the last worker to be employed’, then it seems obvious that if the state appropriates part, say 10 per cent, of the products manufactured—and this, of course, is the ultimate meaning of indirect taxes—then the marginal productivity of labour has actually been reduced by 10 per cent, and wages (i.e. real wages) have to decline correspondingly all along the line.2 This, however, primarily concerns domestic taxes on production or consumption (in Sweden, taxes on aquavit and malt liquor, as well as the domestic sugar-beet excise), and Professor Thyrén has not explicitly stated, perhaps has not even implied, that these taxes could be shifted on to others by consumers in the working-class population. Tariffs, of course, constitute a somewhat more complicated story, but not to such an extent that it would be impossible to form an approximate idea of their effects. By tradition, there is a distinction between so-called fiscal duties and protective tariffs; the former are imposed on goods which are not at all or could not readily be produced domestically, such as coffee, spices, southern fruits, better kinds of tobacco and many others. Here, the entire tariff accrues to the state and price increases affect all consumers of these goods as an indirect tax. Could workers for their part be compensated for this by higher wages? Hardly, 154

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because the price of our domestically produced goods is not increased through these tariffs (more likely the contrary, due to lower demand from abroad); how then would the workers employed in such production obtain higher wages? But this should hold true for all tariffs, even protective tariffs, to the extent that they serve as fiscal duties, i.e. to the extent that they make foreign goods more expensive without completely blocking their importation. Even in this instance, the price level of domestically produced goods, by means of which we purchase and pay for these foreign commodities, would not be changed, much less improved. These tariffs could not have an increasing effect on wages to any greater degree than, as we saw, in the case of ordinary fiscal duties. It remains to consider purely protective tariffs, i.e. their effects on the price of domestic commodities protected by tariffs, whereby, for simplicity, we could conceive of these tariffs as being so high that they actually shut out all imports—as is approximately the case with respect to the duty on sugar. Indeed, what we have to say about this could, in principle, apply equally well to those tariffs which only partially block foreign imports. Since this effect obviously moves in the direction of increasing prices, one could be led to believe that wages would also rise to a corresponding degree. On the other hand, these tariffs (i.e. purely protective tariffs and others, to the extent that they act as protective tariffs) do not provide the state with any income; consequently, in order for tariff protection in its entirety to afford compensation for workers’ indirect taxes—and it does not seem possible, I repeat, to attribute any other reasonable implication to Mr Thyrén’s words— then protective tariffs as such evidently have to be dedicated to raising workers’ wages, not only on a level with the increase in prices of domestic consumer necessities to which these tariffs give rise, but also above that level. A moment’s reflection, however, should suffice to show the unfoundedness of such a view. If anything, it may be called into question whether even the highest protective tariffs could raise workers’ wages by a single öre. It is quite clear that a tariff, by itself, cannot cause any price increase. Rather, in addition, the production in question (as long as it is not the object of a domestic monopoly, either legally or merely de facto) has to be associated with such great natural impediments that tariff protection is the only way it can become profitable, to an extent corresponding to consumption needs, or at all. If there are no such impediments, then even if it is attempted, tariff protection would obviously have no effect whatsoever. But if obstacles do exist, then the productivity of labour in this sector, or at least its marginal productivity, according to which wages are determined, would decline to precisely the same degree that the price of the commodity has risen and, from an economic point of view, there would be absolutely no possibility of a wage increase. The force of this argument is enhanced if one bears in mind that numerous branches of production cannot benefit from tariffs at all, namely our natural export industries as well as the entire production of 155

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goods which, even in the case of free trade, would not be imported. Wages could not rise in these branches either, although under the assumption of sufficient mobility of labour, wages would not be appreciably higher in one branch of production than in the other, (it goes without saying that the fortunate owners of a tariff-protected production monopoly are no more inclined to offer wages higher than those they are forced to pay because of competition on the labour market.) It would probably be worthwhile to try and illustrate this by means of a simple, although fictitious, numerical example. Even if such exercises cannot be accepted as full proof, they are in general highly instructive; many economic theories, which are now regarded as sound, could not be maintained for an instant if they were arranged in the disobliging guise of numbers or algebraic symbols. We imagine a country which, due to natural conditions, is constrained to produce a single good or group of commodities, let us say food. For the sake of simplicity, we also assume, for the time being, that the law of relatively diminishing returns is not yet in evidence, even in agriculture, and hence that there is no rent in a strict sense. Under free trade, the country in question would consume, let us say, 75 per cent of its own food production, and advantageously exchange the remaining fourth for the industrial products of other countries. However, we also choose to assume that a duty, corresponding to 100 per cent of the value of the commodity, would be sufficient to block the import of these industrial goods, although it would also be necessary in order to make domestic production of the goods profitable. If a duty were now introduced, the supply of both food and industrial products in the country as a whole would obviously be lower than during the free-trade era. This is because half of the total productive power of the country would now be required to produce the same quantity of industrial goods as before; then only the other half would remain for producing food, so that food consumption would have to decrease by approximately one-third. It is easily seen that food consumption could not revert to its previous level unless consumption of industrial goods were reduced by half of its former volume. Therefore, another distribution would probably occur whereby, for example, 60 per cent of the country’s productive power is devoted to producing food and the remaining 40 per cent to producing industrial goods. In other words, total consumption of both commodity groups would be reduced by exactly 20 per cent. It then seems likely that even the real value of wages would decline in about the same proportion. Basically, it would not matter how the prices of both money and wages behave in this context. If we assume, however, that the price of agricultural products has remained unchanged, then the price of industrial goods would have doubled. But since the direct production of industrial goods also requires twice as much labour per unit as was formerly required for indirect acquisition of such goods through exchange, then there is no scope for a wage increase in either of these sectors of production. Hence, 156

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the increase in the price of industrial products generated by tariffs will strike a heavy blow to the workers—to the extent that they are consumers of these goods. In reality, however, the result of a case such as this would be somewhat less unfavourable for the workers. Agriculture is in fact governed by the law of diminishing returns; therefore, if one-sided agricultural production is suppressed, then the marginal productivity, and thereby wages, increase. Perhaps this increase could wholly outweigh the rising price of industrial goods which are tariff protected, although workers’ demand for them is relatively lower. Thus, in an agricultural country, a system of industrial tariffs could actually be advantageous to workers, in the sense that it would delay the transition to less fertile land and the subsequent emergence of a rent. But an opposite result will occur when, as in our country or other Western European countries, food production is safeguarded by high tariffs. The rent then rises at the expense of wages. Another important factor is that a price increase affects precisely the consumption good which is indispensable even to a worker and which, in practice, claims a much larger share of his income as compared to other social classes. Our conclusion is thus considerably different from the one drawn by Mr Thyrén. It is by no means given that protective tariffs are at all able to raise workers’ money income, and it is as good as certain—at least with respect to conditions in our country as well as other (West) European countries—that they cannot achieve this to a degree which would correspond to the increase in the price of tariff-protected, domestically produced goods, much less provide compensation for the workers’ indirect taxes. NOTES 1 See, for example, my Finanztheoretische Untersuchungen, pp. 68ff [editor’s note: see also ‘On the Theory of Tax Incidence’, Chapter 5 in this collection]. I also take the liberty of referring to this thesis for further explanations of some subsequent statements in the text. 2 Admittedly, this is not wholly exact; rather, as shown in the above-mentioned essay, the result should also be reinforcement of a capitalistic feature of the production process (extension of the production period). The consequences hereof are of secondary importance, however, and can probably be ignored in this context.

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In the most recent issue of Statsvetenskaplig Tidskrift, a lengthy essay by F.Brock appeared on this subject, or a part of it.1 Brock’s immediate concern is the well-known Social Democratic bill in last year’s parliamentary session, proposing a general reduction of tariffs by 10 per cent in order to combat ‘the present high prices’, and what he wants to show is that a measure of this kind could not bring the working population of this country more than temporary relief at the most—and even this would be at the expense of their class brothers in other countries and attended by various disadvantages for industry and therefore in the long term also for the workers themselves. Some of the reflections Brock makes in this connection are probably quite correct, for example that the current wave of rising prices is not caused exclusively, and in the international perspective is not caused at all, by the tariff system, but must rather be attributed to other causes, above all the heavy production of gold. In the main, however, I find his account extremely misleading, and since an issue of major social importance is involved, I am of the opinion that it should not be allowed to go unchallenged. If I have misunderstood Brock on any point—though I do not believe this is the case— I shall be happy to admit it, if he is prepared to explain what he means more clearly, e.g. in the follow-up article he has promised. Brock begins with a detailed and accurate account of what is known as the theory of comparative costs in international trade and draws from this— or perhaps more precisely, appears to draw—the conclusion, which is also quite correct, that a so-called universal protectionist system, i.e. a system intended to protect all branches of business equally, is an absurdity. He says: Once one has become aware of these primary, fundamental truths, and has subjected them to careful thought and examination—and this cannot be recommended too warmly to all those who have any desire to express an opinion on issues of tariff policy—one is bound to realize that it is simply impossible to protect all branches of business within a Originally published as ‘Dyrtid, tullar och arbetslöner’, Ekonomisk Tidskrift, 1914.

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country by means of tariffs. Yet the adherents of the so-called universal protectionist system claim to make this absurdity their goal. Thus far everything appears to be quite in order: I endorse both the conclusion and the argument that precedes it without reserve. If one has subjected the theory of comparative costs to ‘careful thought and examination’, it is selfevident that under free trade the goods each country produces must quite automatically fall into two categories: goods of which the country produces more than enough to match its own needs (or more correctly, its purchasing power), and of which it therefore has a surplus for export, and goods of which it produces less than its own needs, or none at all, and is therefore compelled to make good the deficiency by imports from abroad.2 Obviously only the latter of these two branches of production can be effectively protected by tariffs; for the export industry, however, at all events if there is free competition within the country, import duties on the goods it produces will have no consequences at all, while it will suffer greatly from the protective tariffs on goods in the other category, as these will raise its own production costs. Sooner or later, therefore, the export industry will have to curtail its exports, or completely cease to export goods; capital and labour will be partially transferred from this industry to the branches of the economy that have now become more profitable than previously because of the tariffs, and which therefore also supply a greater part of the needs of the domestic market, so that imports are diminished to the same degree as exports. (Of course this need not prevent both categories remaining undiminished for other reasons, e.g. technical inventions, or even continuing to expand, though not as much as they would have done under free trade.) However, it becomes apparent from the next section of Brock’s essay that this is not what he meant at all—if it had been, the greater part of his article would certainly have been left unwritten. His statement about the impossibility or absurdity of protecting all branches of business is based instead on a view of the course of events that for me at least was completely novel and which I do not think can be used with any advantage. This is how he continues: For even if we assume, for the sake of demonstration, that all industries were able to profit to the full from the protection that, according to this system, the tariffs ought to provide them all in equal measure—though for the export industries this would only be possible assuming, first, that price agreements existed between all producers in this sector, and second, that the higher price level on the domestic market made possible by the tariffs enabled them to recoup the losses incurred in production costs for the goods they exported because of the protection given to other branches of the economy—even then, taken as a whole this would only mean that the production costs for the various types of goods would rise in absolute terms (reckoned in money). Relative to one 159

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another, however, they would not undergo any change at all, and thus, according to what we have already seen, in the long run3 these universal tariffs would fail to provide the least protection to any industry. Instead, exports and imports would remain unchanged, as they were before the tariffs were brought in. The line of thought expressed in this strange passage is therefore that in a ‘universal system’, implemented in the way described by Brock, the production costs for all goods would be raised equally, but since international trade depends not on absolute but only on relative costs, this trade would continue to proceed in exactly the same way as previously, under the free trade regime. If I have understood this correctly, then I have to say I consider Brock’s way of thinking fundamentally wrong: it is self-contradictory and has nothing to do with real life. First, in the theory of comparative costs, production costs expressed in money are completely irrelevant. If a commodity is more expensive in terms of money to produce here than abroad, then of course it cannot possibly pay to export it. The comparative costs Torrens and Ricardo had in mind were, as Brock emphasizes quite correctly at the beginning of his article, real costs: labour and capital. A country that is obliged by adverse natural conditions to employ more labour and capital than other countries in the production of a certain commodity can nevertheless, they argued, be competitive in this branch if wages calculated in money, and perhaps also the interest rate on capital, quite automatically adjust to a lower level in that country than in the other countries. But second, the economic scenario Brock presents here is in itself utterly impossible, a fantasy without foundation. Even if producers in the export industries were able to exploit the protective tariffs to fleece the domestic consumer at will, by forming trusts and cartels, this could never induce them to sell their goods or any part of their goods to foreign clients at a loss. Instead, they would cheerfully pocket the domestic profit and place their surplus capital in the other industries that had undergone an artificial boom as a result of the protective tariffs. It should certainly not be denied that exceptions can occur here, though chiefly of a more temporary or occasional nature. The manufacturing plants designed for goods for export can of course not be paid off immediately, so exports may continue for a while, even if at a loss in the usual sense of the word. In addition, as Pareto and others have demonstrated, foreign sales at below average production cost can be economically worthwhile for a branch of industry that is highly subject to the law of ‘increasing returns’ (with production costs diminishing in relative terms as the volume of production increases), if the overheads have already been covered by the domestic market. Finally, an occasional ‘dumping’ on foreign markets of one parcel of surplus products or another can often occur. But all these things are secondary 160

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phenomena, and they do not seem to be what Brock has in mind, either. That a system of protective tariffs, no matter how ‘universal’ they may be, in itself and by and large must result in both exports and imports shrinking and perhaps wholly ceasing, surely cannot reasonably be doubted. It would not have occurred to me to dwell in such detail on this oversight of Brock’s if his entire argument, or at least the greater part of it, were not completely and utterly based on this erroneous premise. To be sure, his sense of reality forces him to concede that such a system does not exist anywhere in the pure form; instead, its real significance, he claims, is that, as he puts it at one point, ‘reflections of this kind have a great theoretical mission to fulfil(?)’. He also adds the qualification time and again, with remarkable persistence, that his opinions on tariffs and their effects do not apply under any conditions other than their actually being ‘universal’. However, since he has surely not taken upon himself the task of tilting at windmills, one must be entitled to assume that he regards the existing tariff system as essentially satisfying this condition. The fact that the authors of the tariff bill in question, who are not economists by training, have proved to be prey to this idea, which is so common among laymen, cannot justify Brock in accepting it as a hypothesis in order to base on it conclusions about the supposed futility of the endeavours of the working class to improve their economic position by reducing tariffs. To proceed in such a way would be nothing short of despicable. That his conclusions in any case are completely without foundation ought to be apparent enough from what I have said. They are worth about as much as his ludicrous premise: that the more comprehensive a system of tariffs becomes, the closer it gets to free trade, so that I suppose in the end, when the import of all goods is forbidden, foreign trade would rise to a maximum.4 I could close here, but the question is too important for me not to make an attempt to add some constructive comments to complement the critical remarks I have made above. It goes without saying that the problem of the effects of protective tariffs in general and their influence on wages in particular is extremely difficult to solve. Indeed, it is impossible to achieve such a solution in detail. But it can probably be managed in broad outline if one only follows Walras’s advice to approach a difficult question step by step. So let us assume to begin with that all production costs are pure labour costs, or else, which is about equally simple, that labour, land (or natural forces) and capital participate in the same proportions in the production of all goods. In such a case the problem is very easily solved and the triumph of the free trade argument is incontestable. If we let commodity group A represent the export goods and commodity group B the import goods, then without infringing at all on the general validity of the problem we can assume further that under free trade the latter group is not produced at all in the country, but is imported in its entirety. The entire productive capacity of the country is 161

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therefore used in producing group A. Half of the produce may be consumed within the country, while the other half is exchanged for commodity group B, which is produced abroad and which, we shall assume, is acquired at a price that is half that for which it could have been produced domestically. However, as a result of a sufficiently high protective tariff domestic production of commodity group B becomes worthwhile, and these goods gradually cease to be imported. Now if other countries respond with a similar tariff on commodity group A, the export of these goods will cease at the same time. If not, the export of these latter goods will continue for a while, but since they now have to be paid for in gold, all prices rise in the country, until all exports of commodity group A also have to stop. In either case, therefore, the productive capacity of the home country will ultimately be divided between the production of both B and A for the country’s own needs. The ratio between the two sectors will depend on the circumstances. If, for example, A are foodstuffs and B manufactured commodities, then it might be imagined that half the productive capacity would be used in the production of A, which would therefore be consumed in the same quantity as previously. The other half would then be left over for manufacturing B, but in line with our assumptions, it could of course produce only half the quantity that used to be imported of these goods. Consumption of these goods would therefore have to be reduced by half at the same time as their price, calculated in A, had obviously risen to twice its previous level. If, on the other hand, A are industrial items and B foodstuffs, then the consumption of foodstuffs too will have to be cut, either in quantity or quality, since of course otherwise the entire productive capacity of the country would be required for their production, so that nothing at all would be left for the manufacture of A. We might therefore imagine that, say, of the productive capacity would now be used to produce B and to produce A. In this case, the consumption of both foods and manufactured goods would have been reduced by a third. Further, according to our assumption, the distribution of the yield of production between the different factors of production (labour, land and capital) ought to remain unchanged, so that all real incomes would be uniformly reduced—assuming, that is, that the consumption by different social classes of the different kinds of goods were fully proportional, though this is not so in reality. In the former case, if A were foodstuffs and B manufactured commodities, then all incomes, calculated in foodstuffs, would be unchanged, but the part of these incomes that is spent on industrial products would now have just half the purchasing power it had before the tariffs were introduced. In the latter case, if A were manufactured goods and B foodstuffs, all incomes—still calculated in foodstuffs—would have sunk by half, but some (inadequate) compensation would be gained from the fact that the part of them spent on manufactured goods would now have twice as much purchasing power as previously. For the working class, which is chiefly a consumer of foodstuffs, the latter case is obviously far more unfavourable 162

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than the former. But in both cases, the workers (in common with the other producers, the landowners and capitalists) inevitably lose by the tariffs. A similar loss affects the workers in other countries, whether these countries are protectionist or not. So far, then, Brock’s emotional appeal to the workers of our country not to seek their own advantage at the expense of their brothers in other countries has no basis in reality. However, there is another factor involved, and this alone explains how such a folly as protective tariffs was ever able to arise, or perhaps, rather, why it is that from the perspective of certain private interests, these tariffs no longer look like folly. The distribution of natural resources, labour and capital is in fact not the same within different branches of production; indeed, it is highly variable. This complicates the problem considerably, since as a result of the protective tariffs, the domestic demand for production elements that are primarily used in the import industries increases, and the demand for those that are predominantly used in the export industries declines. This process can go so far that for the owners of production elements of the first kind, the general loss to the national economy from the tariff system is not merely reduced, but is even turned into its opposite, a profit. Let us assume again that A denotes foodstuffs and B manufactured goods. A sufficiently high protective tariff on the latter group of goods would make the export of the former more difficult and perhaps impossible. This would obviously lead to reduced demand for the production element that is primarily involved in the production of foodstuffs, i.e. cultivated land or land suitable for cultivation. Rent would sink, possibly to zero, or be prevented from rising, if it were on the way up for other reasons. The advantage this would generate for all non-landowners, particularly the working population of the country in the form of higher wages, might very well counterbalance or even outweigh the high price of industrial items, especially because these, as I have said, play a relatively insignificant part in the workers’ consumption. It is no doubt this fact that often makes high tariffs on industrial products (the only tariffs that can be effective in such cases) the object of enthusiastic support from the working class in recently colonized countries, e.g. the United States.5 On the other hand, these protective tariffs imposed by newly settled countries are naturally to the detriment of the old countries’ industries, and particularly of their working population. So here Brock’s heartfelt admonition for solidarity between workers might be in place, if, that is, it concluded in an appeal to American workers not to embrace for their own benefit (which, moreover, is uncertain, since the advantages do not necessarily counterbalance the disadvantages) a tariff policy that raises the price of bread for their class comrades in Europe! As for agricultural tariffs, for similar reasons they can only be effective in countries that under free trade import foodstuffs, though this category now includes the whole of Western Europe. Like all other tariffs they diminish the 163

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country’s productive capacity, but their effect on the workers is far more damaging: total output is reduced by the tariffs, an increased portion of this output now goes to the landowners in the form of higher rents, and in addition, the relative rise in prices hits the group of goods that make up the workers’ main object of consumption. Agricultural tariffs therefore hurt the interests of the workers from three points of view, and that it has ever been possible to implement them in spite of the workers’ protests is of course due to the fact that the opposition to them has not been able to make itself felt adequately in elections or parliamentary votes, even in countries with a nominally universal franchise. It might be thought that the owners of circulating capital ought to have made common cause with the workers here, but first, their interests do not coincide in all respects, especially not in the important respect of consumption, and second, the simultaneous introduction of industrial tariffs has brought with it advantages, even if at times of a rather illusory kind, at least for certain types of capitalistic associations. But it must not be forgotten that these matters are so complicated that in some cases it is often difficult or impossible to thoroughly weigh the advantages and drawbacks. Nothing is more common, for example, than for even smallholders to think that they benefit from tariffs on foodstuffs. And yet it is probably quite the opposite: the smallholder is mainly a worker and as such, like all workers, he is hurt by tariffs that raise the rate of rent. In real terms the damage he suffers shows itself in that the higher rents mean cultivated or cultivable land becoming so expensive that he is unable to expand his tenancy to the extent that would allow him to turn his and his family’s labour to the best possible account. I think that what I have said indicates the solution of the problem of tariffs in its most important essentials. Its details belong to the domain of practical judgement. But some of these details, even if of secondary importance, are still sufficiently significant to merit being taken into account in theoretical discussions, too. After all, in our country specifically it is the case that our natural export industries occupy themselves, if not exclusively then at least in the main, with the production of raw materials or semi-manufactured goods. In these areas, natural resources are still a dominant factor, and in our country a transition to free trade would therefore mean a large-scale transfer of rent (or forms of income equivalent to it) from one sector to another: it would reduce the market value of arable land, and in its place greatly raise the value of forests and woodlands, mines and waterfalls. That this increase in value should fall into the lap of private individuals without any merit or invested labour of their own at all, seems completely and utterly unjustified. In my opinion, therefore, a radical reduction of tariffs ought to be preceded by an equally radical reform addressing the right of ownership of these increases in value. Many other complementary legislative measures are quite certainly necessary in order to anticipate or alleviate the hardship that a simple 164

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changeover to free trade could not fail to cause in a large number of individual cases. I therefore completely and utterly concur with Brock in his demand that each more substantial cutback in the present tariff system ought to be preceded by painstaking inquiry. But for the reasons given, I am bound to deny that he himself has made any worthwhile contribution to an inquiry of this kind in his essay. NOTES 1 ‘Om dyrtid arbetslöner och solidartullar’ [High prices, wages and universal tariffs], by Fritz H.Brock. On the expression universal tariffs, and Brock’s repeated caution that he is talking exclusively about such tariffs in his article, see below. 2 We can leave the relatively few goods of which neither export nor import occurs out of account; and for the sake of simplicity, we shall also ignore the far more common case where for geographical reasons the same type of commodity is the object of both import and export. 3 The italicized words refer to the fact that imports might fall off during a certain transitional period, while exports continued as before. For these exports, the country would then receive a certain quantity of gold from other countries, and this would provide the foundation for domestic sales, which would now be taking place at a higher price. Of course there is no objection to this reasoning in principle. 4 The peak of absurdity is reached when Brock goes on to assume that other countries, too, would surround themselves with similar ‘universal tariffs’. In this case, the average price level would therefore remain unchanged, so that the theory of comparative costs cannot be applied even by a misunderstanding. Just imagine: two countries do their best to shut themselves off from one another by means of tariffs, and yet, Brock claims, the exchange of goods between them will carry on unhampered ‘just as under a free trade regime’. What has become of common sense in an argument like this? 5 Brock claims that a rise in wages is impossible if the supply of capital remains unchanged, since it would bring about a ‘lengthening of the production period and therefore a reduction of the sum of wages available each year. But he forgets that, in reality, the workers have to compete not just with the capitalists, but also with landowners, various monopolists and others. The fact that a wages policy— in this case, a tariff policy—fails to impinge on the capitalists therefore does not necessarily mean it has no effect on the other competitors. Moreover, of course, the production period and therefore also the capitalist nature of production, is not the same in all trade; in fact, it varies widely, and this fact could also be exploited by a pro-worker tariff policy.

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In the previous issue of this journal, Mr G.Silverstolpe levels a number of criticisms against an essay I published in Dagens Nyheter in April this year. A ‘Postscript’ to that article, which appeared immediately afterwards in the same newspaper, seems to have escaped his attention. It is quite true that when I wrote the first article, I imagined that the war loan that had then just been taken out would bring in its train an increased emission of national bank notes, or of loan-office bills—which amounts to the same thing, since the latter are the basis for the emission of national bank notes and are included in the metal reserves held by the German Central Bank. But already in the ‘Postscript’ I had pointed out that according to later reports, this would probably not be the case: ‘It looks’, I wrote, ‘as if, so as to avoid as far as possible the inconvenience of issuing new notes, things have been arranged in such a way that the new loan will be paid in chiefly by means of credit transfers, changes entered in the bank books.’ At the same time I emphasized that ‘in reality, however, this makes no difference whatsoever. It is all the same whether the new monetary buying power that is placed at the disposal of the state by the loan manifests itself in an increased quantity of bank notes, or credits with the banks (i.e. at bottom, an increase in the velocity of circulation of money). If this monetary buying power is obviously disproportionate to the stock of goods for which it is ultimately to be exchanged, then a progressive depreciation of paper money is still unavoidable.’ That this indeed was what happened is of course sufficiently evident from the fact, first, that during the war the German dollar rate has sometimes been as much as 17 per cent above par, and second, that more than a month ago, according to official sources the average price of commodities in Germany was about 70 per cent higher than at the start of the war. But in general, a currency depreciation of this kind is, as I shall attempt to show, the same thing as a forced loan on the part of the state, or rather a forced saving imposed on the public with no compensation out of government funds.

Originally published as ‘Frivilliga besparingar eller tvungna’, Ekonomisk Tidskrift, 1915.

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Mr Silverstolpe, on the other hand, considers that because this increase in the quantity of bank notes has failed to materialize, it is proved that ‘the German loans of billions of marks are therefore virtually exclusively composed of voluntary1 savings’. This is surely jumping to conclusions. Let us take a simple example. A leather wholesaler sells to the state for war purposes a part of the stock of goods that in normal circumstances would have been consumed in their entirety by the public. Now the general public merely gets the remaining portion of this stock, but as a result of the great increase in the price of leather, the wholesaler receives, let us assume, as much money for this part of his stock as he would normally have received for the entire stock. He can therefore regard the payment rendered by the state as pure profit, and if he has subscribed government bonds for the sum, after reimbursing his suppliers he can lock these securities away in his secretaire as an increase in his wealth. Now, who has loaned the state the money in question? In nominal terms, to be sure, the wholesaler, and he indeed is the one who will benefit from the loan in future; but of course no real saving has taken place on his part, since he has neither had to reduce his consumption, nor sacrificed any capital for the purpose (if he had, this capital would have been the fruit of his earlier savings, and of course he would therefore have been economically entitled to collect interest on it). The real savers in this case are rather the general public, who have received less or worse value than usual for the part of their income they have used in purchasing leather. Looked at purely in the abstract, it is certainly conceivable that the general public could have voluntarily cut back its consumption and subscribed war loans for the equivalent sum. In that case, no significant price rise would have taken place, since the increased demand for leather on the part of the state would be set against the reduced demand of the general public for the same commodity. The wholesaler would not have made any extra profit, but neither would the general public have done so, since of course by and large it would itself have to pay the interest on the bonds it owned, by taxation. The whole process could therefore have been likened to a tax measure, by which the purchasing power of the general public for both leather and other goods would have been restricted in the same way—but in both cases, it would at least have escaped paying interest on a loan that in reality it had scraped together itself. As I say, this is conceivable, purely abstractly, but looked at psychologically it is rather unlikely that people would voluntarily deprive themselves of essentials in order to come to the aid of the state with loans—though of course this kind of behaviour does occur. That things must instead have taken the course described above, by and large, is shown precisely by the sharp rise in prices. This of course necessarily means—at least in so far as the rise in prices exceeds a simultaneous rise in wages, etc.—that the great mass of the population has been forced to go without a greater or lesser part of its otherwise customary consumption. This is taken over instead, perhaps in a 167

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somewhat modified form, by the state, but since the state pays for all that it thus consumes, a third party must have received the payment in this case, and this third party is precisely the minority who exploit the war, and in particular the high commodity prices, to line their own pockets, and who directly or indirectly subscribe an equivalent part of the war loans.2 All this assumes that the state’s needs during the war encroach upon current consumption. It goes without saying that capital is used in the first instance, as long as it lasts and can be made available, and of course no objection can be made to the compensation rendered by the state in the form of debenture bonds in this case, since, as I have said, the ownership of capital thus far represents real savings. (The fact that future production and consumption will suffer for lack of this real capital is another matter.) But unfortunately, the inflated commodity prices in this case, too, mean that the compensation the capitalist in question receives is generally far higher than the yield he would have been able to receive from his capital under normal conditions. In his table, Mr Silverstolpe has specified quite correctly all the items that can come into consideration here, except that he lists the funds employed on necessary repairs and rebuilding as part of ‘the current national income’, which can hardly be right. Incidentally, Professor Cassel had already used the same scheme in one of his numerous articles about the cost of the war. But Cassel goes further than Silverstolpe, for in a couple of cases he also gives figures in the column of figures, and this Silverstolpe has failed to do. According to Cassel, the ‘real savings in peacetime’ in Germany amount to approximately 8 billion marks per year, and he estimates the same sum for repairs. The latter figure is probably more in the way of an approximation, whereas for the former he can claim Helfferich’s authority. But already in my ‘Postscript’ in Dagens Nyheter—and Cassel must have overlooked this, since he has since repeated the same claim unchanged—I pointed out that this figure of Helfferich’s is quite certainly much too high, probably twice as high as in reality.3 In other words, these savings would only be equal in value to the first war loan of 4 billion marks. To be sure, as I have said, these reserves can be supplemented by the productive capacity made available by the postponement of repairs and rebuilding; but on the whole, it is surely obvious that the moment must quite soon come when the extra consumption requirements of the army could no longer be supplied out of ‘reserves of a capital nature’ (including the productive capacity made available in the way I have mentioned) but must rather have had to encroach on the current consumption of the civilian population—and indeed, this is what has actually occurred. That does not mean to say—and I do not believe I have claimed this, at any rate it was not what I meant—that the capital reserves had already been consumed at the time of the first war loan. However, this is a mere detail. The needs of the army cannot be held below a certain minimum level, if the war is to be prosecuted sufficiently forcefully. The more the reserves are spared in this 168

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situation, the sooner the current consumption of the civilian population has to be drawn upon for the needs of the army—all of which has the result described above. In this connection I cannot omit to point out that Mr Silverstolpe’s conclusions concerning the economic effects of the war, particularly the growth of the national debt, seem to me rather casual. He claims that ‘the worse course has been chosen by the state that has raised the necessary funds abroad instead of prevailing upon its own citizens during the course of the war to… make adequate cutbacks in their consumption and adequate savings to finance the war’. This is quite certainly incorrect from a military-strategic point of view. To bring the civilian population of the country down to starvation level or below prematurely or unnecessarily can never be a source of any strength; the population is unlikely to escape its allotted portion of the suffering and severity of war in any case. One might just as well say that a country that provides itself with allies rather than fighting all by itself has ‘chosen the worse course’. Seen in purely economic terms, on the other hand, Mr Silverstolpe’s opinion may have a certain justification, if, that is, the necessary funds are raised by taxation, which has occurred to a great extent in England, as is well known, but until now hardly at all in Germany. But if the method used in both cases is loans, then I am inclined to view a foreign loan, or the export of securities, as ‘the better solution’, since by this means the country at least acquires real capital, whereas with domestic loans, as I have said, it is largely the case that in the future the great mass of the population will be obliged to pay the interest on the loans that it itself has been forced to ‘starve together’, which is, as it were, adding insult to injury. This circumstance too, then, should be taken into account in the event that we, as Mr Silverstolpe puts it, ‘become drawn into the war on Germany’s side’. NOTES 1 My italics. 2 Professor Davidson probably goes too far when he says in an essay in the same issue that ‘no real profits for individuals at the expense of the state arise in the case of a general rise in commodity prices’ (p. 432). Doesn’t this assume that all incomes, including the state’s tax revenues, have increased at the same rate as commodity prices? But this assumption is surely contrary to fact. 3 I have repeated my criticism in more detail in another essay in this issue, and refer the reader to that essay.

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10 THE HISTORICAL DEVELOPMENT OF THE CONCEPT OF INCOME1

I THE CONCEPT OF INCOME IN CIVIL LAW Although the way in which concepts are defined in private law naturally exerts a powerful influence on all the functions of a society, the importance of this fact must not be overestimated. In legal disputes between individuals, the main thing is to have clear, specific and easily comprehensible legal regulations, which leave an impartial judge in no doubt as to the respective rights of the parties concerned. Whether these regulations in fact really get to the heart of the matter under dispute is relatively unimportant; in general, of course, the parties are at liberty to make special agreements in advance, so as to alter their legal situation in the way they desire. Only in public law, where amendments of this kind on the part of individuals are out of the question, do errors of definition take on a truly fateful character from the point of view of social justice. For this reason, jurists ought not to be criticized for preferring in their definitions and classifications to stick to external criteria or analogies that are easily comprehensible to the average mind, and for not enquiring more deeply into the essential principles. However, by the same token, the lawyers ought not to imagine that they have exhausted the real meaning of the issues discussed by their terminological decisions. In general, the true essence of economic laws lies hidden deep; only in recent times has there been much success in bringing the real connections between economic phenomena to light. When the foundations were laid for the civil law that in the main is still in force, around two thousand years ago, these connections were still rather imperfectly known, and in subsequent epochs right up until recent, indeed, modern times, they were if anything made more, not less obscure. Petrazycki, with whose interesting work on the concept of income in civil law2 we shall first occupy ourselves here, observes that in private law ‘the Originally published as ‘Inkomstbegreppets historiska utveckling’, Statens Offentliga Utredningar, no. 70, 1923.

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concept of income employed in the theory of the national economy’ can only be used with great caution. As an example he cites the fact that ‘stocks yielding 1,000 per year are capital as far as the owner is concerned, but not in terms of the national economy, since they do not produce new commodities but merely transfer commodities from one economic entity to another’ (vol. I, p. 35). This may be true, but can hardly give rise to any misunderstanding, since even in the private economy accounts receivable and liabilities are cancelled against one another as far as they go, and nothing fundamentally different occurs in calculations of the size of the national capital. On the other hand, I am quite willing to concede that economic theorems are often far too unclear and far too subject to dispute to provide a secure foundation for civil law. However, this is surely not the case where economic research has been able to conclude that general conceptions regarding economic matters are undoubtedly incorrect or self-contradictory. Later, for example, when discussing the ‘civil policy’ he advocates, Petrazycki talks about replacing the formula, ‘the fruits of capital belong to the owner of the capital’ (jus soli—Petrazycki includes land in the concept of capital, too), with the maxim, ‘the fruits belong to the person who by his labour makes the capital fruitful’ (jus culturae et curae), and claims that this would bring about a far more radical change in the life of the society than for example a change from a monarchical to a republican form of government, or vice versa (p. 328). Here, most economists would probably agree that the very assumption is absurd. Whether society can intervene at all in the distribution between capital and labour of the product of the national economy, without at the same time reducing this product and therefore also the total income of the society, is a moot question, but it is probably certain that even in a socialist state it would be impossible for the whole yield of land or capital to accrue to the individual or individuals who happen to exploit a certain quantity of land or capital. What is decisive from a social point of view is therefore not the question as to who owns or ought to own the yield of a given capital (in the broad sense of the word), but rather who owns or ought to own the capital itself. The concept of income in civil law is based in the main on the doctrine of fructus in Roman law. This term originally referred to the fruits of the earth, both vegetable and animal (perhaps in the very beginning merely the fruits of trees), but it gradually came to include the yield of all kinds of capital, including, and not least, slave capital. The term employed to designate income from labour was quaestus, though like the later term reditus this word could also, in a broader sense, include income in the form of fructus (the reverse usage also occurred occasionally, but only in a metaphorical sense). However, the doctrine of quaestus remained relatively undeveloped, since paid labour was really considered unworthy of a free man, even if it not infrequently had to be resorted to for necessity’s 171

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sake. For the same reason the important modern category of business and professional income was, if not wholly missing, at least largely absent. Most of the physical labour and a significant part of the intellectual work was performed by slaves; the profit the owner of these slaves was able to make was understood not as profit from business activity, but as the yield of his capital, as fructus servi, not as quaestus. As is well known, the theory of fructus in contrast was very amply expounded in ancient Roman law, and the judgements presented there are still to this day regarded as ‘sources’ for this part of civil law by jurists, especially in Germany. In particular, the numerous cases in which a person possessed only the right of use and enjoyment of another person’s property— e.g. a husband with regard to his wife’s dowry, a person leasing another person’s land with the slaves appurtenant to it, etc.—required a precise determination as to what should here be understood as the yield of the property, as distinct from the property itself. On the basis of what we have said, it is only natural, given the detailed elaboration of the law in addition to the great acumen applied to it, that far-fetched analogies and naive juridical fictions together with even more naive scientific conceptions3 sometimes took the place of a true analysis of concepts. It is less natural, however, that students of Roman law have followed in the footsteps of their ancient precursors until the most recent times. The author of the first proposal for the Bürgerliches Gesetzbuch [German Civil Code] is mocked by Petrazycki for having advanced ‘independent views on scientific matters, deviating from the views of other scientists’. However, what Petrazycki attempts to show—this is in fact the chief argument in his lengthy work—is that the more or less naive explanations given by individual teachers of law in antiquity concerning the origin of the various rules of law, including the question of the concept of income, must not be confused with the sound juridical instinct that, based on the popular sense of justice, found expression in the actual administration of justice. This seems very probable, but that Petrazycki is always correct in his interpretation of this ‘juridical instinct’ is not equally obvious. He wants to show that when the disparity between ancient and modern conditions is taken into account, the rules concerning fructus coincide almost exactly with the concept of income that manifests itself in the general opinion of our day. According to Petrazycki, this concept of income has two characteristic features. First, income is not understood as a purely physical relation between one thing and another (e.g. the fruits of a tree in relation to the tree), but always as a relation between a person and a thing—what is income for one person, he says, may be ‘capital’, i.e. a source of income, for another person or for the same person under changed circumstances, and so forth. Second, ‘the aspiration to a regularly recurring satisfaction of our needs creates the concept of income as an economically permitted consumption fund, a normal consumption limit, this limit being determined by the capacity of the revenues to recur (‘die 172

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Wiederkehrsfähigkeit der Einnahmen’). Guaranteeing the recurrence of the consumption fund demands the preservation of the capital stock, the means of earning income.’ In this definition we recognize several of the features in which many writers in the field of economics have also wanted to see that which is essential to the concept of income. According to Petrazycki, they all boil down to the periodicity of income, from which it follows that receipts which by their nature are not apt to be repeated are not to be regarded as income, but ought rather to be understood purely as an increase in capital. As I shall attempt to show later, this definition is much too superficial, in fact it probably mixes up cause and effect. However, it would undeniably be very striking if it could be found to be the essence of the ancient conception of justice in this matter, too. But here Petrazycki’s argument—even though it is praised by Aschehoug4—seems rather forced to me. In arguing his case, he returns again and again to a few specific ancient legal regulations, which I should therefore like to examine in some detail, making every allowance for my unfortunately minimal knowledge of the field in question. 1 In Roman law, a guardian was only bound to account for simple interest on his ward’s capital, since it was recognized as a general principle that there was no obligation to produce ‘fruits of fruits’. However, at a given point in time he was to hand over the capital together with the accrued (unconsumed) interest to an official guardian, known as a ‘curator’, and this officer now became liable to account for interest on the whole sum, which therefore was transformed in his hand into capital. The regularly resulting interest on this capital was now regarded as income or fructus. However, it is hard to see in this any rational principle whatever. After all, it could not be any more difficult for the former guardian than for the latter to place the interest, too, at interest. The point of the whole procedure was probably at bottom merely to afford the first guardian some benefit for managing the capital, even though according to the prescripts of the law, strictly applied, he was not supposed to receive any such benefit, and as an excuse the maxim was used in such cases that ‘fruits are not obtained from fruits’. This case surely does not prove any more than this, and indeed, under modern conditions, where the guardian is bound to submit an annual account of his administration, the whole problem has disappeared. 2 A question that has always given lawyers a lot of trouble is whether minerals should be regarded as fructus and therefore, after the deduction of mining costs, as income from the property where they are mined, or as a part of the land as capital. On this question the ancient Roman sources are somewhat divided, and they are even self-contradictory in places, although they predominantly incline to the former alternative, which Petrazycki considers to confirm his thesis, since it is a matter of regularly recurring revenues. 173

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But in fact, this question cannot be answered by means of a universal rule. A ton of ore that is removed from a mine undeniably reduces the capital value of the mine, but not by the value of this ton, but rather by the present value of a ton of ore to be mined only in the final operating year of the mine (assuming the difficulties involved in extracting ore have not increased over time). If this point in time is far off, e.g. a century or more in the future, then the latter value is, practically speaking, equal to zero, and all that is mined can then be seen as income (or yield). However, if the mine is expected to be exhausted after just a few years, then on the contrary a large, perhaps the greater, part of the value of the mined ore represents a real reduction in the capital and ought to that extent not to be treated as income. The decisive point is therefore not that the revenues recur regularly, but rather that they can be expected to recur over a sufficiently long period. But of course in neither case, indeed, not even if the mine were exhausted after the very first year, does this prevent the entire value of the mine being regarded as income for the person who first discovered or claimed it, with reasonable deductions for his costs or risk. 3 According to Roman law, the value of treasure trove—the finding of which must have been far more common in those times, when the rights of the individual were less secure, than it is now—was to be divided equally between the finder and the owner of the land. If the former was a slave, then according to the letter of the law, the finder’s reward went to his owner, as with everything a slave earned. But if a person other than his owner had the usufruct of the slave at the time, the question arose whether the relevant half of the treasure should go to the usufructuary as a fructus servi, or be regarded as a non-fruit and therefore go to the slave himself, i.e. to his owner.5 Jurists decided in favour of the latter alternative, and the sources justify this decision by explaining that the slave was actually hired not to search for treasure, but rather to cultivate land; Petrazycki approves of this explanation, but disapproves of the additional argument that the slave ‘sought one thing, but fortune gave another’. In any case, the decision appears to be motivated with complete adequacy by the fact that the finding of treasure must, in the absence of special stipulations, be considered to have lain outside the contract of use and enjoyment; the fact Petrazycki adduces, that the finding of treasure was an isolated occurrence that by its very nature was not likely to recur, seems superfluous. Incidentally, it is surely not impossible that the regulation in question was made in part in the interests of the slave, i.e. for humanitarian reasons. For even if, as I have said, the law strictly speaking did not grant a slave any property whatsoever, it was none the less common practice to allow him to retain any extras he earned for himself, as his so-called peculium, which he would use at some future time to buy his liberty, and nothing seems more appropriate for such purposes than the finder’s reward for treasure trove, of which his master, if he was the owner of the land, in any case kept 174

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half. The usufructuary, on the other hand, naturally did not have the same interest in the slave, and would probably generally have insisted on his rights to the utmost. 4 In the time of the Republic, according to Cicero, it was already being debated among legal scholars whether the child of a slave-woman should be counted as fructus and therefore, if she was in the possession of a usufructuary at the time of her delivery, whether the child should belong to the usufructuary, or whether the mother’s owner should also be the child’s master. The latter opinion prevailed. Jurists from the time of the Empire explain this decision with roughly the same line of argument as was used in the case of the slave who finds treasure trove, namely, that one ‘hardly (non temere) acquires female slaves for the purpose of having them bear children’—a reason we shall examine in a moment. But they also added a more humanitarian, though rather unclear, explanation, namely, that ‘it seems absurd that a human being should be regarded as fruit, since by the nature of things all fruits are procured for the benefit of human beings’ (Gaius), or that ‘a human being cannot be counted among the fruit harvested by another human being’ (Ulpian).6 Petrazycki makes fun of this ‘sentimentality’ as not in keeping with the character of the institution of slavery; in his view, and in accordance with his general thesis, the true reason was rather that the pregnancy of a slave-woman, in contrast to that of a domestic animal, was an isolated, not a regularly recurring, phenomenon. This reason can hardly be called decisive. Among a larger group of slaves, e.g. on a Roman latifundium, the birth of slave children was probably on the contrary a fairly regular event, and indeed one that was necessary to keep up the stock of slaves. On the other hand, it seems to me that Petrazycki forgets that the relationship between a slave and his or her owner, even though not in keeping with our concept of justice, was none the less a personal relationship—sometimes a far closer relationship than that between worker and employer in our times—and that the relationship between mother and child has probably always been considered personal and regarded with a certain degree of respect. However little sensitivity one ascribes to the Romans, it is still likely that they did not disrupt either of these two relationships by unnecessary interventions. In fact, this consideration probably triumphed over the power of legal analogies, so that here we are dealing with a real exception to the general theory of fructus. 5 In contrast to the above case, which is chiefly of historical interest, the following appears to be of greater, and abiding, importance. It concerns the classification undertaken by the famous law-teacher Sabinus during the period of the earlier Empire, with respect to the scope of the term quaestus. He designated as quaestus exclusively what is earned by labour (‘quod ex opera descendit’) and explicitly distinguishes from it inheritances, legacies and gifts7 (gains of fortune and increases in the value of assets are not mentioned). 175

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Unfortunately, Sabinus did not give any reasons for this decision—he presumably considered them self-evident. Subsequent jurists attempted to make good this omission, but their attempts were not always very wellconceived. Ulpian, for example, expresses the peculiar view that the reason why Sabinus excluded inheritances and gifts from the concept of quaestus may have been the fact that these gains are not received without some cause; rather, they accrue to us because they are merited in some way (‘ob meritum aliquod’). One has to agree with Petrazycki that this explanation gets things completely the wrong way round; if things were as Ulpian states, that would of course be a reason for putting inheritances and gifts on the same footing as earnings from labour. But whether the same judgement can be passed on the explanation given somewhere by ‘the astute theorist Paul’ seems less obvious. For Paul gave as the reason for the distinction that ‘for the most part, inheritances come to us either from our parents or from a manumitted slave as something that is owing to us’ (‘quasi debitum nobis’). Petrazycki equates Paul’s statement with Ulpian’s without any regard to the fact that ‘meritum’ and ‘debitum’ are two different things; one can hardly merit something without labour, but one can have a claim to something from birth, as for example a child’s claim to maintenance from its parents. In the case of manumitted slaves, the law decreed that if they died intestate their estate should go to their former owner (who was now their so-called patronus) or his children. These children were therefore considered to have at least a subsidiary claim on the client’s, the former slave’s, property; they were to be regarded as potential owners of this property and therefore did not receive any new income by the inheritance. Other sources, including some additional passages in the jurists already mentioned, unfortunately, according to Petrazycki, do not go into the legal structure of the receipts at issue (inheritances, gifts, etc.) but rather designate them quite vaguely as gains ‘ex aliis causis’ and instead place the entire emphasis on the view that income from labour, including fructus servi, derives ‘ex operis’, in which view the decisive factor is considered to be the effort demanded by these acquisitions, in contrast to the beneficial acquisitions mentioned above. Petrazycki considers this theory incorrect: the acquisition of inheritances or gifts, he says, can also under certain circumstances be associated with a certain effort. One might also add, and probably with greater reason, that in the case of fructus servi it is of course the slave and not his owner or possessor who bears the burden of the effort. According to Petrazycki, the right approach would be ‘to count as earned income (quaestus) the receipts acquired by means of an activity that by its nature is regularly recurring (or by such operae as can be the object of a profession and be pursued professionally)’ (I: 257). As before, he attempts to show that this conception prevailed in ancient Roman legal practice, in spite of the sometimes false theory. However, the two sources he cites to try to prove his point do not 176

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seem very convincing. One of them concerns the finding of treasure trove by a slave in the possession of a usufructuary, which we have already discussed, the other the unusual case of a free person mistakenly sold as a slave. When the mistake was corrected, this person received no recompense for the labour he had performed for his master (as long as the master had possessed him in good faith) or on his master’s property; on the other hand, he was allowed to keep what he might have received during this time in the form of gifts, inheritances, etc., as well as what he had earned by voluntary labour for a third person (‘ex negotio gesto’). The fact that this became the practice, even though, in the opinion of some jurists, coming into an inheritance also to some extent (‘aliquatenus’) involved an effort—as is well known, it could also entail a great risk—supports Petrazycki’s interpretation, in his view. However, it seems to me that the same result could be arrived at on the basis of common justice. After all, what was at stake in this case was a just accommodation between two persons who had both been the victims of the same mistake. Thus it seemed reasonable that the man who thought he was buying a slave had to be satisfied with the economic result he had in any case expected would compensate him for the price he had paid, but could demand no more. I said previously that the understanding of the concept of income held by Petrazycki and those who share his views seems to involve a confusion of cause and effect. Of course it is perfectly true that where labour, and as a rule also natural resources, in addition to the services of capital when properly maintained, are continually renewed, all actual production takes on the character of regular recurrence, and it is also beyond doubt that the main purpose of production is to allow consumption that is as regular as possible. But this fact is surely at bottom secondary, even if it may be useful as a convenient outward criterion. The primary phenomenon is surely rather production itself: what I produce in the true sense of the word, i.e. what I create with the means of production belonging to me, or, in the case of production undertaken in conjunction with other people, the portion of the product that falls to my lot on the basis of agreement, is my income in the truest sense of the word. What all receipts ‘ex aliis causis’ have in common is that they do not derive from my production. The fact that in most cases they are also occasional, i.e. appear sporadically, also seems to be secondary.8 By the nature of things, these ‘causae’ can only be of two kinds. (1) Acquisitions at the cost of other persons, either in accordance with their wishes (gifts) or against them, this latter category comprising not merely goods gained by means of deceit, but also many other kinds of acquisitions: monopoly profits, profits from swings in the business cycle in excess of necessary risk premiums, etc. (2) Taking possession of ownerless property, comprising, first, occupation in the true sense of the word, e.g. net profits when staking a claim to mines, earth finds, etc., and second and above all, inheritance. 177

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However, a thorough classification of the types of acquisitions that belong in these two groups is anything but straightforward, and it is possible that legal disputes between individuals demand criteria that are more easily understood and juridically precise. It is just that it must not be imagined, as I have said, that such criteria really get to the heart of the matter. Nevertheless, when it comes to inheritances in particular, the difference between inheritances and other acquisitions seems to be so obvious in itself—the legal language of older times talked about what a person ‘inherits and acquires’—that there is no need to have recourse to the fact that inheritance is not a regularly recurring phenomenon. Though in fact it does occur regularly, at least once or twice in each person’s lifetime—as long as his parents are not entirely without means— and occasionally it can be more important for his economy than everything he does himself. This was particularly the case in ancient Rome, where inheritance was what actually constituted a free and independent person as distinct from a slave or a proletarian. In public law and particularly in financial law, to which we now move on, the concept of income must in any case be based upon a deeper investigation of the true nature of the various forms of receipts or income; we cannot be content with quite simply accepting the definitions of an irrelevant doctrine. For extended periods in the ancient Roman Empire, for example, the inheritance tax (‘vicesima hereditatum’) was the only direct tax payable in the homeland of Italy. As the name implies, it was originally set at 5 per cent, and inheritances to very close relatives were exempt, but according to Gibbon it was gradually increased in various ways until it amounted to a veritable confiscation of fortunes. To employ these fortunes to cover the current expenses of the state was quite certainly a fatal error, but not because the fortune constituted an occasional receipt for the person assessed for taxes, but rather because they were not matched by any real, productive earning and therefore necessarily led to a gradual diminution of the national wealth.

II THE CONCEPT OF INCOME IN ECONOMICS AND FINANCE. THE CLASSICAL THEORIES OF INCOME FROM LABOUR AND ITS TAXATION The substantial expansion in the state’s sphere of activities that began at the start of so-called modern times and made ever-increasing demands on the inhabitants of each country for sustained contributions in support of public finances, gradually made it a necessity for scientifically minded persons to put on a conceptual basis the distinction and connection between the public economy and the aggregate of all private economies (the so-called national economy), in an attempt to ascertain the ways in which they affect and influence one another. These endeavours proved fruitful in both areas; in fact they provided the first impetus to the science we call economics, and at the 178

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same time they laid a scientific foundation for fiscal theory, though this foundation is unfortunately far more imperfect. The first stumbling attempt in this direction—if we ignore the seeds planted in antiquity—came, as is well known, from the so-called mercantilists, whom we shall pass over here; a much more profound though still rather imperfect attempt was made later by their opponents, the physiocrats. The physiocrats took as their point of departure—as incidentally the mercantilists had also done—the private economic concepts of gross and net income, and attempted to transfer them to the national economy as well. However, the physiocrats’ ‘produit net’ did not actually correspond to the reditus purus [net returns] or fructus deductis inpensis [yield minus costs] of private law, but rather to its fructus servi. To be sure, this came to about the same thing in slave economies, but was no longer quite appropriate after the granting of personal independence, such as it was, to all the inhabitants of society. Fundamentally, this ‘produit net’ was nothing other than is called in modern terms the individual’s free income, the surplus over necessary subsistence that he can use for higher cultural and general purposes, among these general purposes being not least the support of the state’s activities. As is well known, the physiocrats taught that a surplus production of this kind only occurs in agriculture or more generally speaking in the production of raw materials (‘métiers productifs’), where ‘nature’, as Adam Smith, who in many respects was their disciple, subsequently put it, ‘works together with man’, and the product therefore regularly exceeds the labourer’s own subsistence needs. In processing industries, in contrast, i.e. where man works on his own, the additional value the processed raw material receives only corresponds to the labourer’s own maintenance; the same thing was held to apply in trade, etc. (‘métiers stériles’). The surplus in the production of raw materials, the rent of the land in a broad sense, therefore became the net product of the labour of the society, the fund from which all its collective and higher cultural needs had to be met. Looked at purely in the abstract, this theory is no doubt completely wrong. As McCulloch rightly observed, surplus production would on the contrary attain its highest possible level in a flourishing colonial country, where land yields no rent in the true sense of the word. Furthermore, there this surplus would occur not merely in agriculture but just as much in all trades, since of course, given free competition and ignoring the role of capital in production, with which the physiocrats hardly concern themselves, all labourers would produce the same quantity of exchange values. In concrete terms, however, in fact and in practice physiocratic theory had a considerably greater range. To be sure, the physiocrats still had a rather incomplete idea of the true nature of both rent and, even more so, the interest on capital. In part they confused these two concepts, as when Quesnay demanded that the rate of interest on money ‘should not be set higher than the rate of rent’, which of course fundamentally is the same 179

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thing as assuming that land is always sold at a certain invariable multiple of its annual yield.9 But when it comes to the third factor of production, labour, and the reasons determining its recompense, the physiocrats stood on considerably more secure ground. It was Quesnay and his adherents who for the first time in the modern era emphatically expressed the thought that, taken up by Adam Smith too, was to acquire its full systematic development through Malthus, namely, that uninhibited fertility always has the tendency to bring the wages of labour—at least of common, unskilled labour—down to the very subsistence level, so that, as Quesnay put it, in all states, whether well or ill governed, the great mass of the population will always live in poverty. If this theory is true, or to the extent that it is true—and it has unfortunately proved itself only too true, both then and subsequently—then of course the physiocrats’ main thesis has to be conceded as substantially correct: the incomes that are free of labour, whether they are called rent or interest on capital or entrepreneurial (monopoly) profit or all three in conjunction, in that case constitute in fact, generally speaking, the entire surplus fund of the society, its produit net. (It must incidentally be remembered that in those days agriculture was the economic mainstay of the European countries, and of France in particular, to a far greater extent than it is now, that industry had barely progressed beyond the level of handicraft, and that trade was comparatively undeveloped.) Now as is also well known, the physiocrats drew from this, their main thesis, a consequence that was extremely important for the evolution of fiscal theory, namely, that this net product, or ‘rent’, as we too shall call it for the sake of brevity, constitutes the only logical source of tax revenues for the state. They added—and this is also extremely important, to the extent that it is true—that taxes could not actually be drawn from any other source of revenue; wherever the government attempted to impose them, they would always ultimately gravitate to rent. Therefore, to avoid a great deal of circuitousness, trouble, expense and—not least—unnecessary suffering, rent ought once and for all to be made the sole object of taxation (‘impôt unique’). This way of looking at things has had a far greater influence than is generally imagined on later fiscal theory, though to be sure fiscal practice was long to continue on its old, accustomed paths. For as we shall see in a moment, it was taken up, and indeed given a far more incisive form, by Adam Smith, and received in this new form the full adherence of no less an authority than Ricardo. Both these prominent economists were proponents of the thesis that a tax that is imposed on labour, whether directly or indirectly (as a tax on consumption), is not borne by labour but is shifted on to other social classes. It does not lie within the scope of this brief essay to enter into the incredibly intricate problems of the theory of tax shifting or incidence in detail. Nonetheless, before we go any further, we must devote due attention to the 180

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point just mentioned. For if it is true that certain kinds of income are, as it were, immune from taxation, then of course it is quite simply futile to want to see in income as such an adequate tax base. If one adopts the standpoint of the physiocrats on the issue of population growth—and as I have said, this position has still not lost its significance— then in fact it does seem impossible to escape their conclusions. Expenses in the form of taxation cannot reasonably be imposed on a person who finds himself at the subsistence level. If this nevertheless occurs, then a reaction is set in motion that leads by means of increased mortality in the homes of labourers, particularly among small children, diminished number of marriages, or, in the best case, emigration, to a reduced supply of labour and thus to higher wages, so that these again align themselves with the subsistence level even after the deduction of taxes. Indeed, even looked at somewhat less pessimistically, if one believes, for example, that the labourers will stubbornly hold on to a certain way of life for reasons of conviction or habit, the result is the same: delayed marriage and emigration become more prominent, while mortality does not rise to the same degree. But of course in both cases the result can only be reached via a transitional state, replete with great suffering for the working classes. Incidentally, this cannot be called tax shifting in the true sense, for what is meant by that term is an increase in income or a decrease in expenses that is made possible for the taxpayer only by the form of tax chosen, whereas here, of course, the workers could have improved their position by a voluntary reduction in their numbers. The state as it were discounts this wage increase in advance by imposing tax. On the other hand, the physiocrats seem to have overlooked the fact that although the removal of those taxes that weigh primarily on the workers, such as some consumption taxes, would result in a temporary advantage for the workers, in the long term the effect would more likely be the opposite. For if the assumptions made are correct, this would bring in its train a new increase in the numbers of the indigent population, which would lead to a new decline in wages down to the subsistence level, or to the minimum standard insisted on by the workers. But it is very possible, or rather highly probable, that in this process ‘le produit net’, the fund from which all the cultural and communal expenses of the society have to be paid, would have failed to grow at the same rate as the population. The only result would then be that the country as a whole would have become poorer than previously, and indirectly this would necessarily hurt the working-class population, too. Of course, it does not follow from this that the workers ought never to be freed from the taxes that burden them, but only that population issues and tax issues must not be mixed up, but must be kept strictly apart. If the worker is unable to pay taxes, says John Stuart Mill, then what is wrong in this society is something other than an equitable division of the tax burden. We shall return to this extremely important question later in another connection. 181

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The thesis that taxes imposed on labour can be shifted was, as I have said, taken up by Adam Smith, though in a form diverging from the theory of the physiocrats; however, this divergence is hardly an improvement. In his opinion (Wealth of Nations, book V, ch. ii), it is the demand for labour that determines the real wages of the workers and sets them at a higher or lower sum, according as the society itself is in a more or less flourishing condition. Since the customary or average price of commodities determines the sum of money that must be paid out to the workers in order to provide them with this level of maintenance, which is more generous or more meagre according as circumstances dictate, it follows, Smith claimed, that if the demand for labour and the price of commodities remain the same, then ‘a direct tax upon the wages of labour can have no other effect than to raise them somewhat higher than the tax’. This argument is not very logical. If the demand for and supply of labour stay the same, then certainly wages remain unchanged, but of course the workers then have to pay tax on these wages. No rise in wages can take place given unchanged demand, unless the supply of labour is diminished, but this is not assumed by Smith here. Buchanan, Adam Smith’s first commentator, attempted to refute this opinion of his, chiefly on the grounds we have presented above. However, oddly enough, Ricardo, who is otherwise so astute and critical, stepped in to defend Adam Smith on this point. Both in his chapter on taxes on raw produce (provisions) and in the chapter on (direct) taxes on wages (Principles, chs. ix and xvi), Ricardo argues the thesis that a tax imposed in one way or the other on the workers would immediately be shifted by them on to the employers (who in contrast would not be in a position to shift the tax further), and that this would happen without any need for an intervening period of suffering for the workers, leading to a reduction in their numbers. Unfortunately, the cast-iron logic that characterizes most of Ricardo’s writings is absent from these chapters. It is hard to avoid the impression that he had a certain favourite plan concerning the practice of taxation in mind, dimming his critical gaze. In fact he elaborates a plan of this kind in the first of the two chapters concerned. In order to avoid a resumption of the ‘income tax’ that had then already been abolished and was not very popular, he wanted to introduce a general tax on commodities. This tax, he claimed, would affect in the first place all consumers in proportion to their individual consumption— but with the exception of the workers, who, as stated, according to Ricardo would shift their share of the tax on to the entrepreneurs. Since the entrepreneurs would therefore have to pay double taxation, the commodity tax ought to be supplemented by a tax on the rent of land (land-tax) and a tax on the profits of capital, e.g. on the ownership of government bonds which had been issued in such greatly increased quantities during the Napoleonic Wars. In this way, according to Ricardo, it would be possible to 182

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arrive at a system of taxes that was well balanced in every respect, and that left the weakest shoulders free. Regrettably, his argument that the tax on the labouring classes can be shifted is anything but convincing. Moreover, in the first of these two chapters his reasoning is extremely obscure and in formal terms even self-contradictory. In the second, his line of thought is more easily followed, but its weaknesses are also patently obvious. It has been said, by Seligman among others, that Ricardo here applied the so-called wage fund doctrine in far too absolute a manner, but this is quite incorrect; on the contrary, a consistent application of the wage fund doctrine leads to a diametrically opposed result. For if the wage fund paid out each year is an (approximately) constant quantity, then the average wage is ascertained quite simply by dividing this sum by the number of workers, or, in the case of time wages, by the total quantity of labour carried out in the course of the year, calculated in time. The worker then has to pay the tax imposed on him out of these wages, with no chance of (immediately) transferring this tax either to the employers or to other social classes. That Ricardo was able to overlook so simple a state of affairs at all was due in the first instance to the fact that he complicated the issue by the addition of other facts irrelevant to the actual matter at hand. For it must be remembered, he says, ‘that the fund raised by the tax is employed by government in maintaining labourers, unproductive indeed, but still labourers. If labour were not to rise when wages are taxed, there would be a great increase in the competition for labour, because the owners of capital, who would have nothing to pay towards such a tax, would have the same funds for employing labour; whilst the government who received the tax would have an additional fund for the same purpose. Government and the people thus become competitors, and the consequence of their competition is a rise in the price of labour. The same number of men only will be employed, but they will be employed at additional wages.’ All this is perfectly true, but it has nothing to do with the matter at hand, since of course it must always be assumed that the application to which tax revenues are put is the same, no matter how the tax is imposed; otherwise we shall be comparing unequal quantities. In the present case, moreover, it would have been possible to completely ignore the government’s ‘fund’ and quite simply to assume that the workers have to work for the state for one month per year, for example, at their own expense, without any direct compensation. Instead, they would then be allowed to collect the entire wage fund in the remaining eleven months, and their annual incomes would therefore remain unchanged, in spite of their unpaid labour for the state. But if this tax had instead been laid on the other classes of society, then of course the workers would have collected a wage for this twelfth month, too, and would therefore have received a higher net income (or, more correctly, consumable income) than at present. The tax laid on them will therefore unavoidably also be 183

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borne by them, even if in this particular case it takes on the nature of ‘lucrum cessans’ [an unrealized gain] rather than ‘damnum emergent’ [a newly arising loss]. However, Ricardo continues in the following, somewhat breakneck manner: ‘If the tax had been laid at once on the people of capital, their fund for the maintenance of labour would have been diminished in the very same degree that the fund of government for that purpose had been increased; and therefore there would have been no rise in wages; for though there would be the same demand, there would not be the same competition’. However, in the first place, this assumption of his is completely illogical. The sum that the private entrepreneur employs annually for the payment of workers constitutes only a part of his circulating capital, and the circulating capital itself makes up only a part of his total capital (or of the capital at his disposal). Nor is the allocation of the capital dependent on his whim; it is rather a consequence of economic laws; if he allocated his capital in a different way, his profit would be less than it is now. Therefore, even if he reacted to the imposition of a tax by encroaching on and using up his capital in a degree fully corresponding to the tax, which in itself is improbable, it would still be completely impossible for him to allow this consumption of his capital to go beyond a certain part of the capital, and this would mean that the allocation of the capital as a whole would be less advantageous for him. But second, even if one were willing to go along with Ricardo’s incredible assumption, the result—which he seems to have completely overlooked—is nevertheless that the workers have to bear the tax in its entirety. For the employers must be subject to the same temptation to consume capital, whether the reduction of their incomes is due to a direct tax or to a tax shifted to them in the form of higher wages. If this reduction of capital is undertaken by way of anticipation on the basis of an expected rise in wages, then this rise fails to occur at all; if not, wages might possibly be increased, but only for a short time. To be sure, the so-called wage fund doctrine is rather imperfect—though it is at any rate better than the illogical conception that economists for a while attempted to replace it with, namely, that the workers receive their payment out of the ‘products’. But the more complete theory of distribution that has been the fruit of economic research in recent decades also leads to the same result. Taken as a whole, this theory boils down to the view that in a state of economic equilibrium, given free competition, the owners of the various means of production (workers, landowners, capitalists) have so disposed what they own that each of them attains a greater satisfaction of his needs than he would be able to receive if he employed his means of production in a different manner under the prevailing circumstances. Now if a tax is imposed on him, then to be sure his share of the general production, in other words, his consumable income, is reduced, but it continues to be the maximum he can attain under the prevailing circumstances, and he has therefore no cause to seek to employ his share of the productive resources in any other way. 184

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This is true, of course, under the assumption that the tax is imposed in an equal way on each category of producers, within which there is free competition. On the whole, no transference of taxes can take place between different categories that are not in competition with one another, e.g. workers, landowners or capitalists, as long as the size of the various elements of production remains unchanged. The latter condition is certainly extremely important, but is most suitably treated as an independent question. Within these limitations—i.e. as long as the tax has not reached such a level that it noticeably affects the size of either the capital or the stock of workers—it can therefore be said that an income tax will rest where it is laid, and that all other taxes come to rest as soon as they impinge upon income, in other words, as soon as or to the extent that a good that has been made more expensive by means of a toll, excise, etc., has become an object of consumption. The idea many people cherish so dearly, that taxes can be shifted ad infinitum, must be rejected as unfounded.

III CONTINUATION. THE DISPUTE ABOUT THE CONCEPT OF INCOME. ‘ENGLISH’ AND ‘GERMAN’ SCHOOLS This makes obvious without further discussion the great significance of income for all taxation, and this significance has of course become even more apparent as general, direct income tax has increasingly come to the fore in the tax system in more recent times. At the same time it is clear that the fiscal system is and must be fundamentally a part of the national economy; the activity of the state and of other public bodies constitutes only a part of the economic life of society, which, even if it appears to embody only the play of free competition, and not a planned, communal undertaking, still necessarily makes up a connected whole. It is only by attempting to analyse the nature of this connection and by setting the incomes of private individuals in relation to the major income categories of the national economy that we can gain, if not a decisive, then at least a constructive perspective and a stable ground for the phenomenon of public finance, which is otherwise so vague and undefined. This was what the physiocrats and their followers, particularly the English economists, attempted. In the subsequent period fiscal theory became a favourite subject for German economists, but the results of their activity have been rather discouraging. Instead of continuing to build on the foundation that had been laid, while correcting where necessary the errors or imperfections of the classical economists, the Germans have consistently endeavoured to overthrow utterly this body of doctrine as being too ‘hedonistic’ or ‘materialistic’, though without being able to replace it in the least by any better or more tenable system, in spite of all their talk of ‘ethics’.10 In addition, as we shall now show, the theories of Adam Smith and Ricardo have been thoroughly misunderstood by most German authors. 185

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Adam Smith notes (Wealth of Nations, book II, ch. ii) that, just as when talking about, for example, a landowner a distinction is made between the gross and net yield of his property (gross and net rent), one can also talk of gross and net revenue when dealing with a whole nation. ‘The gross revenue’, he says, ‘of all the inhabitants of a great country comprehends the whole annual produce of their land and labour; the net revenue, what remains free to them after deducting the expense of maintaining—first, their fixed, and, secondly, their circulating capital; or what, without encroaching upon their capital, they can place in their stock reserved for immediate consumption, or spend upon their subsistence, conveniencies, and amusements. Their real wealth, too, is in proportion, not to their gross, but to their neat [sic] revenue’. Obviously, the concept of net income is employed here in a broader sense than by the physiocrats, namely as denoting not merely the ‘free’ income or surplus production, but rather the total consumption fund of the entire population. Other than this, hardly any objection can be made to his reasoning except that the comparison is only valid under the assumption of a stationary society. In general, a landowner would probably also count as income what he has employed in the course of the year in improving the property, raising new buildings, etc.; after all, he could have consumed this sum, too, without becoming any poorer. In an advancing society, on the other hand, i.e. a society with a growing population, one certainly cannot regard as a consumption fund all that remains after the maintenance of the means of production; rather, a gradual increase in these means is necessary if the society is not to decline into poverty. Yet this fact that is so obvious and so very important in its consequences has, as far as I know, hardly been pointed out or at least has scarcely been given enough attention by a single author. That Adam Smith failed to do so himself is less remarkable, since he in fact started from the assumption that, by and large, the population grows extremely slowly (only doubling in 500 years). But that later writers have continued to argue as if we still found ourselves in stationary circumstances is almost incredible. Adam Smith now proceeds to a closer analysis of the economic complex involved. His presentation demonstrates on the one hand considerable progress compared with the physiocrats in his insight into the true nature of capital, but still reveals a certain vacillation when discussing problems concerning capital.11 He notes—formally in contradiction to what he had stated previously—that although all expenses for the maintenance of the fixed capital must be excluded from the net income of the society, this is not the case with expenses incurred in maintaining the circulating capital. Here Smith is thinking of those parts of the circulating capital that, like provisions of food, raw materials for the textile industry, and so forth, gradually as it were become part of the annual consumption. But this distinction is unnecessary and serves only to mislead. One year’s crop of corn, for example, can very well be understood as a capital that—just like any other capital good—with the addition of various kinds of labour (threshing, grinding, baking, etc.) creates 186

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a commodity that constitutes a major component of the consumption and (real) net income of the population in the following crop year. At the same time, the majority of agricultural workers are employed in renewing this capital, i.e. preparing the next year’s crop; the produce of their labour is therefore not part of the year’s net income.12 However, this and similar weaknesses in Adam Smith’s account cannot affect the main result of his analysis, which on this point—with the reservations mentioned above—has to be regarded as completely correct and even selfevident. Robert Meyer (Das Wesen des Einkommens, p. 8) makes the criticism that ‘the sum of all commodities produced during the year does not make up the annual product but is the fruit of production that has taken place long before (preparatory labour)’. However, this objection is probably not of any importance if, like Smith, one understands the entire mass of capital as a fund of means of production that is essentially invariable and is maintained or renewed in stages. However, as a result of a curious accident, which we shall talk about in a moment, it is precisely this part of Smith’s account that German writers have attacked most vigorously. Later in the same work (book II, ch. v), Smith develops an idea that he has adopted from the physiocrats, namely, that from the point of view of the nation as a whole, agricultural production is more important than industry and trade, it being assumed that capital of a given size is capable of employing and maintaining a far greater number of workers in agriculture than in industry and trade. Towards the end of the chapter, he adds the following words: ‘The riches, and as far as power depends upon riches, the power of every country, must always be in proportion to the value of its annual produce, the fund from which all taxes must ultimately be paid’. There is not the least doubt that by ‘annual produce’ Adam Smith means exactly the same thing as that which in the passage cited previously he termed the net revenue of the society, i.e. not the whole gross produce (‘the whole annual produce’) but rather this sum after the deduction of all expenses for the maintenance of the capital. So when Ricardo says in the introductory words to his chapter xxvi, ‘On Gross and Net Revenue’, that ‘Adam Smith constantly magnifies the advantages which a country derives from a large gross, rather than a large net income’, it is clear that the terminology he is using here is different from Smith’s; he takes the term ‘net income’ quite simply in the physiocratic sense as surplus product, ‘produit net’ (free income). In essence, however, Ricardo’s objection is quite justified, and it is certainly surprising that Adam Smith here makes the whole consumption fund of the society the tax source or tax fund, since after all he too was of the opinion that taxes imposed either directly or indirectly on the incomes of the workers are not borne by them but are shifted on to other social classes. Ricardo goes on to make Adam Smith’s standpoint the object of some reflections that he unfortunately expresses far too summarily, but which are 187

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still extremely significant, in my opinion. ‘Granting, for a moment’, he says, ‘that this [Adam Smith’s opinion that agriculture is capable of employing more people for the same capital] were true, what would be the advantage resulting to a country from the employment of a great quantity of productive labour, if, whether it employed that quantity or a smaller, its net rent and profits together would be the same. The whole produce of the land and labour13 of every country is divided into three portions: of these, one portion is devoted to wages, another to profits, and the other to rent. It is from the two last portions only that any deductions can be made for taxes or for savings; the former, if moderate, constituting always the necessary expenses of production.14 To an individual with a capital of £20,000, whose profits were £2,000 per annum, it would be a matter quite indifferent whether his capital would employ a hundred or a thousand men, whether the commodity produced sold for £10,000 or for £20,000, provided, in all cases, his profits were not diminished below £2,000. Is not the real interest of the nation similar? Provided its net real income, its rent and profits be the same, it is of no importance whether the nation consists of ten or of twelve millions of inhabitants. Its power of supporting fleets and armies, and all species of unproductive’ (we would say: cultural) ‘labour, must be in proportion to its net, and not in proportion to its gross revenue. If five millions of men could produce as much food and clothing as was necessary for ten millions, food and clothing for five millions would be the net revenue. Would it be of any advantage to the country that, to produce this same net revenue, seven millions of men should be required, that is to say, that seven millions should be employed to produce food and clothing sufficient for twelve millions? The food and clothing of five millions would be still the net revenue. The employing a greater number of men would enable us neither to add a man to our army and navy, nor to contribute one guinea more in taxes.’ In a note responding to J.B.Say, Ricardo defends himself against the ‘misunderstanding’ that he had ‘considered as nothing the happiness of so many human beings’. But this is rather superfluous, for nothing can be more apparent than that if, in the one case, ten million people and, in the other, twelve million have to share an identical sum for cultural purposes between them, then the fate of the latter group must be more pitiable. If the twelve million people already exist, then of course the society ought to endeavour to find the means to support them, even if the last two million are only able to earn a bare subsistence, but to increase the stock of the population with no prospect other than a deterioration in the average standard of living, which may already have been far too low, is quite certainly an unforgivable error. Those who strive for ‘internal colonization’, the provision of homes of their own for agricultural labourers, etc., generally consider themselves to have achieved their goal if they have more or less succeeded in making sure that a labouring family is just able to feed itself on a minimal plot of land. There is never any question of any surplus production for the needs of society. But 188

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that being so, even in the best case these colonists become a kind of recipient of public relief, since, although they are incapable of making any contribution at all towards meeting social and cultural needs, they still always expect to participate to some extent in the benefits of public enterprises. Nevertheless, this passage in Ricardo has been subjected to almost innumerable attacks, in that it has been considered, utterly without justification, to entail a denial of the right of workers to live an independent life, their degradation to mere ‘means of production’, and so on. J.B.Say was, as stated, one of the first of these critics, which was rather inconsistent with his well-known acceptance of Malthus’s doctrine. Sismondi, in spite of being highly regarded by Ricardo himself, came up with the witticism that has been repeated ad nauseam, but is quite off the mark, that, according to Ricardo, the best thing would be if the King of England could bring forth the entire net produce by turning on a tap, since then no people at all would be required (of course the correct conclusion in such a case would be that all inhabitants of the society could then devote themselves to cultural tasks). But German authors in particular have never wearied of attacking Ricardo’s statement as inhumane, unethical, ‘small-minded’, etc. Adolf Held, especially, indulges in veritable orgies of unwarranted accusations against Ricardo— until, mirabile dictu, in our times Kleinwächter suddenly discovers that ‘with the best will in the world, no objection can be made’ to Ricardo’s assertion—which to be sure he renders somewhat freely.15 ‘It is impossible’, he says in the same connection, ‘to read into these words—as with Smith (!)—any regret that wages have to be paid at all, since they reduce the net national income.’ The tragi-comical fact of the matter is that Adam Smith, in spite of being criticized by Ricardo in this case, has quite undeservedly come in for his share of criticism in the German attacks on Ricardo, until finally, as seen from the above quotation, he is left as the sole accused. The critics overlooked the fact that Ricardo, as I have said, took the words ‘gross and net revenue’ in a different sense than Smith, and therefore, from Bernhardi on,16 accused Smith of inconsistency. Furthermore, amusingly enough, a mistranslation seems to have influenced the following German authors more than anything else. In my essay in Ekonomisk Tidskrift, 1922 (see the note at the bottom of p. 42), I have pointed out that in his well-known early work17 Schmoller misquotes Smith when (in the passage following the statement by Smith cited above on p. 186) he renders ‘the produce of the labour’ with ‘the wages of labour’. I have since found that the source of this mistake of Schmoller’s must be C.W.Asher’s German translation of Smith, published in 1861, where the same mistake occurs. Kleinwächter has also been misled by this translation, for in his work, mentioned above, one can read on p. 50 the following peculiar alleged quotation from Smith: ‘The costs of maintaining the fixed capital must obviously be excluded from the net revenue of a society; for neither the materials necessary for the machines, tools, works buildings, 189

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etc., nor the wages of the labour [sic] employed in producing these objects can be counted as part of it. It is true that the wages [sic] may be part of it, as the workers employed in this way may use the entire sum of their wages for immediate consumption, but in other sorts of labour, both the price and the produce enter into the part of the stock reserved for that purpose’, and so forth. The utter meaninglessness of this ‘quotation’ ought not to have escaped a thoughtful reader. Kleinwächter could easily have confirmed that Adam Smith’s words, cited correctly, are completely unimpeachable. Instead, he rushes on with the most absurd accusations of ‘woolliness’, ‘hardness’, ‘inhumanity’, etc., all built on the ‘fact’ that Smith refuses to count ‘wages’ as part of the net national income (which on the contrary he does quite explicitly18). Schmoller, in turn, cuts the quotation short after the first sentence, so that the formal self-contradiction is not apparent (this certainly looks a little suspicious, though of course it may have been unintentional). As I have described in the essay mentioned above, he then goes on to edify his readers by talking about Adam Smith’s alleged ‘great leap from the stand-point of the national economy to that of the private entrepreneur, who quite logically counts wages as part of his production costs’, and so on. This whole German polemic against Smith has to be regarded as utterly wide of the mark, and on the whole, the so-called Hermann-Schmoller concept of income—‘what a person can consume without reducing his stock of capital’—is merely an application in the field of the private economy of the same line of thought that Smith employed in dealing with the national economy, (it is equally correct in both cases, as long as we are dealing with a stationary society and incomes earned by production.) There can therefore be no question of any ‘leap’ on the part of Smith from one ‘standpoint’ to the other. This is in fact admitted by Robert Meyer,19 though he still wants to claim for Schmoller the credit for ‘being the first’ to re-emphasize explicitly the relation between income and needs (p. 5), a claim that is virtually incomprehensible. Meyer goes on to claim (p. 11) that the theory ‘suggested by Smith’ that only what can be consumed without diminishing the stock of wealth can be a consumption fund, implies that the task of the economy lies in the maintenance of wealth rather than in the satisfaction of needs and that it follows from this that a person with no receipts ‘in addition’ to his stock of wealth must starve. This attack, too, is wide of the mark in every respect. Smith’s theory—even though introduced with a comparison drawn from the private economy—of course applies to the national income and the national consumption fund. That many private individuals may have to live off their wealth for a shorter or longer period is unlikely to have escaped Smith’s notice, but this is irrelevant in terms of the national economy, since a fully equivalent new accumulation of capital takes place on the part of other people. 190

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The true deficiency in Smith’s account, ignoring details, lies in a completely different area, namely (as already mentioned) in the fact that Smith always proceeds from the assumption of a stationary national economy. Only under this assumption can all that remains of the annual produce once the maintenance of the means of production has been taken care of, be regarded as a consumption fund and in this sense as the net income of the society; if the population is gradually increasing, these deductions have to be far greater, so as to include also the steady increase in the means of production that is necessary to ensure unchanged consumption per capita of the population. But that means that the parallel with the concept of income in the private economy ceases to apply, unless one is willing to exclude from this concept all increases of wealth when it comes to taxation, and therefore essentially to make consumption the standard for taxation. However, virtually all subsequent writers have passed by this problem without suspecting a thing; even those who actually advocate consumption as the standard for taxation, like John Stuart Mill (and most recently Irving Fisher), do so for a different (and hardly tenable) reason, namely, that the income that has been saved and capitalized would otherwise be taxed twice, first, when it is saved, and second, in the future, when the saved capital yields a return. (I shall have more to say about this subsequently.) However, if one proceeds from Smith’s tacit assumption of a stationary society, his conclusion that the national income is the consumption fund is more or less self-evident; but the consequence of this conclusion for the sphere of the private economy is not exactly the one drawn by Hermann and Schmoller. After all, society as a whole can only gain revenues by means of production—ignoring non-economic relations with other societies—and the parallel would then require that only what is earned by means of production should be counted as income in the private economy. However, a private person can also have other sources of revenue (taken in a broad sense), namely beneficial acquisition, above all inheritance. It is surely rather unlikely that either Hermann or Schmoller intended to include inheritance, for example, in the concept of income,20 but formally speaking, it would belong there by their definition, since of course a person can consume an inheritance he has received without diminishing his previous wealth. However, if this became the general practice, it would inescapably bring in its train a reduction of the national wealth; either the productive equipment would not be renewed as it deteriorated or completely wore out, or else it would be mortgaged and supported by foreign loans. This could even be the case with natural resources, the ‘land’. Later writers have generally attempted to make good this omission in the Hermann-Schmoller concept of income by adding another restrictive feature to the concept of income in the private economy, namely, that the receipts must have the quality of endurance or derive from an enduring source. This qualification in general led to the exclusion of inheritances (and gifts) from 191

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income in the true sense of the word, so that the sum of private incomes was thus brought into virtual agreement with the national income. But this definition was still not completely satisfactory, since of course a temporary increase in one person’s gainful employment and therefore receipts can very well be reconciled with an equivalent reduction for one or more other persons in these respects, so that the aggregate national production still remains roughly unchanged. This applies especially during violent swings in the economy. It is also common knowledge that in times of economic turmoil, countries that have adopted this factor in their income tax legislation (the derivation of income from enduring sources of income) have been unable to reach significant parts of the actual national income by means of the income tax. Thus, for example, Germany during and after the World War. The correct definition is probably therefore, as I have said, receipts earned by means of production, onerous acquisition (as distinguished from receipts acquired without production, beneficial acquisition). As we have already emphasized in Ekonomisk Tidskrift, Schmoller’s polemic against the ‘English School’ in the essay we have referred to is not very apposite. The application he makes of this polemic in the fiscal sphere really boils down to the conclusion that income as such should in principle be the standard for taxation. To be sure, Adam Smith had urged the same view, though he had conceded that the wealthier classes ought to contribute with a somewhat higher rate of taxation, in proportional as well as absolute terms, e.g. in the form of taxes on luxuries. On the other hand, as we have seen, both Smith and Ricardo had taken up and even unduly extended the thesis of the physiocrats that the wages of labour are immune to taxes. Under the influence of this view and probably also of the humanitarian ideas of Bentham and others, most German authors, among them Rau, had, when Schmoller wrote his essay, advanced the principle that only free income, i.e. the income remaining after the deduction of the sum of income necessary to sustain life (some even said, the sum needed to maintain a standard of living consistent with one’s social station), ought to be made the object of income tax. Schmoller, like Schäffle a short time before him,21 opposed this view. He notes—and this is of course quite correct—that a supposed rationalization of this kind, or, to use the modern expression, ‘refinement’ of the income tax, is an empty gesture as long as public revenue needs are largely satisfied by other taxes imposed in accordance with completely different principles and at times without any demonstrable principles at all, e.g. taxes on returns on investments or, even more so, indirect taxes. The exemption of small incomes advocated when it comes to income tax can therefore, to the extent that it is warranted, be fully justified, he says, by the fact that the other taxes, particularly consumption taxes, are anything but strictly proportional, indeed, are in part even inversely progressive. However, if an ideal standard for all taxation is to be proposed, then in Schmoller’s 192

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opinion this norm can only be income as such, not just the surplus over and above subsistence. Oddly enough, however, Schmoller fails to provide any real argument in support of this claim. As is generally known, Adam Smith had considered income the correct norm for taxation, from the point of view both of ability to pay and of the benefit principle (even if he is not completely consistent). However, Schmoller rejects both these principles. ‘Ability to pay’, he says— with some justification—‘is in itself an empty concept, and is unusable until it is more exactly defined, no matter how much you puzzle over it.’ As for the point of view of benefit, like many other writers he emphasizes that what the state does for the individual outweighs by a factor of ‘hundreds or thousands’ what the individual does for the state—though this can certainly not be claimed about just any level of public services whatever. Like Stahl and Bluntschli he derives the individual’s obligation to pay from ‘the duty of the citizen pure and simple’, though here it may be objected that citizenship as such can hardly entail economic obligations, since it is not in itself linked to any economic advantages—except of course for those afforded by the actual undertakings of the state, but that brings us back to the benefit principle again—nor is it based on a voluntary commitment (like parenthood, for example). As a standard for tax-paying obligation, Schmoller follows Schäffle in proposing a concept that, to say the least, is very obscure, the ‘tax personality’, ‘the total economic power of the individual’, which, according to what he claims, is measured by Hermann’s concept of income. However, Schmoller is not completely consistent in the elaboration of his proposal. He concedes for example that, in general, so-called capital income ought to be taxed at a higher rate than income from labour, but not because the former is as a rule more enduring than the latter and therefore provides its owner with greater security. Instead, his reason is that a person with private means could generally acquire extra income by working, so that his potential income is higher than his actual income. (On the other hand, there is never any discussion in Schmoller of the greater or lesser justification of either of these kinds of income.) He even takes a step towards progressive or degressive taxation on the grounds that the state ought to make sure that even the poorest are not deprived by taxation of the opportunity to provide themselves with a ‘free’ income over and above the bare necessities of life. According to Schmoller, this is something quite different from the ‘taxation of surplus’ he has rejected, but the distinction appears to be very subtle. However, on one point he is unyielding: no deductions ought to be allowed for dependants.22 He goes so far as to claim that families with many children pay less tax, since on account of their many necessary expenses they are not in a position to consume highly taxed luxury goods. Nonetheless, he fails to demonstrate that this ‘benefit’— which, moreover, can be received by anyone who so desires—compensates for their higher share of unavoidable taxes on consumption. In Schmoller’s 193

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opinion, the birth and upbringing of children ought not to be regarded as ‘necessary expenses’ but rather as ‘pleasure’. Finally, he warns against allowing tax exemption to become a ‘premium for procreation’, since the poor classes already give birth to far too many children as it is. This final point is probably quite correct, but as long as society does not take any other measures to curb excessively high birth rates—if anything, it encourages them—it seems inconsistent to attempt to do this by means of taxation, especially as the consequences of this measure are inevitably suffered by the children, who are certainly innocent. This work of Schmoller’s can hardly be called a superior achievement. The credit it has enjoyed in Germany can probably be ascribed mainly to its supposedly triumphant critique of the views of the English School, though for the reasons I have given, this critique has to be regarded as utterly wide of the mark, or rather, meaningless. From the period immediately following Schmoller only a couple of articles in journals on ‘The Theory of Income’ are to be reported, by the German Roesler and the Hungarian B.Weiss. However, neither of these has advanced the question in the least. Roesler’s essay (Hildebrands Jahrbücher, 1868) is nothing but a most irresponsible attack on Adam Smith, or rather on all economic theory, which is called among other things a—preparatory school for socialism! As a sample of the author’s acumen let me merely cite his claim (p. 310n) that ‘if wages are drawn from capital and the capital belongs to its owner, then of course the labourer has no claim either to a wage or to the product of his labour, but rather at the most to the increase in value that the product undergoes by means of his labour. Consequently, the distribution of incomes ought to be completely reversed: the wages should belong to the capitalist, and the interest on the capital to the labourers’. According to what the author asserts further on, exactly the same result follows from the ‘untrue, confused and impractical’ theory of ‘Smithianism’ that ‘the results of production belong to the owners of the sources of production from which these results flow’. For since ‘labour is inert if it is not made fruitful and effective by wages’, the labourers can ‘at most stake a claim to’ the increase in value mentioned, but not to any wages, and so on. Apparently there was a time in Germany when a scholarly author could indulge in absolutely any absurdities, as long as they were spiced with a suitable number of invectives against the two ‘whipping boys’: Classical economics and socialism. Of Weiss’s two essays (Zeitschrift für die gesamte Staatswissenschaft, 1877–8) the first contains a quite substantial though very concise survey of various (mainly German) authors’ positions on the concept of income; the second, in which he attempts to present his own position, is rather insignificant both in critical and in positive terms. Like most German-language authors in the second half of the nineteenth century, Weiss turns out to be prey to the most absurd ideas about the ‘petty-mindedness’ and lack of humanity of the English School and above all Ricardo. He claims (p. 697) 194

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that according to Ricardo, ‘the most preferable methods of production are those by which the net income can be made to rise, if necessary by forcing labourers out of work’, and adds that there is now probably general agreement ‘that this idea has to be considered one of the greatest errors [Verirrungen] in the science’. Those who have read, for example, Ricardo’s chapter ‘On Machinery’23 know that his true position was the exact opposite of the one he is saddled with here, and as we have pointed out, it is in fact impossible to read anything else into his chapter ‘On Gross and Net Revenue’, either. There is after all a great difference between not wanting to advocate an increase in the population which can only allow the new arrivals a bare subsistence, and will mean a reduction in economic and cultural standards for the population as a whole— and contemplating with equanimity a development which robs some of the labourers already in existence of their means of support. This distinction does not seem to exist for Weiss; he is of the opinion that even if the working class was able to earn no more than enough to support itself on account of its large numbers, ‘it is still desirable that it should be so numerous’, among other things for the reason ‘that in almost all states this class contributes the greater part of public revenues, particularly in the form of indirect taxes’, and also because ‘the working class forms an essential part of the occupational make-up of society, without which it would lack its stimulating diversity and its sharp contrasts’. Here there might be stronger grounds for talking about a lack of humanity and scientific ‘error’. It is also revealing that when Weiss (p. 723) talks about the ability of the state to regulate the distribution of incomes among other things by means of its population policy, he mentions only two measures: ‘restriction of the freedom to emigrate and of the right to become a resident’. That neither of these measures is likely to improve the income situation of the workers is surely obvious, after all. IV THE NATURE OF INCOME, BY ROBERT MEYER One really ought to have been able to expect more of the lengthy monograph on Das Wesen des Einkommens [The Nature of Income] published in 1887 by Robert Meyer, the author of Die Principien der gerechten Besteuerung [The Principles of Equitable Taxation], which had appeared three years previously and is excellent in many respects. But quite contrary to the expectations this earlier work might have aroused, the later book has little to do with the theory of public finance. Applications to taxation theory occur only sporadically and are in the main without much interest. Still less is it a matter of a juridically precise formulation of the concept of income with respect to civil law. In fact, it is hard to say what the author’s foremost intention was in this work. Perhaps its most original feature, and probably what has gained most acceptance, is Meyer’s demonstration that the regular recurrence of income that had been considered by many authors a kind of scientific 195

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postulate, belonging to the very definition of the concept of income, is rather to be understood as a practical goal, desirable and worth striving for, to be sure, but never attained in full. On the basis of this demonstration, he writes in the very conclusion of his book, ‘Perhaps a theory that regards giving regular, periodic form to economic processes as one of its most important tasks, will at some future time succeed in extending its influence to real life— that of the nation as well as that of individuals—and thus in bringing closer to its realization the eagerly coveted goal of securing a national income (Volkseinkommen) for the people, and guaranteeing the private incomes of all private households’. These words, which incidentally are not entirely clear, seem most nearly to indicate that, in the author’s view, the main focus of his account is on the areas of production policy and social reform, but in fact this is not the case at all. If something of this kind had been the author’s intention, he could naturally not have avoided occupying himself in detail with population change on the one hand, as one of the main factors affecting production and income distribution, and with the actual level of incomes on the other hand, as the final outcome of the intended development. However, neither of these highly important questions is discussed in the work itself; instead, they are dismissed in a single sentence on the penultimate page of the book. There he writes, ‘Just as we can only judge the prosperity of the individual economic entity by relating income to needs, when judging the prosperity of the nation, the national income must be looked at relative to the needs of the whole country. These needs rise and fall with the population, and are determined by its size; the alignment of national income development with population development regularly constitutes a goal that is eagerly striven for but, to be sure, not always attained. This work, in which the level of income has not been subjected to study at all, is not the place to go into these ideas in detail.’ The last sentence (to which I have added italics) is particularly strange; when one reads it one can hardly believe one’s eyes. In actual fact, the very question of the regularly recurring nature of income implicitly contains the two other issues that Meyer has thought himself able to exclude from his observations. After all, by his own admission, excessively rapid population growth can become an insuperable obstacle to the preservation of incomes at their previous average level; and how is it even possible to occupy oneself with the question of the regularity of income without taking into account the causes that determine its size in each particular instance? The lack of a clearly conceived purpose has naturally greatly diminished the value of the work. A thorough account or critique would barely be worthwhile for our purposes, and I shall therefore confine myself to a few major points. At the very outset, the author points out quite correctly that the great difference which Schmoller claims exists between Hermann’s and Adam Smith’s understanding of the concept of income actually does not exist at all. 196

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Unfortunately he does not extend his scrutiny to Schmoller’s critique of Smith as a whole, but rather, like so many other German authors, simply rattles off the usual absurd, completely groundless accusation that ‘Smith’s theory of income leads to the view that the net income of a society consists exclusively in the surpluses calculated from the capitalist entrepreneurs’ point of view, and that the prosperity of the society is dependent on the attainment of the maximum possible surplus of this kind’ (p. 3). Of course this is not Adam Smith’s position at all; it might be said to be the position held by the physiocrats (including Turgot) and Ricardo, but only because, or to the extent that, they consider it a fact that wages will always remain at subsistence level. In his polemic against Malthus (in chapter xxxii, ‘Mr Malthus’s Opinions on Rent’), Ricardo makes explicitly clear that his understanding of the net (=free) national income is not affected at all by the possibility of the workers receiving a considerable part of this income in the form of increased wages. In that case, they would quite simply join the other classes as part-owners of the net (=free) income of the society, but the nature of this income would not have changed in the process. Schmoller’s ‘great merit’, incidentally, as I have said, consists, according to Meyer, in his having emphasized the relation of income to need, instead of making production fundamental, as Smith does. For Meyer argues that Smith overlooked the fact that the annual produce he talks about, which is supposed to serve the consumption of the society in the period in question, after the deduction of costs for the maintenance of capital, ‘is obviously not the produce of that year, but rather to a large extent the fruit of production that has taken place long before (pre-performed labour)’ (p. 8). But as we have already pointed out, this is merely playing with words. Of course, the actual state of affairs is indisputable, but this ‘pre-performed labour’ is quite simply what Adam Smith calls the society’s fixed and circulating capital. In combination with this capital, a portion of the current contributions of labour and the forces of nature that are under employment produces the annual production of commodities for consumption; while the remainder, generally in combination with already existing capital, is employed in the maintenance and renewal, and perhaps expansion, of the capital stock itself. In the former case the labour and natural forces currently employed sometimes play no role whatsoever, so that the capital is responsible for production on its own or in combination only with free natural forces. This is the case with certain products that improve with age, such as wine, and others, and it is virtually the case with the utilization of certain items of fixed capital, too, such as dwelling-houses. However, Smith did overlook the fact that if this model is to be applied systematically, the very utilization of such objects, and the satisfaction of needs as such in general, must be regarded as the real object or substratum of consumption, and therefore as income. On this point, however, oddly enough, Meyer—in contrast to most modern authors and to his own position in his 197

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earlier work (mentioned previously)—falls back on Smith’s conception, in that he attempts to maintain that the utilization of goods ought not to be included in calculations of either national or private income. However, his only real argument here seems to be to point out that if it were otherwise, consistency would require that the utilization of our clothes, books and household utensils should also be included in calculations of income. But it is obviously only the smallness of the sum involved that prevents this consequence being drawn in practice; when it comes to costly items, such as jewellery, a certain income tax is in fact paid in Sweden, for example, in the form of wealth tax. As for dwelling-houses and other buildings, Meyer himself has to admit that it ‘is often necessary for the purposes of taxation to express the satisfaction of needs achieved by these objects in numerical form’, but according to him this means ‘only that an estimate is made of the income a given person would need in order to provide himself with the same measure of satisfaction of needs’ (that he now has) ‘if he did not have the item in question at his disposal’. He also cites ‘the common usage: So-and-so has an income of 1,500 guilders and a house, a horse and carriage, and so on’. This argument is characteristic of the book’s lack of a real, practical purpose. If scientific terminology is all that is at issue, there is some justification for saying that in the interests of comprehensibility one should depart as little as possible from common usage. But it is a completely different thing if practical interests, e.g. questions of taxation or other legal issues, are at stake; in such cases, the consistency required by justice and fairness must of course prevail, and the demands of conventional linguistic usage must be put aside. The examples of idle, hair-splitting sophistry we have cited are in fact typical of the whole book. So, for example, the author wants to exclude personal services from the concept of commodities and thus from private income, but oddly enough he includes them as a part of the national income— in general, agreement between these two concepts is not a desideratum for him, indeed, if anything, quite the contrary. Similarly, in contrast to most authors, he wants to regard so-called derived income as an independent portion of income, even if it is not linked to any service in return. ‘If A’, he says (pp. 243ff), ‘has an income of 4,000 guilders and pays his old servant 200 guilders, both these sums ought to be regarded as independent incomes’—nota bene, there is no question here of Meyer seeing the latter sum as a kind of delayed payment for services already rendered. Admittedly, over against this total sum of 4,200 guilders in private incomes, there exists, says Meyer, a ‘sum of goods’ worth just 4,000 guilders in the national income. But in these contrasting figures he sees ‘the basis of an extremely important economic fact: private incomes form the basis of purchasing power with respect to the commodities (Genussobjekte) that form part of the national income, and the comparison between private and national incomes therefore seems likely to provide criteria for the assessment of the movement of commodity prices’. A 198

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most remarkable conclusion! Surely the man who gave away the 200 guilders is left with a purchasing power of just 3,800, not 4,000 guilders! Of course, this expense may lead to changes in his own consumption, even in qualitative respects; it may reduce his inclination to save, and so forth, as Meyer indeed emphasizes as he continues, but this is still not the same thing at all as the two of them together having a purchasing power of 4,200 guilders. If one imagines the relationship to be reciprocal, so that two good friends, for example, were in the habit of giving each other expensive Christmas presents, then it would certainly be most peculiar if these gifts were counted as part of the annual incomes of both—even though, according to our assumption, they recur at regular intervals. The most commendable aspect of Meyer’s book is probably, as I have said, his demonstration that although regular recurrence may be a desideratum to be striven for, it is not an a priori postulate of income. Nevertheless, he proposes the following definition of income (to be valid, if I have understood him rightly, both for private and national income): ‘a quantity of consumption commodities (Genussgüter, Güter erster Ordnung) received in a given period, acquired in security in accordance with needs’. If applied to the whole national economy (in a stationary society!), this definition is basically congruent with Adam Smith’s own, but, if it is intended to apply to private income, which of course can be subject to great variation in individual cases, even in a stationary society, it is surely much too narrow. Meyer himself seems to concede this, and proposes an additional clause to make it ‘fully commensurate with actual conditions’: ‘taking into account the prevailing state of the economy and the culture’. But this addendum is probably much too vague to signify any improvement. It is possible that other readers have been able to get more out of Meyer’s work than I. Generally, other authors praise the critical sections but disagree with Meyer’s positive proposals. However, with the exception of his demonstration of the near-agreement between Hermann’s and Smith’s theories of income, I cannot find anything of value in the critical presentation, either. Nor has the work probably exercised any influence on practical applications of the theory of income, and in my view it has to be regretted that so much reading (though mostly of the literature in German) and so much of his own work has been expended with so little success—in the main for want of a clearly conceived plan for the whole enterprise. V MORE RECENT WORK ON THE CONCEPT OF INCOME However, Kleinwächter’s lengthy monograph on Das Einkommen und seine Verteilung [income and its Distribution] (1896), which forms part of the anthology Hand- und Lehrbuch der Staatswissenschaften [Handbook and Theory of Political Science], is still more devoid of substance and thought. Most of the book is devoted to the so-called distribution of the national income, 199

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i.e. the division of the produce among the factors of production, or into wages, rent, capital interest and entrepreneurial profits. We do not need to concern ourselves more closely with this issue here. The introductory chapter deals with the concept of income itself, but in a way that is anything but worthwhile. At the very outset (indeed, even in the list of contents!) the author surprises the reader with the claim that ‘the concept of income is untenable, since it is completely impossible to ascertain the size of income’, a claim he subsequently repeats incessantly. He emphasizes—quite correctly—that a systematic exposition of the concept of income must go further than what originally gave rise to the name, and still continues to constitute its real meaning as it is generally understood, namely, what comes into an economy from outside, particularly in the form of money. The analysis must rather be extended to include all utilities added to the economy in question during a given period, whether they are produced within the economy or outside it, and whether they are of a material or immaterial nature; but according to Kleinwächter, to be this consistent would lead to completely absurd results. However, as G.Schanz pointed out quite rightly in his review of Kleinwächter’s work (Finanzarchiv, 1896), Kleinwächter exaggerates these absurdities in a completely irresponsible, almost incredible way. He claims that if all the services the members of a family performed for one another reciprocally, e.g. in the form of education, health care, etc., plus the services a person can render himself, were to be valued in money and entered in the family accounts, ‘a family belonging to a junior civil servant with an annual salary of 1,200 marks and no private means would be able to earn and accumulate an arbitrary sum of millions’(!). A tailor or cobbler who makes his own family’s clothes or shoes would have a higher income and therefore be liable for higher income taxes ‘the quicker his children wore out their clothes or shoes’. Kleinwächter ignores the fact that the craftsman in question would have to neglect his work for paying customers correspondingly. Finally, he claims, under such conditions ‘a wine merchant would be completely free of the danger of bankruptcy: all he needs to do is to drink up his wines himself, and his books will reveal the most lavish sales of his goods’. This necessarily presupposes that the wine merchant makes his wines completely on his own, otherwise of course even by the books his consumption would far surpass the profits from his business. It is of course true that not all income in kind, whether of a material or an immaterial nature, can be entered in due form in accounts or be taxed, but this is a deficiency which the concept of income shares with almost all other economic concepts. However, if, as a matter of principle, income in kind were excluded on this account from the concept of income, e.g. for purposes of taxation, then, first, obviously a great injustice would be committed, and second, a changeover from an exchange or money economy to a barter economy for the purpose of avoiding taxes could easily ensue, to the detriment of the national economy. There were various examples of this during the World War, and at other times. 200

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The most amusing thing about it is that after all this criticism of the concept of income, Kleinwächter does not make the least attempt either to delimit this concept or to replace it with something else. Instead, having filled page after page with idle talk of this kind, he proceeds with the calmest of minds to an extensive division and classification of this ‘impossible’ concept! In this classification, the peak of absurdity is reached in his attack on the ‘English School’. We have already mentioned that he, like Schmoller before him, falls prey to an unfortunate mistranslation of a passage in Adam Smith. Exclusively on the basis of this error—whose presence the very meaninglessness of the text should have made him suspect24—he fills two whole pages (royal octavo) with the most absurd accusations against Smith, surpassing in this all his many predecessors in the ‘German School’. On the other hand, he departs from the standard pattern of these attacks in that he does not intensify them when he comes to Ricardo. On the contrary, as I have mentioned, he concedes when dealing with Ricardo’s statement about gross and net national income that ‘with the best will in the world(!), no objection can be made to this abstractly presented claim’. This statement, he says, does not have the same ‘unpleasant flavour’ as Adam Smith’s words, into which, as we have mentioned previously, he wants ‘to read a regret that wages have to be paid out at all, since they reduce the net national income’, and so on. There is no denying that one feels amazed when confronted by such a manner of doing scholarship. Without doubt, Smith shared the notions of his contemporaries in seeing the lowly standing of the working class mainly as an inevitable natural phenomenon. It was left to Malthus to provide the first theoretical proof of the incorrectness of this view, after the French Revolution had raised the demand for improved economic conditions for even the lowest classes of society in practice. But there is surely no need to defend Adam Smith from accusations of ‘petty-mindedness’, ‘antagonism towards the working class’, and so forth. Nor does it improve matters that it is actually more Smith’s intelligence than his ethics that Kleinwächter wants to attack. For he admits that in various passages in his work Smith ‘espouses the cause of the working class very warmly’, which means he ‘must be unconscious of the terrible harshness and inhumanity contained in his idea of the national income’ (in an inaccurate translation!). Other prominent German authors of the present period have not really made any attempt to investigate the principles of the concept of income. An authority such as Adolf Wagner deliberately avoids entering into such an investigation. Roscher’s distinction between productively and nonproductively earned receipts (or, if one prefers, earned and non-earned receipts),25 which seems to me excellent, has not been followed up. Instead, as I have said, the attempt has generally been made to distinguish between more and less regularly recurring receipts, though in the process the connection between private and national income disappears. 201

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Schanz does not make any real contribution to the investigation of the question, either, in his well-known essay in Finanzarchiv (1896). His account, which is both lively and substantial, is far too well known for me to need to give a detailed report of its content. Without doubt, much, if not most, of Schanz’s criticism of older writers is well justified. It is particularly striking, for example, when he argues against those who want to see a necessary component of the very concept of income in its regularly recurring nature by using income statistics to show how much even the total national income can vary from year to year. Similarly, Schanz is probably quite right in opposing those who want to see the way in which different kinds of receipts are ‘normally’ used as a criterion for their classification as income or non-income. One either has to go all the way and make consumption itself the standard for all taxation, or else one has to admit that a rule that can be broken at any time by the individual is obviously far too vague as a criterion for distinguishing between the different categories of receipts. On the other hand, in my opinion, Schanz fails completely—as I have emphasized in my essay in Ekonomisk Tidskrift, which I have referred to several times—when he also tries to make the way in which receipts are acquired irrelevant to their character as income in the true sense of the word (contra Roscher and others). A similarly cheap and worthless argument is the shallow deductio in absurdum that consists in simply equating freedom from income tax on a certain receipt with exemption from tax or fiscal attention as a whole. Thus, for example, Schanz cites with approval the argument brought by the government’s representative in the Prussian state parliament in 1891 for bringing speculative capital gains within the frame of income tax (p. 47). The speaker had talked about the fact that fortunate realestate speculators, without possessing a penny in formal income, were none the less able to live in prosperity year after year by gradually borrowing money on their plots of land, which, though undeveloped, were steadily rising in value. He then concluded with the following rhetorical turn of phrase: ‘Well, gentlemen, do you wish to place these families in the lowest tax bracket or leave them completely exempt? If you do not want to do this, you are left with no alternative but to say that the gains proceeding from real-estate speculation are income and ought to be taxed as such’. Of course, this is jumping to conclusions. It was certainly obvious that an injustice was here in evidence, in that certain people were at an unfair advantage when it came to taxation, but it does not follow that the appropriate way to redress this injustice was to create a new category of income; on the contrary, it can be claimed that bringing these gains of fortune under the income tax became an obstacle to their adequate fiscal treatment. To be sure, Schanz argues the contrary view. He claims (p. 28) that ‘precisely by including all such gains’—inheritances, gifts, lottery winnings, windfall profits, etc.—‘the world of income distribution and income employment is fully opened up for the first time, and important phenomena in the realm of 202

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the formation of income and wealth are subjected to critical scrutiny. I am referring to gambling gains and windfall profits, inheritances from distant relatives, etc’. This is quite illogical. After all, the purpose of advancing a concept of income in fiscal theory is to establish a uniform standard for at least a significant part of taxation. If certain kinds of income are to be subjected to a special ‘critique’, and therefore to special treatment in fiscal respects, they could equally well have been excluded from the general concept of income. Schanz’s own formulation of this concept is as follows: ‘we count as income all net proceeds and usufructs, services rendered by a third person having monetary value, all gifts, inheritances, legacies, lottery winnings, insurance capital, annuities, windfall gains of all kinds’. This definition hardly seems likely to have a chance of gaining general acceptance, whether in fiscal theory or in the practice of fiscal law. What it has to recommend it is the endeavour not to exclude any kind of gains from fiscal treatment. In this respect it has as its model the tax legislation of the German Hanseatic cities and the city of Basel, which had long before guided Davidson in his proposal for a standard of taxation for the income tax, which is reminiscent of Schanz’s, though more cautiously formulated. But none of these laws has gone so far as to include inheritances and gifts in the taxation of income.26 Nor would legislation seem likely to go this far. Surely the only real issue in practice is rather whether the various kinds of gains of fortune and windfall profits ought, as now, to have their place within income taxation (in which case they should anyway be treated with complete consistency), or whether they should not instead, together with inheritances and gifts, form a separate category whose common characteristic would be to comprise gains that have not been earned by production but rather derive ‘ex aliis causis’, and whose fiscal treatment is dependent on these ‘causae’, i.e. on their greater or lesser degree of social justification. In my view, Schanz deserves greater credit for his proposal to grant taxfree deductions not only for all interest on debts but also for all capital losses (here, too, he is anticipated by Davidson). If all capital gains, of whatever kind, are subject to taxation, consistency undeniably demands that tax deductions should be permitted for all capital losses. Further, if unearned capital gains, e.g. of the kind that occurred so extensively during the economic turmoil of the World War, were to be subject to special, confiscatory treatment, then consistency would probably actually require us to go a step further and allow not only tax-free deductions for unearned capital losses, but even a degree of compensation from the community; the necessary means should be provided by the confiscatory measures mentioned. ‘Even the concept of national income (Volkseinkommen)’, writes Schanz, ‘constitutes no barrier to understanding private income as we do’, for this concept, he claims, ‘has little more than abstract significance’. One can either understand it simply as the sum of all private incomes, so that the average income, ‘which each citizen can make use of without diminishing the wealth 203

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he has had hitherto’, is found by dividing it by the population—or rather by the number of taxpayers; ‘or else the national income can be calculated by abstracting from the transfers of capital resulting from legal and commercial relationships, voluntary gifts, gambling and insurance’. In the latter case, he concludes, ‘the national income becomes a concept in its own right and is identical with the consumption fund of the national economy. Evidently the national income in this sense is a lesser quantity than the sum of private incomes.’ This is rather unclearly formulated. If one takes seriously Schanz’s demand that all interest on debts and all capital losses ought to be deductible when calculating income, it is not easy to see what one is supposed to ‘abstract’ from in his second case, as far as transactions inter vivos are concerned; the sum of all private incomes, at least in a stationary society, will necessarily be identical with the ‘consumption fund’ of the society. On the other hand, if inheritances and bequests are also counted in private incomes—Schanz makes no mention of these factors in this connection—then the sum of all private incomes will obviously be greater than the consumption fund of the society. The same thing is true of the net savings of the population: either they have to be counted as part of the national income, which will then no longer tally with the consumption fund of the society but will exceed it by a greater or lesser amount, or else a real discrepancy arises between the concept of income in the private economy and in the national economy—unless, like the author we shall discuss in a moment, one decides to identify the concept of income with the concept of consumption. Finally, Schanz maintains that his definition of income is the most suitable for purposes of taxation, since in contrast to other definitions it draws a dividing line that is both as well-defined and as comprehensive as possible. However, this supposed advantage virtually disappears, as Schanz himself has to concede that within the field he has thus delimited, new dividing lines have to be drawn, since it is obviously impossible to subject all his heterogeneous income categories to uniform treatment in tax terms. Finally, let us look at The Nature of Capital and Income, published in 1906 by the American author Irving Fisher, to the extent that it touches on questions discussed here. In contrast to Schanz or Robert Meyer, for whom the connection between private and national income does not play any real role, Fisher makes this connection his point of departure and attempts to follow it through rigorously. The contribution this allows him to make both to the exposition of what might be called national economic bookkeeping and to the explanation of the implications for the national economy of the (doubleentry) bookkeeping used in business, is not without merit, but his almost casual application of this account to fiscal theory seems to me precipitate and poorly justified. Fisher begins by pointing out the indisputable fact that all production, the whole economic activity of the society, has consumption, 204

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the subjective satisfaction of needs, as its ultimate goal. He advances the antithesis familiar from his previous writings between ‘capital’—in which he includes not only land but in principle also people in so far as they are endowed with physical and intellectual powers—as a fund of (material) productive equipment existing at each instant of time, and ‘income’ as the stream of consumable services flowing forth from this capital during a given period of time. He shows in a quite beautiful and very lucid way how, both when it comes to capital and when it comes to income (when understood in this way), this result is evident equally from either of two methods of cancellation. On the one hand, there is the method of ‘balances’, in which for each individual, assets are cancelled against liabilities, or receipts against the outlay incurred in acquiring them; on the other hand, there is the method of ‘couples’, in which for each transaction between two individuals, first, claims and debts, and second, services and what Fisher calls disservices are cancelled against one another socially. In the former case, there is left as a remainder that cannot be cancelled out the sum of all the net wealth or net incomes of all private individuals, in the second case the real capital of the society (understood in a more or less extended sense), which is identical with the first sum, or the entire sum of directly consumable services in the society during the time period in question. An example will serve to illustrate his line of thought, for which we must otherwise refer the reader to the text. A house requires a certain annual maintenance. This then represents a cost to the owner, which must be deducted from his receipts when calculating his consumable income. The repair man, in turn, comes into the possession of an income which, if the house had not required repair, could have been consumed by its owner. In social terms, the repair of the house constitutes, on the one hand, a service performed by the repair man (and his tools, etc.), but on the other hand a ‘disservice’ performed by the house itself, which has required or absorbed this service merely so as to be preserved in an unchanged condition. In social terms the result of this transaction is therefore zero (or, if preferred, the avoidance of a minus in the social capital), and what is left in real terms are in actual fact the consumable services performed in the course of the year in part by the house itself, in part by the makers of the food, clothes and other commodities, which in this case are consumed by the house-owner and the repair man in combination. Thus far there is nothing remarkable about Fisher’s line of thought; actually, it coincides with the argument made by Adam Smith in the passage cited above (Wealth of Nations, book II, ch. ii). But Fisher goes a step further and wants to apply the opposition ‘service and disservice’ even when dealing with the accumulation of fresh capital. Even a house that is under construction, he says, performs a ‘disservice’ by absorbing the services put into its construction. The positive services this house will perform do not belong to the present, but to the future, just like the services that the house that has only been repaired will perform. The concept of income—or at least ‘realized income’— 205

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ought therefore, in his opinion, to be restricted so as to include only the services actually consumed during the time period in question, but should then include all such services. Without doubt, it is possible to apply such an approach with complete consistency. Furthermore, as I have said, this presents certain advantages for the ‘bookkeeping of the society’, statistics relating to income and capital. The sum of all private incomes is automatically equal to the income of the society, and even in an advancing society, this income will only comprise what the society actually makes use of for its consumption in the period in question. Whether Fisher’s definitions also agree with conventional linguistic usage is a more subordinate question here.27 But when Fisher goes so far as to claim that this is the only correct or logical definition of the concept of income, and without giving any reasons, even drawing far-reaching conclusions from this definition with respect to the taxation of income, then I am afraid he is begging the question. In his chapter xiv, which is intended to put down possible objections, he takes the following example, which appears on the surface to be very convincing. At a time when the general rate of interest stands at 4 per cent, and is expected to remain at 4 per cent in the future, too, a person buys an ‘annuity’ (perpetual pension) of $4 a year, which, however, begins to be paid only at the end of the second year. In one year’s time this bond is therefore worth $100, while its present value is only just over $96. This value is arrived at by discounting the whole infinite series of annuities with compound interest. However, if the increase of value that the bond undergoes during the first year were also to be counted as income, then, in Fisher’s opinion, this income too should be counted in the series of annuities, and the present value of the bond would then be not $96, but about $100, which is absurd. But this argument is rather simplistic. If what is meant by income is only the consumable portion of a person’s receipts, or rather, the portion he actually consumes, then the bondholder in this case has no such income during the first year; if he acquires income, e.g. by pawning his bond, in subsequent years he will receive not $4, but instead only about $3.84 net, after the deduction of the interest on the debt. On the other hand, if the capitalized receipts are also called income, it must be equally correct to say that during the first year he enjoyed an income of about $3.84 and, by adding this income to his capital, he acquired an income of $4 in subsequent years, which he may be assumed to consume. It is self-evident that this capitalized income should not be discounted separately when calculating the present value of the bond; in fact, it is of course discounted in connection with the $4 series. Fisher’s next example is of greater interest for our subject. With this example he considers himself to have ‘put the matter in a practical light’. He imagines three brothers, who have each inherited an equally large fortune, say, $10,000. The rate of interest is assumed to be 5%. The first brother invests his capital in a perpetual annual annuity of $500. The second brother 206

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entrusts his fortune to a trust company, where it is allowed to grow with compound interest for fourteen years, after which it is converted into a perpetual annuity of $1,000 a year. The third brother, who is assumed to be ‘of the spendthrift type’, immediately buys an annuity of $2,000 a year for (not quite) six years. Fisher then compares and contrasts the apparently very different results that are obtained for the calculation of income, depending on whether, like him, one regards only consumed receipts (but consumed receipts in their entirety) as income, or whether one counts receipts that are saved (though not consumed capital) as income, too. In the latter case, the ‘thrifty’ second brother would be considered to have an income that gradually grew from $500 to $1,000 over the first fourteen years (during which he had no income at all, according to Fisher), and then remained at $1,000. The third brother, on the other hand, the ‘spendthrift’, would be considered to have an income that gradually shrank from $500 to zero over the course of the six years. ‘Was it for such an “income”’, asks Fisher rhetorically, ‘that he invested $10,000?’ Fisher assumes further that an income tax of, say, 10% is laid on these three people, and shows that the results of this tax are also extremely different, depending on whether one subscribes to his own definition of income or the conventional definition that is employed in the tax legislation of most countries, including the United States. In the latter case, he says, the third brother, the spendthrift, gets to pay next to no tax; he can, for example, buy himself free of the whole tax by making a single payment of as little as about $158, whereas the same operation would obviously cost the first brother a one-time payment of all of $1,000. The second, thrifty brother would be unable to free himself of the tax unless he made an immediate payment of all of $1,714, i.e. more than a sixth of the total capital, even though the tax, as stated, was only 10%.28 All this is of course indisputable, but it is surely not possible to solve questions of fiscal theory simply by means of purely arithmetical calculations of this kind, however startling their results may be. To solve such problems, one has to penetrate to the most fundamental principles of taxation. If taxes are regarded only as a common burden, which ought to be borne by individual citizens according to their respective ability or means, surely it can hardly be claimed that this ability is particularly large in the case of a person who is forced to consume his capital, while it is small or non-existent in the case of a person who is even able to add the interest to his capital. Fisher appears to simplify his argument in an undue fashion, by declaring in advance that the third brother is a spendthrift. However, it is certainly conceivable that he employed his fortune for a perfectly legitimate purpose, e.g. in order to pursue an expensive course of studies in preparation for his future professional work. In that case, of course, he would actually simply have exchanged one capital for another (the skills thus acquired), whose future yield will be taxed. 207

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Presumably not even Fisher himself would consider that an exchange of this kind ought to be reason for taxation. Alternatively, if one takes the position that taxes are payment for the undertakings of the state, which after all are largely designed to facilitate and safeguard the gainful employment of the individual citizen, then the tax must surely be levied according to gains from this employment, irrespective of how these gains are subsequently used. If they are capitalized, i.e. if they are used to enable further gainful employment, then a new round of taxation ensues, not double taxation, as Fisher, like Mill and many other authors, claims. Moreover, there is a great danger here of circularity. For if capitalized income is granted exemption from taxation, then it is clear that this capital, if and when it is subsequently consumed, must be taxed as income. But of course it does not follow that either of these two things ought to happen. If the capital has already been taxed as income when it was accumulated, then its later consumption cannot be subject to income tax (though the interest it yields in future certainly can be). The superficiality of Fisher’s ideas is also evident from his complete silence concerning the fiscal treatment of inheritances. He concedes (p. 109) that the regularity demanded by most writers, particularly the Germans, as a necessary quality of income in the true sense of the word, as opposed to ‘large’ or ‘unusual’ acquisitions, serves to exclude from income ‘such obviously inappropriate elements as bequests and gifts of large fortunes’. However, citing the example of an American millionaire who had recently received an inheritance of $70 million, he continues for his part: ‘But the reason that it is improper to call this suddenly acquired fortune income is not that it was large, nor that it was sudden, but that it consisted of rights to concrete wealth— factories, ships, railways, and dwellings. These things are not under any circumstances income, but yield income through future uses.’ On the basis of this argument, Fisher ought of course to demand tax exemption for inheritances and gifts, at least of real property, just as he argues for tax exemption for capitalized revenues. Can this really be what he means? Though fluently and captivatingly written and giving an impression of ‘exactness’ by its many concrete examples, Fisher’s lengthy book seems to me rather devoid of value for the investigation of the problem that has occupied us. With this we conclude our account. Evidently, it can make no claim to completeness. But, on the other hand, it has probably not passed over any idea of importance for the solution of the question of a rational determination of the fiscal concept of income. Unfortunately, the final result is evidently rather meagre, not to say purely negative. The beginnings of a rational treatment of the problem of income from an economic and fiscal point of view that occurred in the eighteenth and early nineteenth centuries have not been followed up since then. A major cause of this failure is that national 208

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prejudices have blocked the way to fruitful scholarly co-operation between economists from different countries. As for the concept of income itself, it may even be doubted whether any real progress has been made in judging the nature of income since the days of the ancient Roman lawyer Sabinus. If the reasons that led him (as we have mentioned above) to distinguish inheritances, bequests and gifts from ‘quaestus’ in the true sense of the word had come down to posterity, we might also possess a more secure foundation for the taxation of income than any modern author has been able to lay.29 In my view, the only real advance lies in the societal development which has led to the justification of different kinds of income and acquisitions of wealth being subjected to a critique that was unknown in former times. Of course, much still remains to be done before this critique manages to pass beyond the stage of vague discontent and acquires the clarity, precision and practicability that is required for all legislation. Nonetheless, it is probably by paying attention to this factor that we may seek guidance for a fruitful development of fiscal policy and particularly for the determination of the true concept of income and the correct design of the income tax. Stockholm, August 1923

NOTES 1 This essay is merely in the nature of a sketch. Time has not permitted its completion and full elaboration. 2 Petrazycki, Die Lehre vom Einkommen vom Standpunkt des Gemeinen Civilrechts [The Theory of Income in Common Civil Law] (Berlin 1893–5), especially vol. I, Grundbegriffe [Fundamental Concepts]. 3 For example, when marble was considered to ‘grow’, stones to be brought forth by the earth by means of coldness, and so forth. 4 T.H.Aschehoug, ‘Afkastning og intægt’, [Yield and income] Statsøkonomisk Tidskrift, 1898, p. 229n. 5 If the owner of the slave was also the owner of the land, he would therefore get all the treasure. 6 The first of the three quotations above is also from Ulpian and is considered by Petrazycki to express his ‘true’ opinion, while in the ‘words last cited he merely intended to illustrate an older view’. This claim is hardly supported by the text. 7 From a purely legal point of view this had significance in a number of different cases, particularly for what was called ‘societas quaestus’, an association for joint earnings, whether the mutuality of the association lay in the actual performance of work or not. Two teachers of grammar in a small town, for example, could agree to share the earnings from their lessons in order not to depress the market for each other. In such cases it was of course necessary to determine which revenues belonged in the communal pot and which did not. 8 In his essay in Statsökonomisk Tidskrift (1898), which is otherwise excellent, Aschehoug uses the term ‘occasional receipts’ with a certain ambiguity, in that he sometimes means by it receipts deriving from causes that are independent of the individual concerned (see pp. 228–9). 209

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9 François Quesnay’s famous, but very obscure, Tableau économique is based, if I have understood it rightly, on an even more serious confusion, namely, that between rent and the circulating capital employed in agriculture. He wants to show that in a well-balanced society rent is so to speak reborn each year at the same size as in the previous year; but according to the picture he presents of this process, the rent is employed in the maintenance of the working masses and is regenerated by them. However, this of course only applies to the capital employed in agriculture (and industry), or a part of it. The rent, on the other hand, or surplus production as a whole, can certainly benefit production indirectly, in so far as it serves to maintain the state, but this benefit then occurs via the activity of the state as an intermediary link; whereas in so far as the yield of the land (and of capital) is consumed idly by its owners, it is of course lost to production, and if it is reborn the following year, this happens because the land and the remaining capital stock then give both a new gross and a new net yield. 10 In contrast to English fiscal theory, German theory took as its point of departure the old theory of cameralism, which brought with it a certain tendency to stress the authority of a more or less autocratic governmental power with respect to the systems of public finance and taxation, too. 11 For example, as is well known, he did not regard a house occupied by the owner himself as capital. 12 The only thing worthy of note here is probably that because of the intermittence of agricultural production, the stock of corn cannot be counted as capital with respect to transactions occurring within the crop year. For a landowner who pays his workers in kind it is a matter of indifference whether payment is made in advance or after the completion of the work, as long as all transactions occur within the same crop year; in the former case, after all, he even avoids the inconvenience of storing the corn. Only if the workers were willing to receive their payment out of the next crop would this in general be to his advantage. In other words, the time factor has to be calculated in whole (crop) years in this case. It is possibly something similar to our line of argument above (in the text) that Schäffle had in mind when he states that ‘the circulating capital does not, as so often claimed, maintain the workers, but rather it is by means of the circulating capital that all members of the national economy exchange their primary contributions (labour and the use of capital) in concrete forms and quantities of goods’ (Das gesellschaftliche System der menschlichen Wirtschaft, I:278). This idea is in any case rather obscurely put. 13 It must always be remembered here and subsequently that Ricardo employs the word ‘gross’ for what Smith terms ‘net’. The ‘whole produce’ in the text is therefore not Adam Smith’s ‘whole produce’ (gross revenue) but rather this sum after the deduction of costs for the maintenance of the capital, which Ricardo considers self-evident. Ricardo has no term for Adam Smith’s ‘gross revenue’, just as Smith has no term in this connection for Ricardo’s (and the physiocrats’) ‘net revenue’. 14 In a note, Ricardo himself expresses the reservation that this assertion is ‘perhaps too strongly expressed’; the labourers too can receive a part of ‘the net produce of the country’—in his sense of the word. 15 F.von Kleinwächter, Das Einkommen und seine Verteilung [Income and its Distribution] (1896), p. 52. 16 F.T.von Bernhardi, Versuch einer Kritik der Gründe, die für großes und kleines Grundeigentum angeführt werden [A critical essay on the arguments for major and minor landed property] (1849). In spite of its title, the book consists chiefly of a broad critique of Adam Smith, Ricardo, and others. This critique is much admired in Germany but in my opinion is on the whole completely off the mark; in addition, it fails to lead to any positive results at all. 210

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17 G.von Schmoller, ‘Die Lehre vom Einkommen’ [The Theory of Income], Zeitschrift für die gesamte Staatswissenschaft (1863). 18 Smith’s intention was to warn against the very common misconception that the produce available for consumption in a year is the result of co-operation between the existing capital and the entire workforce, but of course he never denied for a minute that the workers, too, are maintained out of the annual consumption fund. 19 Robert Meyer, Das Wesen des Einkommens [The Nature of Income] (1887). 20 As far as Hermann is concerned, this is as good as certain, since it is apparent from his fourth chapter, ‘The Economy’, that in general he did not even consider inheritance a transfer of wealth. ‘By inheritances and legacies’, he says (Staatswirtschaftliche Untersuchungen [Studies in Political Economy], new edition, p. 131), ‘no real transfer of goods from one economy to another takes place if the survivors take over the economy of the person who has left the inheritance. The legal right of inheritance is not a true uncompensated transmission of wealth to others; rather, it makes the goods into a kind of family property, which apart from its economic advantages to the heir at the same time guarantees the continuity of family bonds’. 21 In his essay ‘Mensch und Gut in der Volkswirtschaft’ [Man and property in the national economy] (Deutsche Vierteljahrschrift, 1861), which Schmoller praises in lofty tones, but which I find rather muddled. 22 Hermann took the opposite point of view on this issue (Staatswirtschaftliche Untersuchungen, new edition, p. 594n). 23 This chapter was added in the third edition of Ricardo’s Principles, but was not included in Baumstark’s German translation (published in 1837), so that it probably long remained unknown to those who only read German. 24 He could have found a correct translation of this passage in both Hermann and Bernhardi. 25 At bottom, Hermann, too, makes this distinction, for at the very beginning of his chapter (ix) on income, he says he intends to ignore ‘new goods’ that someone receives without an equivalent economic contribution, and that therefore merely entail a change in the distribution, but not any increase in the total income. His position on the question of inheritance has been touched on above. 26 On the other hand, according to Schanz, this was the case both in the older Bavarian income tax of 1848 and in the Union Law of the United States from 1894. However, what he says about this is far too vague or too brief to allow any definite conclusions. 27 Fisher claims (p. 116) that this is the case, and that his terminology among other things ‘justifies the phrase “living beyond income”’. I find this incomprehensible, if precisely that which is consumed is income. If a person consumes his capital, Fisher explicitly advocates the view that he is providing himself with income in this way. But then a person who lives on borrowed money must surely also be considered to have provided himself with an income to match his expenditure; admittedly, this income is linked to a negative capital, a debt, that in social terms cancels out the capital claim that has arisen on the part of the lender. I have been unable to find any more precise explanation for this statement of Fisher’s in his book; I assume it is due to a slip. 28 I have not checked Fisher’s figures, but they appear to be at least more or less correct. 29 Of course this does not mean that I deny that certain improvements in some details of the theory of income have gradually taken place, particularly in more recent times. Among these may be reckoned the idea that is more and more generally accepted—though as we have seen, it is still disputed in part by Robert 211

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Meyer—that benefits in kind and the personal utilization of capital items such as dwelling-houses ought to be counted as part of income. Another advance is the opinion advocated above all by Adolf Wagner, that profits from swings in the business cycle and gambling gains ought, together with inheritances and gifts, to be organized in a separate category of receipts: ‘windfalls’, increases in wealth independent of any measures taken by the person concerned. (Cf. Aschehoug’s second definition of ‘occasional revenues’, p. 11n.) However, the correct fiscal treatment of these kinds of revenue is still very much open to debate and in fact, in my view, constitutes one of the foremost theoretical and practical problems for modern fiscal theory.

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In spite of all that has been written about the concept of income, particularly by German authors, the meaning or scope of this concept still remains rather vague. This is no doubt because no one has ever really spelled out to himself the purpose the definition of this concept is actually supposed to serve. In itself it is, of course, primarily a question of terminology, and the answer given should not necessarily always be the same. On the contrary, it is quite likely that the concept of income in civil law, e.g. as used in bookkeeping, cannot be exactly the same as income in fiscal law; at least as far as is known, no successful attempt has ever been made to base a person’s taxation simply on his accounts, however correctly they may have been kept. It is precisely the latter concept, however, the concept of income fiscally speaking, with which the debate about income is chiefly concerned: the intention is to secure a solid, uniform basis for taxation, and especially for the direct income tax which is coming more and more to the fore these days. But it is surely apparent that this can only be done by analysing the principles of income tax itself (which in turn can only be understood in connection with taxation as a whole), hardly by means of a priori formulations of the nature of income. The criteria that have been advanced in such formulations by various authors and occasionally also in legislation—the regularity of income, its derivation from a permanent source or a source regarded as permanent, etc.—hardly lead to satisfactory results. Distinguishing between income and an increase in wealth as two different concepts seems even more unproductive, since of course all income, as long as it is not consumed, is also an increase in wealth. To be sure, this does not mean that all increases in wealth are or should be regarded as income, too, but then, if a boundary is to be drawn, it must anyway divide increases in wealth that are income from those that are not. But in that case we are back where we started: what is income? More recent authors, such as G.Schanz,1 have therefore been inclined to tear down all these laboriously raised divisions and let the simple concept of Originally published as ‘Inkomstbegreppet i skattehänseende’, Ekonomisk Tidskrift, 1922.

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income employed in bookkeeping prevail over the whole line. But this is surely going too far: the time will probably never come when for example inheritance tax can proceed according to the same rules as normal income tax. It seems to me that would stand in complete contradiction to Schanz’s own understanding of the concept of inheritance tax, as revealed in his later writings. In the following, a modest attempt will be made properly to define a fiscal concept of income as far as this can be done, against the background of the general understanding of the system of taxation that seems most correct to me. Since the result is in part negative and as a whole may appear somewhat vague, let me just add at this point that though finance, like all legal disciplines, certainly requires thorough definitions of its concepts, the most important thing is that these definitions are implemented throughout with complete consistency in order to prevent on the one hand arbitrariness in the application of the law, and on the other hand loopholes and tax fraud on the part of the individual. Whether the definition adopted by the legislator is also fully rational in all respects is probably, however important in itself, of comparatively less importance when it comes to practical applications. I From the point of view of taxation, income is of significance in two respects: first, as the source of taxes, and second, as a tax base, i.e. a norm or standard for taxation. These two respects must not be confused with one another. Income is and in the long run has to be the source of taxes. This would be the case even if not a single tax were set according to income, indeed, even if there were no norm for taxation at all and society instead satisfied its need for revenues by means of occasional levies on individual citizens. It may be added that the fact that income is the source of taxes must be stressed above all with reference to taxes that are not set according to income, in order to counteract the idea that so often crops up that certain taxes of this kind, e.g. consumption taxes, do not actually affect anyone, but rather as it were float in the air, or at least are felt less than a direct income tax. This is of course incorrect: by and large, a given reduction in our incomes must always be felt in the same way. The only advantage of consumption taxes—though it is a very dubious advantage—is rather that when people pay them they do not always feel or understand that they are paying taxes. On the other hand, it does not necessarily follow from the fact that income is the source of taxes that a general income tax is the only correct form of taxation, or, which comes to more or less the same thing, that the whole tax system should ultimately be set according to income. It is true that a standardization of this kind, if it could be implemented, would at least be better than no standardization at all, but still, the demand that tax should be set according to income remains insufficiently motivated as long as it has not 214

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been demonstrated why income ought to be the universal norm for taxation, and if so, what income, defined in what way. However, the two respects do coincide to the extent that a tax directed primarily towards some other object of taxation than income, e.g. a wealth tax, is more likely than a direct income tax to overstep the bounds of income and encroach upon capital itself, or at least hinder a necessary or desirable growth of capital. But of course the same thing can occur even with a pure income tax if it is so high that the person owing taxes is tempted to have recourse to his capital, or refrains from accumulating capital, in order to maintain his customary way of life. However, let us take as our point of departure the distinction between income as the source of taxes and income as a tax base, and tentatively define income such that the sum of the incomes of individual citizens is equal to the whole of the aggregate national income, by which in turn we understand the fund—or rather flow—of commodities and personal services that is renewed year by year, and from which society as a whole has to satisfy the needs of its individual members as far as this is possible within the framework of the existing division of property. If, to begin with, a society that is stationary, in the strictest sense of the word, is made the basis of our discussion, as is our intention throughout this section, then the concept of the national income becomes relatively simple: it coincides with the total annual production of commodities and services, with the sole reservation that the aggregate means of production has to be maintained or when necessary gradually renewed, so that their stock neither increases nor diminishes. Otherwise, of course, the condition ‘stationary’ would be invalidated, as the society in question would either increase or decrease in prosperity, in its standard of life, and in that sense it would not be stationary, even if the numerical strength of its population remained unchanged. As is well known, this state of affairs had already been pointed out by Adam Smith, and later writers have been unable to add anything substantial to his basic conception, however capable they have thought themselves—in my opinion with very little reason—of criticizing and improving on Smith’s concept of income.2 In this connection, however, Adam Smith advanced another thesis that is as true in its foundation as it is problematic in its application. For he points out that the useful knowledge and skills that the inhabitants or members of the society have acquired should be considered part of the fixed capital of the nation. Undoubtedly, too, keeping up these skills is just as indispensable a condition of production as maintaining the capital properly speaking. Indeed, one could go still further and say that both bringing up young people to be useful members of society and physically maintaining or renewing man-power constitute equally necessary conditions of production. Of course, this point of view must not be insisted upon too much: the maintenance of man-power, i.e. of health and strength, is of course an end in itself, not just a means to 215

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production, and similarly bringing up children, if it can be done without too many worries, is certainly one of life’s richest sources of joy. However, there is enough truth in these reflections that, for example, the tax exemption for the subsistence both of the taxpayer himself (and of his wife where applicable) and of the children he supports, which forms part of our own income tax law, does not need to be regarded as due to any particular humanitarian considerations, but is rather fully compatible with the fundamental nature of our society’s economy. Now public enterprises, the undertakings of the state and the municipalities, could be understood simply as a constitutive part of the general national production we have talked about. Thus, the state and municipalities, first, provide us with the kinds of directly consumable commodities and services which are better produced publicly than by the efforts of individuals or private associations (postal and telegraph services, state railways, water and lighting in the cities and other densely populated communities, the upkeep of streets and highways, and so on). Second, they provide for the preservation of social order, the protection of the law within the country and externally, education, etc., which are essential prerequisites for all production. Of course, in many cases, these two branches of the public sector overlap: the safety of life and property is a good in itself even disregarding its significance for production; the work of the public information and transportation services is intended both to supply directly consumable services and to facilitate production; something similar applies in the case of the public education system, and so on. If things are understood in this way, then admittedly it cannot be said that the goal of the combined private and public production in present-day society is to achieve the greatest possible satisfaction of needs in society as a whole. That would presuppose a planned socialist or communist organization of both the production and the distribution of products, whereas in fact this distribution now depends chiefly on each individual’s ownership of the productive factors: labour, land, capital, etc. But to some extent it can certainly be said that this combined production aims to produce the greatest possible sum of means to satisfy needs; for if the available forces of production allowed an increase in the yield of production in any area, then the laws for general price formation (the economic principle) should be enough to lead these forces, whether in the private or the public sector, to be directed to just that area. The price of public-sector products is represented here, of course, by the taxes and fees that individual citizens have to pay in order to maintain this sector. However, since the prices of public-sector products, at least formally, are not determined by free competition through supply and demand on the market, but rather in a substantially different way, it is undeniably simpler and clearer to follow common practice and think of the production of the 216

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public and private sectors as separate and parallel. Even where the purpose of public enterprises is to produce commodities and services that are individually distinct and can therefore be (and indeed often are) paid for directly by the person making use of them, in the form of tariffs or fees, this public production is generally still more or less monopolistic in nature and the prices of its products and services are fixed unilaterally by the state (or the municipalities). But very often, by the nature of things, public services lack any such discrete form. Although each separate individual must be more or less able to form an idea of the advantage he thinks they bring him or the interest he takes in their accomplishment, he cannot haggle over their prices directly as he can with goods and services that are offered on the market. Indeed, he cannot even expand or curtail his consumption of these commodities or services to the amount he considers most advantageous to himself, as to some extent is the case with the monopolistic pricing (fees and tariffs) just mentioned. Nevertheless, it is obvious that the size of the public sector (the undertakings of the state and the municipalities)—and therefore, to the extent that its costs are not covered by fees and tariff prices, the society’s need for taxes—must observe a certain relation not just to the total private income of the society, but also to its parts, the incomes of individual citizens, and that in theory this relation must be carefully measured, even if it is not always easily demonstrable in practice. Where consumable commodities or services are concerned, each separate individual should in principle be in a position to divide his consumption between the public goods and those offered on the market in such a way that, taking into account the necessary price of the former, which he has paid in the form of taxes, his needs are satisfied to the greatest possible extent. 3 On the other hand, when it comes to the maintenance of social order, the rule of law, education, etc., viewed as indispensable prerequisites for all production, their costs, just as much as other production costs, have to be covered by the gross yield of production, and the level of these costs should be set as far as possible so that, when they are taken into account, the net yield of production for each individual producer is as large as possible. This means that the range of the public sector should extend to the point at which its marginal costs just correspond to the increase in the gross yield of the production of each individual, and therefore also of the total production, to which they give rise. Of course, this applies only in broad outline. Even the maximization of the satisfaction of needs generally attributed to free competition is by no means absolute, but rather highly relative. It is only guaranteed with certainty in one respect, namely, that no one is obliged to pay for something for which he has no use. In theory at least, the public sector can also meet this requirement, and in my opinion it should meet it, too. As for the apparent contradiction between these statements and our previous concession that the individual citizen cannot haggle over the 217

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price of public services, it will probably disappear if we bear in mind the fact that what is involved is generally only a gradual expansion, or occasionally contraction, in the range of the public sector. Now since each change of this kind is bound up with an increased, or reduced, need for taxes, it ought by rights to give rise to a debate as to which taxes would be used for the purpose, or which could be remitted. Theoretically speaking, if the measure at issue entails any benefit to the community, it must necessarily be possible for the distribution of the additional (or disappearing) sum of taxes to be organized in such a way that the result also entails an increased benefit for each individual member of society who pays any taxes at all. In practice, of course, we shall have to accept something less satisfactory, namely, a certain degree of protection for the rights of minorities, which can probably be achieved most simply by requiring a qualified majority when decisions are made. This is what I have urged in my earlier writings, and it has subsequently been put into practice to some extent in our country, though merely with respect to local taxes. This, then, is the very first result of our investigation, a somewhat vague result, no doubt, but none the less, it seems to me, better than the rather empty conclusion implied in merely pointing to the principle of ability to pay, which of course says nothing at all about the concrete level of public expenditure and therefore of taxes. The only answer that can be given to the question of what this level should be, when put in such general terms, is that the aim must be to achieve a certain harmony between both the incomes and the expenditure of the community and of its individual members. If this harmony could be achieved in every detail—which I do not want to go into further—the problem of taxes would already be solved without the involvement of any other principle.4 Of course, in this hypothetical case, too, personal income will also play a major role as the tax base, since in general, though admittedly not always, one can assume that people in the same economic position are approximately equally benefited by and interested in the undertakings of the various branches of the public sector. The concept of personal income in turn would also become very straightforward, namely the result of an individual’s gainful employment during the tax period after the deduction of expenses for the maintenance of his wealth.5 This would, however, be true in the first instance only if we assume that the condition ‘stationary’ also extends to the individual economy. However, such an assumption cannot be made. Even in a society that is practically speaking stationary, the economic life of the individual is subject to change. Even if we suppose that the aggregate stock of means of production does not change, an individual person can increase or reduce his ownership 218

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of these means, and if he does, then some other individual or individuals must be thought of as reducing or increasing their ownership in a precisely equivalent degree. If this happens in return for compensation, however, in that portions of income are exchanged for portions of wealth and vice versa, then no changes ensue in the line of argument we have pursued. Here it makes no difference whether the income that has been saved and transformed into wealth, but not, in contrast, the consumed portion of wealth, is regarded as (taxable) income (as is usually the case when income is taxed), or, as John Stuart Mill prescribed, and as actually takes place when consumption is taxed, the volume of consumption is made the tax base. In either case, given the circumstances described, public expenditure and the spending of individuals on consumption would still keep within the limits of the national income without encroaching on the actual stock of wealth. It is a different matter with what is known as beneficial acquisition, e.g. a substantial gift taken from the donor’s own wealth and not intended for immediate consumption, or an inheritance. Wealth acquired in such ways obviously forms no part of the national income, and so the community would not be able to appropriate any considerable part of it to pay for its current expenses without disturbing the economic balance of the society in such a way as to impair the future prosperity of the nation. To be sure, the needs of a person leaving an inheritance cease upon his death, but in a stationary society it must be assumed that the needs of the remaining population grow organically by the same amount, so that the total sum of needs remains unchanged. Nevertheless, many writers want to count inheritance (and gifts) as taxable income, which should only escape income tax because it is actually already taxed in some other way. Inheritance (and gift) tax should therefore really be regarded as a breakaway fraction of income tax. In his work Om beskattningsnormen vid inkomstskatten [On the Norm for Taxation in the Case of the Income Tax] (1889), Davidson, too, essentially agrees with this view, though for different reasons: he considers that even if these kinds of increases of wealth in the long run neither can nor ought to be a source of taxes and thus cannot be called income, either, they should still be taken into consideration when assessing income tax, since they obviously constitute proof of an increase in the ability to pay of the person in question.6 According to Davidson, therefore, inheritance (and gift) tax would constitute an augmented tax on the other or real income, present or future. I for my part cannot concur with this way of looking at the question. If the right to an inheritance, for example, were as indisputable as, in most people’s view, a person’s right to what he has earned by the sweat of his brow by persevering and laborious work, then in my opinion no inheritance tax at all should be payable, just as in Swedish law no inheritance tax is payable on half the marital property, or for even more compelling reasons. Such a case would arise if the heirs themselves had amassed the inherited wealth by their 219

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own work—as can still occur within the closed family economy and as used to be far more common than now. To take a really striking example, let us imagine a man living with his parents in a rural area who has run the farm on behalf of his aged father for a long time, and in doing so has not only improved the farm but has also paid part or all of its debts, which we assume to have been so large to begin with that the farm had no actual capital value. In this case, it is hard to see how any tax could rightfully be demanded of him when on his father’s death he takes possession legally of what morally or socially must already be regarded as property he has earned himself. The real basis of inheritance tax, and at the same time the explanation for its remarkably vigorous growth precisely at the present time, lies rather, in my opinion, in the fact that as a rule the right of the heirs is not as indisputable as it would have been in an exceptional case of this kind—in a word, in an incipient, more or less clearly grasped rejection of the full unrestricted right of inheritance as such. This is proved most clearly by the increasingly vociferous demand that the set of persons with any entitlement to inheritance should be considerably restricted. Here, therefore, it is no longer a tax that is involved, but rather a complete confiscation of property left by deceased persons, which in the absence of close relatives should be treated as property without heirs or abandoned property. In cases where inheritance still comes into question or currently is actually paid out, there would then surely be good reason to regard what is known as inheritance tax as a partial confiscation. This is also the only way to arrive at an unforced explanation of its structure, which diverges so sharply from that of most other taxes: its fixed tax rates, which are independent of the society’s need for taxes (which varies year by year), together with its dual progression, depending on both the size of the share of the inheritance and the degree of relatedness. But as a necessary consequence of this analysis, there is no doubt that revenues from the inheritance tax should not be consumed by the community for its current expenses, but should rather be invested in order to preserve their status as wealth. This requirement, to be sure, has so far only been put forward as a desideratum within tax legislation, but it will probably force its way through as the inheritance tax is further extended, which can hardly be more than a matter of time. I have dwelt on this issue not in order to call the position of inheritance tax in our tax system into question—except of course as regards the use the tax is put to—but rather because the argument pursued here probably has a far broader application, as will be shown later. As to any objections that it still remains undecided on this view whether or not that part of the property left by a deceased person that actually falls to the heirs should be regarded as their income, I have no desire to argue this point. However, it seems quite natural for the reduced right of inheritance (a right the state therefore sanctions), like the right to half the marital property, to be regarded as property to which the heir in principle already has a prior claim—of course where 220

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direct descendants are involved, attention could be drawn here to the regulations concerning their statutory share of the inheritance (cf. Schanz)— and which is therefore subject to tax not on its capital sum, but rather only with regard to the future yield of that capital sum.7 Whether what we have said is also fully applicable to bequests and gifts appears more debatable, but we shall not investigate this question more closely here. However, in Swedish tax law, gift tax in particular has probably come to be treated far too much as an appendix to inheritance tax, or perhaps rather as a means to prevent the fraudulent evasion of inheritance tax, but without sufficiently considering the specific quality of the institution of gifts. Something similar is probably true of the tax on bequests. II So far we have assumed throughout a society that is essentially stationary. If we drop this condition and instead suppose that the society is advancing, then new difficulties arise in defining the concept of income, and in general so many new fiscal problems ensue that it is astonishing that so little attention has been paid to this distinction in the literature on the theory of public finance. It can probably even be argued that the most important and most difficult tax issues are connected precisely with the degree in which differing societies are actually advancing. For the sake of simplicity we shall assume in the following, where no other condition is explicitly stated, that the fact that the society is advancing manifests itself exclusively in that the population increases year by year, while the prosperity of the society is assumed to be more or less unchanged. Rapid, sustained population growth is in fact the condition in which most nations in Europe or of European origin—and some others, too, e.g. Egypt, Java, etc.— have been for the past century or even longer. To most people’s mind these days, this even seems the normal state of affairs for population, though that, of course, would be an absurdity.8 However, as long as this condition persists, it is clear that the national income in the sense of a consumption fund—which must always be its real or chief function—can no longer coincide with the annual production, even after allowances are made for the sacrifices of labour and natural resources necessary for the maintenance of the means of production. Rather, in this case, the aggregate means of production must experience constant growth, fully matching the increase in the population. In an old country, moreover, where most of the best agricultural land is already cultivated and the supply of other natural resources, such as forests, mines, water power and so forth, is similarly strictly limited, a uniform increase in all the means of production is an impossibility if the technology remains unchanged. The prerequisite for rapid population growth in Europe has in fact been a vast number of technical and commercial advances. These have made it possible, first, to extract richer and richer harvests from both the old 221

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fields and the pasture land that has been converted into arable land, and, second, to bring food supplies and raw materials from transoceanic countries in exchange for the products of Europe’s industries, which have undergone such extraordinary growth. The foundation for the expansion of these industries, in turn, has been the increasing exploitation of the subterranean riches of the coal mines and ore-fields of Europe (in Sweden, also of the natural forests which used to be almost inaccessible). In each case this development has required unheard-of quantities of new capital—certainly, by the nature of things, on a scale far exceeding that by which the population itself has grown. This new capital, the fruit of the nation’s successive savings, can be a great source of wealth to private individuals, but for the nation as a whole the increased capital is quite simply a necessity, without which its standard of life would immediately begin to decline. The same thing is true, incidentally, of technical progress, too. Protected by patent law or in some other way, a technical invention can certainly provide its owner with an enormous income, but this income must in fact be part of a national income that may not have undergone any growth at all per capita of the population. As a direct consequence of this need for new capital, it is even less possible than in a stationary society to place that part of the public sector that is intended to provide us with consumable goods and services on an equal footing with, or to let it be on the same scale as, the sum total of the combined private production, since now a constantly increasing part of this production neither is nor can be intended for consumption at all. Nor, therefore, is it possible to make that part of the public sector equal to the sum of all private incomes, as defined in the previous section. Only in so far as public undertakings are aimed at facilitating or safeguarding actual production should they still continue to occur on the scale that allows the greatest possible yield from production itself, including a fully adequate expansion of the capital. Clearly, the boundaries between these two areas are extremely difficult to draw. Nevertheless, the distinction is surely of the greatest importance: many public expenses that serve to enhance comfort and pleasure in the life of our present-day society, and that are apparently able to occur without encroaching on private consumption to any great extent—in that the funds that finance them are derived from the part of private incomes otherwise intended for the formation of capital—become reprehensible if the provision of capital required to meet future needs is thereby put at risk. A shortage of capital of this kind can probably be made up temporarily by loans from abroad, but of course not indefinitely. On the other hand, it must not be forgotten that under the conditions actually prevailing in our society, the accumulation of capital is of direct benefit only to the relatively small number of people who have succeeded in becoming owners of capital on a large scale. What is involved here for the great mass of the population that owns almost no property is merely the indirect benefit of capital in the form of tools used in production or funds for the advancing of 222

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wages, which make it possible to raise wages or at least prevent them from decreasing. Moreover, the workers would benefit in much the same way if production were run with capital borrowed from abroad. Alternatively, using the more convenient means of transport now available, they could search out capital (together with natural resources) in its homeland, by emigrating. The question now becomes to what extent these circumstances should affect our definition of personal income. Naturally, as a source of taxes the sum of all private incomes must still correspond to the national income in the limited sense defined above, but what becomes of them as the norm for taxation? When the income subject to tax is being determined, can it be enough to allow deductions only for that part of the income (or ‘receipts’) that is used in the maintenance of the taxpayer’s capital, as most tax laws prescribe, and as would be justified in a stationary society? In an advancing society, would it not be logical also to allow deductions for that part of the income that is used in improving real property, increasing inventories or paying off capital debts, as well as in accumulating new capital in general, at least to the extent corresponding to the country’s need for new capital; or rather—since an increase in the relative size of the capital and thereby in the general level of prosperity is also desirable—for all income that is saved and capitalized? There has been no lack of initiatives in this direction in modern legislative work, and in fact no less a person than John Stuart Mill suggested a procedure of this kind. However, his reasons were in part of a different kind, in that he regarded it as an impermissible double taxation to first tax the capital when it is accumulated, and then tax the interest it yields in the future. It is true that this argument fails to stand up, since the earning of the income that formed the capital and the capital’s Subsequent application to interest-bearing ends obviously constitute two separate earnings, each of which requires the co-operation and protection of the state, so that both ought to be taxed. But the analogy between the maintenance or renewal of the capital stock and a necessary expansion of this capital to preserve (or raise) the general level of prosperity none the less remains and deserves attention. Now if it were the case that the accumulation of capital were evenly distributed over the entire population, so that a family which had many children, and which therefore needed a lot of capital to provide for their future productive activity, also had a correspondingly increased capacity to save, then the arguments we have just rehearsed would indeed have great significance. But as everyone knows, the exact opposite is the case: those who stand in the greatest need of capital have little or no capacity to accumulate it, while most capital is accumulated by people who already have enough or more than enough capital. The recommendation can hardly be made to increase this disparity still further by transferring a part of the tax burden borne by the wealthy on to weaker shoulders. As a rule, then, the income that is used in accumulating capital should also be taxed. (Certain 223

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exceptions, such as deductions for insurance premiums up to a certain minor amount, do not conflict with this rule, but rather confirm it.) Indeed, consistency might demand that neither should deductions be permitted for the maintenance of capital that already exists, since of course this too is anything but equally distributed among those subject to taxation. As to the danger that such measures would pose to the generation of a sufficiently large accumulation of capital, society should attempt to forestall it by itself accumulating capital, using the means it has at its disposal. We shall have more to say about this later. Yet it might seem hopeless to strive to remedy by means of taxation the social paradox we have just indicated to the full extent necessary. In a stationary society even a moderately high inheritance tax, if properly applied, should be able to serve to level out gradually the traditional inequities of the distribution of wealth in society. In a rapidly advancing society, in contrast, as we have already emphasized, the provision of capital per capita of the population must also necessarily grow. However, the ownership of capital objects and their returns generally remain in the hands of a relatively small number of people, the major savers and their heirs, and the large part of the population whose parents have left to them merely their own lack of means thus becomes more and more dependent on the owners of the capital (including natural resources). The gap between the poor and the rich steadily increases, and if we wanted to try to level it out by continuing to raise the inheritance tax, we might be forced to resort to tax rates so high that private savings would be discouraged or even decline. Out of the frying pan into the fire.9 Fortunately, there is a phenomenon these days that makes this matter somewhat more hopeful, namely the tendency to diminished population growth that is noticeable in all civilized countries. This trend began even before the World War, and will surely not be halted in the foreseeable future. To the extent that this tendency makes itself felt, the solution of both the problem already discussed and other fiscal problems, which to a greater or lesser extent are consequences of the persistence of the advancing type of society, and which we shall now proceed to consider, is obviously made easier. III One such consequence, as is well known, is the increased scarcity of land and other natural resources, and, in more densely populated communities, of building sites. This makes the very ownership of land a constantly growing source of income.10 As is now generally acknowledged, the coming into being or growth of a source of income of this kind by no means involves any real increase in the society’s ability to support itself, and therefore in the general level of prosperity—indeed, quite the opposite. This can perhaps be disguised but of 224

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course not annulled by a simultaneous increase in the yield of the national output deriving from other sources—technical and commercial progress, a rapid expansion of capital in the true sense of the word, not least of capital invested in land, and so on. Not infrequently one encounters the claim that rent, particularly the rent yielded by urban sites, is a fruit of society’s industrial development, which ‘gives the land value’. However, this is a rather inaccurate interpretation of the actual state of affairs. The concentration of the population in the cities is an advantage for the combination and division of labour and therefore for industrial production, but the growing distance to the central parts of the city constitutes a hindrance to the process of concentration that can only imperfectly be overcome, and this situation gives the owners of favourably located sites the opportunity to impose a tribute on society in the form of rent. In the same way a new invention, e.g. the Bessemer or Thomas process, can ‘give value’ to previously worthless ores, but only if they exist in an insufficient quantity relative to the need for them, or else if the supply is artificially held back by the mine-owners. Otherwise they would still have no value at all—yet precisely in that case the invention would have been able to produce the greatest benefit to the entire population that it possibly could. In this connection, incidentally, in addition to pure land rent we should probably also mention the increased rental value of houses and buildings already in existence, which is a consequence of the increased scarcity of building materials or otherwise increased building costs, and so on. Now it cannot be denied that, as regards the national economy, these and similar revenues are substantially different in nature to income derived from labour, or from a combination of labour and savings. After all, it would be possible to imagine them disappearing completely without the fund of productive services, by which the society lives and is improved, being diminished in the least—on the contrary, this fund would grow by means of the personal endeavours of people who at present perhaps do not need to work at all. In a way, such income forms the diametrical opposite of the portions of income intended for saving and the accumulation of capital that we discussed previously. Where these are concerned, as we have already emphasized, society must consider well before making any claims at all on them when levying taxes. In particular, it should not use a tax of this kind for the purposes of consumption unless the accumulation of capital by the society is assured in some other way at the same time. As regards the kinds of revenue presently under discussion, since they cannot really be got rid of under free competition the question could be raised whether they should not by rights have been confiscated by the state and municipality when they first arose so as thus to benefit the entire community. The difficulty of drawing an exact line between them and other, undoubtedly legitimate, kinds of earnings, the desirability of avoiding all abrupt and precipitate changes in the social structure that has come down to us, and similar considerations, may supply fully valid 225

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reasons for by and large leaving these incomes in the hands of those who have at some time acquired a legal claim to them and ‘attached a reasonable interest’ to them; but at the same time, the contrary view, which sees in them an arbitrary tribute imposed on productive labour and legitimate earnings, can hardly be rejected as completely without foundation. For this reason, a special fiscal treatment of this kind of income would have been appropriate, simply as a compromise between the different opinions it gives rise to, and the present tendency indiscriminately to treat income from fixed property in the same way as ‘all other income’ is probably at bottom the fruit of a misdirected desire to iron out the differences. In any case, a continued growth in these unearned incomes, as revealed by a gradual increase in the capital value of land and urban sites, forests, mines, water power, etc., should be prevented as far as possible. The so-called tax on capital gains that is planned in our country, too, is not really adequate as a means to this end, as some people think; it does, as it were, too much and too little at the same time. It does too much if society is tempted to regard and treat as a fitting source of income for its customary expenses a social phenomenon that basically amounts merely to a growing shortage of natural resources and thus an impoverishment of society, a decline in its level of prosperity; but at the same time, this tax does far too little if society is satisfied with a tax of a few per cent on sums that it should appropriate in their entirety, since no private person can justifiably lay claim to them. Once again, therefore, we encounter a source of income for society that should be used far more than actually happens, but it should be used for the purposes of investment, not for present purposes. It should be emphasized that this viewpoint in no way implies a recommendation of severity or cupidity on the part of the fiscal authorities. On the contrary, every circumstance that can with any degree of probability be adduced in support of the rights of private interests in such cases should be respected and taken fully into consideration. Such circumstances include, in the first instance, of course, the labour and costs actually invested in the improvement of the property; further, the speculative enterprise and risktaking that is inseparable from all business activity; and last, but not least; the fact that a future increase in value has often already been taken into account at the time the property in question was acquired, so that the purchase price or, in the division of an estate, the buying-out price was actually higher than would have directly corresponded to a reasonable rate of interest on the capital. But the remainder, whether large or small, the truly unearned increase in value, should not be taxed, which would be meaningless here, but instead confiscated. On the other hand, a rise in the capital value of fixed property can sometimes occur without any change in the returns it actually yields, merely as a result of a prolonged decline in the general interest rate. It is of course self-evident that such increases in value cannot simply be placed on a par 226

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with the increases in wealth we have just discussed, those that are based on a real increase in returns. It seems very doubtful to me that they should be subjected to fiscal measures at all, particularly since, of course, if they were, the opposite eventuality—a diminution of wealth as a result of a rise in the interest rate—could hardly be left out of account. It is even more indefensible to tax the purely apparent increases in wealth that result from a fall in the value of money, as has unfortunately been done to a great extent in our own and other countries during and after the war, among other things in the so-called war economy tax. It may incidentally be hoped that the sorry experiences of the war years might lead to the world’s monetary system being put on a completely rational basis from now on, so that more violent oscillations in the value of money could be prevented under all circumstances. IV A more indirect, though that does not mean a less weighty, consequence of the present dominance of the advancing type of society has been the emergence of the industrial monopolies or quasi-monopolies. The general growth of the population and perhaps still more its consequent inevitable concentration in urban communities undoubtedly provides a powerful impetus to large-scale industrial and commercial enterprises. Those that are first on the scene when this happens are often in a position to establish themselves on a scale that excludes competitors, or, if competitors nevertheless arise, an amalgamation of the existing firms can lead to a still more powerful organization that can aggressively eliminate competition. Other modern phenomena, which have no necessary connection with population growth but are still usually stimulated by it, above all the development of means of transport, also evidently favour the emergence of large enterprises, which always result in a more or less pronounced monopoly position. It is surely futile to try to deny that it is precisely this fact that, understood more or less clearly, is the real basis for the sharp increase in modern times in the tax burden on the most prominent form of economic amalgamation, namely, the joint-stock company.11 Otherwise it would be hard to explain this phenomenon, since the analogy to the progressive taxation of the incomes of private individuals is obviously very loose in this case—the taxation of joint-stock companies most closely resembles a partial double taxation of the stock-holders’ incomes—and the argument for general tax progression drawn from the principle of ability to pay completely misses the mark here, since it is by no means necessarily the case that a rich corporation has nothing but rich stock-holders. And this is why it has been found appropriate in Sweden and elsewhere to make the progression of taxes in this case dependent on the size not of the absolute but rather of the relative profit. In other words, here it is not the income itself, but the degree in which it is monopolistic in quality 227

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(in part also its dependence on the business cycle, which we shall say more about in the next section) that supplies the norm for taxation. But something similar probably applies when it comes to the taxation of individuals, too. If we imagined that one person’s economic activity were a hundred or a thousand times as valuable to society as another’s, it would be hard to see why the result of the former’s exertions should not be respected just as much as the result of the latter’s when it comes to taxation, so that the state did not demand more from either of them than it could with good conscience consider equivalent to what it had done to benefit that person. Indeed, it could be asked whether society might not actually gain by granting such an economic giant total tax exemption, if that would spur him on to even more colossal feats of production, since of course these always benefit others too in a greater or lesser degree. However, a closer examination would probably show that this is not the way things are, but that this individual’s extraordinarily high income, even if it bears the name of income from labour, is really the fruit of an abnormal monopolistic position, which is usually inherited and whose social justification is questionable to a greater or lesser extent. (Compare the special regulations which some countries have found reason to enact relating to the taxation of bonuses and the like, something that also occurred in our own war economy tax.) These monopoly-like incomes, whether falling to organizations or to individual persons, do not really constitute any part of the national income, they do not correspond to any real contribution to the national output. In fact, they are a kind of parasite on national production. This expression may seem severe, and it is not justified in all such cases. However, let me draw attention to the thesis already advanced by Adam Smith that monopoly profit always presupposes an artificial restriction of production in order to obtain more profitable sales, i.e. from the point of view of the whole community, an uneconomic procedure. Now unless society thinks itself capable of taking on the role of producer, it cannot dispense with monopolistic amalgamations of capital, since that would mean depriving itself of the advantages of large-scale production. Consequently, it has every reason to trim the profits of monopolies instead, whatever form they may take, and to do this, nota bene, not because of its need of revenues, but rather in order to achieve social justice. In other words, once again it is not a matter of tax in the true sense of the word but rather of confiscation, and the consequences with regard to the use to which the tax is put are then the same as those drawn previously in similar cases. A kind of ‘supertax’, a special form of taxation or fiscal measure, which aimed at obvious divergences from normal, undoubtedly legitimate earnings, and subjected them—which the English supertax does not do—to thorough scrutiny with regard to the degree of their justification, would therefore in my opinion be preferable to a general tax-rate schedule based on mere arithmetical subtleties, which mixes up things that do not belong together, and whose higher rates only serve to encourage wastefulness in the public 228

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economy, while at the same time retarding the provision of the country with the new capital it requires. V Finally, the advancing type of society probably also bears the main responsibility for the vagaries of fortune and the business cycle that, on the one hand, deprive countless individuals of their daily bread, through no fault of their own, and on the other hand, lead to equally undeserved riches for the minority favoured by fortune. In a stationary society, by and large, the only conceivable causes of violent swings in the economy are those that are rooted in external circumstances, such as variations in the weather and the annual harvests, and with each day that passes we are bringing such factors more and more under control by means of progress in the material culture, improvements in communications, and so on. If the population is growing, in contrast, then as soon as it no longer has at its disposal unlimited expanses of land, even the satisfaction of the constantly growing need of everyday commodities requires, strictly speaking, as we have already pointed out, an uninterrupted series of new technical or commercial advances, the discovery of constantly new ways of producing and exchanging goods. The good side of this, the constant spur to new inventions presented by unsatisfied needs, should not be forgotten; it would probably not be found in the same degree in a society that was stationary in terms of its population. But on the other hand, in a numerically stationary society each new technical or commercial advance would mean a real increase in general prosperity, whereas in the socalled advancing society the disheartening overall result is often an expansion merely in breadth, while the actual level of prosperity in society remains unchanged or for the broad mass of the people perhaps even declines. The years immediately preceding the World War seem to some extent to have been characterized by just this tendency. Then again, progress naturally cannot occur just at any time, or at just any rate. To be sure, more often than not one new invention leads to several more, which perfect it, but on the other hand, the new invention also bars the way to further progress in the same field. It has been observed that modern iron production rests in its entirety on the fuel savings gained by the introduction of the blast furnace, when the coal required to produce a hundredweight of pig-iron suddenly went down by the ratio of 7:1, if I remember rightly. That being so, obviously all that can be at stake for all subsequent methods of saving fuel, however ingenious they may be and however much effort may have gone into their development, is a further reduction of the remaining seventh. Similarly, the introduction of crop rotation in agriculture entailed the great advantage that a large part, indeed, most of the land lying fallow could be put into productive use, but of course once fallow fields have been done away with they cannot be done away with again. The same thing applies to the cultivation of clover, by which 229

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pasture land can profitably be transformed into arable land, and so on. In some people’s opinion, all truly epoch-making inventions already belong in the past; that they must at any rate become more and more uncommon lies in the nature of things. It is obvious that this means that economic life necessarily has something highly aleatory and fortuitous about it. All production is becoming more and more capitalistic, in other words labour is increasingly directed towards the future, but no one has control over the future. If one invention, one new enterprise, succeeds to the full and then overwhelms its proprietors with riches—more often than not at the expense of competitors whose methods, though good enough in themselves, are outstripped by those of the new enterprise—there may be perhaps ten that, though technically just as well thought out and the fruits of an equal quantity of labour or material sacrifices, just barely manage to repay these investments, or indeed do not do so at all. Possibly this gambling for the profits of fortune is a necessary stimulus to the inventive genius, or perhaps rather to those who are to be persuaded to take on the risk of financing the invention. But this is not self-evident, and of course there can be no talk here of anything comparable to a mathematical risk premium, calculable in advance. Probably, therefore, the person who started the enterprise concerned would consider himself fully compensated for his exertions and costs, including the risk, by a far more moderate profit. So if he is obliged to acknowledge that it is good luck that has done the rest, he should probably not much mind letting what he has gained in this way without deserving it receive a use more beneficial to society than his personal consumption. To be sure, it is not out of the question for him to give it such an application on his own initiative by taking on the role of benefactor or philanthropist: then it only remains to be seen whether he is as great a genius or as lucky in finding the right way to use his riches as he was in acquiring them. The matter is of a delicate nature and requires delicacy in its execution, but this is no obstacle to, indeed, it is an argument in favour of, making these and similar profits of fortune the object of special investigation and special fiscal measures in addition to general taxation. Further, these measures should be taken far more with social justice in view than from the point of view of the state’s tax requirements for its current expenses. VI I am far from prepared to construct some positive proposal for a thorough reform of our tax system on the basis of the above reflections, and in any case such a proposal would fall outside the scope of this essay. I recognize just as clearly as anyone that there is a big difference between what is correct in theory or in the abstract, and what can be carried out in practice under given conditions. On the other hand, a praxis that does not have a solid 230

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theoretical conception as its basis or at least its background clearly runs the risk of going astray, unless it is possibly rescued by a ‘subconscious’ instinct for what is right. However, this much seems obvious to me: a tax system that completely neglects to establish some congruity between public outlays and the contributions private individuals make to their funding, so that it is clear to every taxpayer or group of taxpayers what each individual branch of the public sector costs him personally, cannot possibly either fulfil the demands of justice or provide a sufficient guarantee for an economical, not wasteful (but not unreasonably niggardly, either) handling of public finances. But on the other hand, this is not enough to achieve full social justice; the principle of social levelling that Adolf Wagner championed so energetically (though he perhaps formulated it less than adequately in theoretical respects) must also be satisfied. However, in my opinion this principle should not, as in Wagner, be confused with true taxation, but should rather be kept clearly separate from it, both conceptually and in reality, in the theory of taxation and in its practice, even if it may assume the form of taxation for the sake of convenience. For this reason, too, the fully legitimate, undisputedly justified income that members of society receive should be distinguished as far as possible from income that in one or other of the respects discussed above can be considered more questionable in terms of its social justification (even if undisputed in civil law). As far as possible, fully legitimate income should be treated according to the principle of voluntarism, self-taxation, which as a rule would probably lead to a merely degressive or weakly progressive tax rate schedule. After all, a person’s income, or at least his free income, generally constitutes the standard for the economic sphere within which he moves, and therefore for the extent to which he claims the services of society. Incidentally, as I have pointed out on another occasion, there would be nothing to prevent an additional ‘infratax’, as it were, a purely proportional tax on incomes below the voluntary tax level, being agreed for specific purposes. If, as I sincerely hope, the day comes at last when all taxes on consumption are abolished, it will probably be very much to the advantage of the broad mass of the people to exchange these mostly inversely progressive taxes for a purely proportional income tax, even without any deductions. Moreover, from a purely theoretical point of view it is not even necessary that the number of tax rate schedules be restricted to just two. It would be perfectly possible to have more to choose from and even to construct new ones as needed according to some simple mathematical formula, which at the same time met the needs of the tax authorities for a simple and easily comprehensible application of the law. All such matters would most likely sort themselves out once the decision had been made to allow the issues of appropriations and public revenues to form a connected whole on paper, too, when the budget is discussed, as they always have to do in reality, after all. 231

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The more questionable kind of income, on the other hand, or the sources from which it proceeds, should be treated in a completely different way, either with fiscal measures of a purely confiscatory kind or with supplementary taxes. The chief aim of such taxes would not be to provide the state with the means to pay for its outlays (though to some extent this could be achieved at the same time as a secondary object) but rather to bring about a correction of the inequities in the distribution of wealth in society that cannot fittingly or not rapidly enough become the subject of legislation as such—in other words, to level out the gulf in society that an increasing accumulation of wealth in the hands of a minority is otherwise apt to create or to widen.12 It is self-evident that all possible caution must be observed with such a course of action, also. Here, too, there would be every reason to require a qualified majority as the basis for decisions, not in point of fact so as to protect the rights of the minorities, since precisely these rights would be at issue, but all the more so in order to prevent excessively hasty decisions or unforeseen developments. If a matter is justified in itself, moreover, one should be able to expect it to win support even among those whose purely personal interests would speak against it. Of course, fiscal measures of this kind could not pull up short at the prospect of part of the private accumulation of capital being put at risk in the process. Instead, as we have now stressed several times, it would be all the more important that their yield should be invested, as far as possible. Further, the future interest on these investments should not be used indiscriminately for the current expenses of the state or municipalities either, but should rather, in accordance with their actual purpose, be used chiefly for socially levelling ends.

VII What I have said has probably made it clear at the same time that a uniform concept of income, i.e. a concept that would imply treating all kinds of revenue covered by it in the same way, as far as taxes are concerned, can hardly be established. Instead, we probably have to expect the increasing differentiation between different kinds of income and portions of income that has marked the tax legislation of recent decades to continue in the future, too. Wealth tax, which is usually merely a disguised form of income tax, is itself an example of a differentiation of this kind, but even within its domain a further differentiation could probably be suggested, e.g. between inherited and earned wealth. In addition, the latent wealth that lies invested in an expensive university education should also receive attention, as has been pointed out, for example, during the well-known discussion in England about a ‘capital levy’ to wipe out the war debts. 232

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The supreme differentiation, however, must be between socially justified and socially less-justified, or completely unjustified, income. In my opinion, this standpoint, though almost never clearly articulated, lies behind the entire modern development of taxation. By the nature of things, the result of this differentiation at any given point in time has to be more or less a matter of convention, and the only general demand that can and should be brought to bear on a definition of income is probably the one we made at the outset: legal clarity and consistency. Or as Adolf Wagner somewhat naively puts it: a thorough ‘statement of the scope of the concept of income makes a separate formulation of this concept superfluous, but also easier’.13 The latter claim is probably debatable. If a differentiation of this kind is duly made, then perhaps ultimately it becomes less significant whether certain kinds of revenues are excluded formally from the general concept of income so that they can be treated separately in fiscal respects, or whether they too are subsumed under the income tax law, though in separate paragraphs, which of course can contain whatever special provisions or formulations are desired. If, for example, gains on the sale of property or other similar capital gains are viewed as unearned or partially unearned revenues, and treated as such, then an almost necessary consequence is that the degree in which the profit is one of fortune and, in accordance with that, the level of the tax rate should be measured by the ratio of the profit to the previous size of the portion of capital in question— as to some extent was the case in the taxation of war economy profits. But certainly, at a pinch, a provision of this kind can also be introduced if the tax on capital gains is retained as a part of the income tax law. In that case it would merely form an analogy to the regulations already in force for the taxation of joint-stock companies, which of course is also formally included in the income tax law.14 But to be sure a completely separate fiscal treatment of all capital gains that in one respect or another do not come under the general or ‘pure’ concept of income, and, further, of the ‘supertax’ suggested above on abnormally high (monopolistic) incomes, would be preferable, above all for the reason that this would make it easier to carry through and to maintain the principle that all (irregular) tax revenues of this kind should be invested—and this I consider to be of the utmost importance. The apparent ease with which the state’s current expenses can be covered by means of fiscal measures that are fundamentally confiscatory in nature—and which for precisely that reason are barely felt by the great mass of the population (remember the war economy tax in its heyday!)—has undoubtedly contributed immensely to the more or less casual growth of public enterprises and administrative agencies that is now beginning to amaze us, but that unfortunately cannot be reversed as easily as it was set in motion. 233

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VIII The many difficult and important practical questions connected with drawing an accurate distinction between net and gross income have not been discussed at all in this essay, since such a discussion, if it is to be fruitful, requires greater knowledge of both fiscal and business matters than has fallen to my lot. Let me make just a single observation on this subject. If unearned capital gains are subject to fiscal treatment, it seems to me that as a necessary corollary there should be no limit at all on the deductions that are allowed for undeserved losses, at least where national taxation is concerned. I have never been able—and nor, I fear, has anyone else—to reach a clear understanding of how the term ‘capital loss’ used in our tax laws should really be interpreted. It seems, in fact, to mean merely that when income is calculated, a minor loss may be deducted in its entirety, while a major loss may not be deducted at all, which is not exactly gratifying to a person who has suffered a major loss. Further, our tax practice in this area is not marked by any very high degree of consistency. Losses which a person incurs by standing surety are not deductible, and yet what the surety does, if called upon, is of course designed to protect the creditor, usually a bank, against losses which the bank itself would have been allowed to deduct from its income, if they had remained as losses. It seems to me that justice requires that no exception at all be made here— if the loss is larger than the year’s income, it should be permissible to spread it over several years’ income—and probably only a misunderstanding could give rise to the claim that the fiscal interests of the state or even of the municipalities conflict with this principle, as long as real estate or businesses located within the municipality itself are ignored. The municipality’s tax demands on them can be regarded to some extent as a mortgaged claim. Of course in any case, the losses represent a reduction in the fund of net incomes out of which the community’s tax needs ultimately have to be met. However, a forbearing and sympathetic course of action towards those who have been hit by losses does not mean any further reduction in this fund, and can therefore be compensated to whatever extent is required by an adequate increase in the general tax rates—though, by and large, such an increase will certainly be quite modest. Thus, those who have incomes will be required to pay tax, but those who at the present time have no income will not be required to pay tax. The necessary reservation for small tax districts, such as municipalities, has already been made above. As to the major and widespread capital losses that can occasionally result from the undulations of the business cycle—and to a still greater extent from fluctuations in the value of money, as long as the problem of its stabilization is allowed to remain unsolved—the right point of attack for the state’s tax claims is probably the profits corresponding to the losses, which generally do not fail to be forthcoming. 234

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The lack of liberality in present procedures therefore only appears to result in some economic advantage to the community, but against this it brings in its train the very real drawback that it fosters discontent or discouragement among those who are subjected to the needless severity of such taxation. These effects are more or less bound to find expression in a lack of enterprising spirit and diminished motivation to work. Since the general purpose of taxation is to benefit, not to harm, the members of society, it should be possible to keep this aim in view when deciding on its details, too, so that taxpayers do not feel that their relations with the fiscal authorities are more or less hostile, as they do at present, but rather on the whole—and indeed, why not without exception?—are transformed into ‘cheerful givers’. IX Finally, let me say just a few words about a couple of questions of detail that seem to me of interest, the first because it constitutes a striking example of the consequences of a lack of consistency in tax legislation (and is also very much in the news just now); the second more as a kind of ‘test case’ for the validity of the principles put forward above. The first question involves the peculiar use that, according to what has recently come to light, can occasionally be made of the regulations concerning tax exemption for capital received because of an insurance policy. Say, for example, a person takes out a high life or endowment insurance policy and pays a single premium, which in the cases adduced has mostly been in the form of a promissory note to the insurance company. When the sum insured becomes due, the capital sum of the debt is naturally deducted, and the remainder, the capital really insured, is paid out to the insured person or the holders of his rights; the interest he has had to pay on his debt to the company in the interim then corresponds almost exactly to the premium he would have had to pay with a normal insurance policy in order to get out the same net sum. But while normal life or endowment insurance premiums are only tax-exempt up to a sum of at most 200 crowns, he can now deduct the entire premium under the rubric of interest on debt, and he can similarly deduct the capital sum of the debt from whatever wealth he may possess. Therefore, at public expense, he realizes a tax gain, perhaps a double tax gain, that wellnigh everyone would probably admit is completely unfair. However, in this case the tax fraud, or whatever it should be called, does not, as generally seems to be thought, consist in the loan transaction itself, which is fully legitimate and has long been in practice. Nor could the abuse in question be prevented by withdrawing the right to deductions on tax returns when such loans are taken out from insurance companies, as has been suggested by insurers (not lawyers); for of course the money could have been borrowed from a third party, e.g. a bank, with much the same effect. And even if it were possible and desirable to prohibit the right to deductions in the 235

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case of all loans for insurance purposes, the problem would still not be remedied to the full. Suppose, for example, that a person who can live on his income from work has a capital of 60,000 crowns, which he would like to increase. If he adds the interest to the capital in the usual way, each year he has to pay income tax on this interest as well as wealth tax on the capital itself. If, on the other hand, he employs the whole sum as a single premium for a (composite) endowment insurance policy, then in ten to twelve years he may be able to take out a sum of about 100,000 crowns—which is tax-free— and in the meantime he has been free of the income and wealth taxes just mentioned. Even if the so-called mathematical value of the insurance were to be put down as capital here, which is probably not compatible with the law, he would still escape the larger part of the tax, namely the tax on the amount of the interest itself. The error therefore lies exclusively in the fact that insured capital is taxexempt by law, though to a large extent it consists of accrued interest on which no tax has been paid during the policy period. If the question is asked how so great an inconsistency was ever able to exist in law, then the answer is assuredly that the intention was to give people every possible encouragement to take out insurance, as a particularly suitable form of saving for those with limited means. This may be a deserving purpose, but it could probably be accomplished to the full if insured capital were made tax-exempt only up to a certain modest amount, whereas with larger amounts only the sum of the premiums paid would be deductible. Other formulas are also conceivable, though I do not want to go into them here. When it comes to life annuities, as already stated, the opposite mistake is made, in that they have been made taxable in their entirety, even though a part of that sum obviously entails a consumption of capital. The second question, which I suppose does not yet have much practical relevance in Sweden, is whether lottery winnings (and other winnings from gambling) should be regarded as taxable income. For those who consider the principle of ability to pay a sufficient basis for pretty well all taxation, this question is naturally decided in advance; for what can enhance a person’s ‘ability to pay’ more than a few thousand-crown notes suddenly flying his way from the wheel of fortune. But anyone looking for a somewhat deeper foundation for taxation than the mere fact that money is there to be taken from one person or another who can do without it more or less easily, must adopt a more hesitant attitude towards the issue. Lotteries are not productive businesses, and so lottery winnings are not a part of the national income, whether this is calculated gross or net. Lotteries merely distribute among their customers in sums of varying size the stakes, or at least the greater part of them, the customers themselves have paid in. A lottery can therefore be compared most closely with a collection for a gift, though with the rather idiotic rule that chance is allowed to decide who is to 236

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receive the gift. Now since a gift composed of contributions from a number of people is not usually subject to tax, whether income or gift tax, then surely by analogy lottery winnings should not be taxed either. However, if one wishes to regard playing the lottery as a genuine way of earning money, as ‘a profitable business’ (Schanz)—though at the same time a very risky business, since in the great majority of cases it ends with a net loss—then surely all costs in this enterprise, even when it brings no returns—i.e. all purchases of lots—should be deductible on income tax returns, just as a grocer who has taken in a stock of oranges that unfortunately go rotten before he has time to sell them is allowed to count the purchase price as part of his costs and therefore to deduct it from his annual income. But if this were done, the yield to the state from this kind of taxation would probably end up as a negative figure. The only truly tenable reason for a taxation (more properly, here, too, a partial confiscation) of lottery winnings must therefore lie in the opinion that this kind of income cannot be regarded as fully legitimate or morally and socially justified. I have no objections to this view, but in that case the state should surely seek with all its power to work against lotteries. The last thing it should do is to set a bad example itself, as is the case in many other countries, and is unfortunately planned in Sweden too; indeed, it has already been carried out in part by the issuing of lottery loans (so-called premium bonds); for it is unacceptable that the state’s supervision of public morality should be allowed to stop short of its own actions. Lottery taxation in all its forms, in many places a major source of income for the community, is in a word one of the many cases in which countries use their citizens’ ignorance or passions in order to trick their way to tax revenues instead of having them approved by the citizens in due form. To be sure, a tax policy of this kind has lofty forebears; it has had its advocates all the way from antiquity through the whole of the Middle Ages and up to our own time, when even a John Stuart Mill has been capable of defending indirect taxes, for example, with the argument that the ignorance of the masses is so great that if people knew how much they were paying in tax they would oppose even the most useful and necessary public expenditure. It is possible that this is the case, but the way to avoid such opposition is assuredly to educate the general public, not to continue with a species of public hypocrisy that in the long run does not fool anyone anyway, but only leads to a reduction in the authority of the state. The main prerequisite for a good civic spirit is rather that everyone should know and understand that he is paying tax, when he is paying tax, how much he is paying in tax, and for what purpose he is paying tax. NOTES 1 G.Schanz, ‘Der Einkommenbegriff und die Einkommensteuergesetze’ [The Concept of Income and Income Tax Laws], Finanzarchiv (1896). 237

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2 In his well-known early work, ‘Die Lehre vom Einkommen’ [The Theory of Income] (Zeitschrift für die gesamte Staatswissenschaft, 1863), Schmoller misquotes Smith when he claims that Smith meant to exclude from the net national income the wages of the labourers who maintain the fixed capital. This would mean that Smith (according to Schmoller) has taken ‘the great step from the standpoint of the national economy to that of the private entrepreneur, who logically enough reckons annual wages among his production costs’. However, in the passage cited in Smith (Wealth of Nations, book II, ch. ii) we find something quite different, namely that while the produce of the labour in this case does not make any part of the net revenue of the country, the wages (‘the price of that labour’) certainly may do so. But in other cases, Smith continues, namely, where the labour concerned is put directly into the production of commodities for consumption, both the produce of the labour and the wages of labour (in so far as these are consumed in their entirety by the labourers) form part of the net national product. It is hardly possible to make any reasonable criticism of this line of argument. On the contrary, one has to admire Adam Smith’s acumen and classifying skill here, in spite of his still somewhat imperfect insight into the nature and functions of capital, which for example leads him to deny that dwelling-houses are capital goods. 3 One consequence of this is that unless there are compelling reasons for doing so, the society should not set the price of its individually consumable services higher than is required to cover the costs. But there can certainly be good reasons for setting the price below that level, indeed, equal to zero, if it is more appropriate to cover the costs by means of special taxes set up for that purpose (e.g. road taxes). 4 Only if a certain sum of taxes is imposed on the society from abroad, such as reparations for war damages, or else because the society has prior commitments, so that a positive result absolutely has to be achieved, is it evidently necessary to have recourse to decisions by an ordinary majority when determining the distribution of taxes. In such cases the principle of ability to pay is probably more or less the only guideline, though anything but a precise one. 5 The so-called Schmoller-Hermann concept of income, which is surely at bottom Adam Smith’s concept. 6 As is well known, Davidson in general maintains that the norm for income tax does not necessarily need to be income itself. The term income tax would be justified by the fact that in the main or as a rule income is nonetheless its norm, i.e. ‘a parte potiori’. 7 Adolph Wagner’s claim that in Bremen both income tax and inheritance tax were payable on inheritance was based on a mistake, as Schanz points out (Finanzarchiv, 1896). On the other hand, in the same essay Schanz makes the objection (to Roscher), for which there is little justification, that if beneficial acquisitions are not recognized as taxable income, then a life annuity received via a bequest should not pay income tax. The tax treatment of life annuities is certainly irrational, since in reality the tax also encroaches on the consumed capital; however, if this circumstance is corrected, so that only the net annuity is taxed, then of course they would merely be treated in the same way as all other interest, and neither Roscher nor anyone else has denied that interest is a form of income. 8 In Adam Smith’s day, if I remember rightly, it was calculated that a doubling of the population would take—five hundred years! 9 To be sure, it is possible and even probable that savings for specific social ends— if these were clearly defined—would be more attractive to the capitalist than the prospect of his wealth being swallowed up like a drop in the ocean by the miscellaneous account of general public expenditure. 238

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10 Shortly before the war, it was stated in an American journal that agricultural rents in the United States ‘have grown as much in the past fifteen years as previously since the time of Columbus’—in other words, they had doubled in the short period of time specified. This result was certainly in part merely apparent, being due to the decline in the value of money that took place even before the war, from the mid-1890s on, and of course another partial cause was the investment of new real capital in the land, but in the main it was probably an expression of the increased scarcity of arable land even in the New World. 11 ‘Co-operatives’, as they are called, obviously do not have the same monopolistic character, even though they are often set up on a very large scale. This is because in the main they are consumer organizations and are generally open to all who want to become members. 12 This process, which is probably what is actually going on, must not be confused with Karl Marx’s wild claim that capital is being gathered into fewer and fewer hands. This opinion overlooks both the division of property by inheritance and the significance of the pooling of capital, and it is also refuted by the statistics. But the fact that millionaires and billionaires are in reality growing in number is small comfort, if the numbers of the indigent are growing at the same time. 13 Adolf Wagner, Grundlegung, 3rd edn, Leipzig, 1892–4, vol. I, p. 405. 14 In either case, it should be demanded in the name of the consistency invoked above that all such gains be taxed, as is (or was) the case in the tax laws of the German Hanseatic cities, Hamburg, Bremen and Lübeck. The proviso about ‘speculative purposes’ that occurs in Prussian income tax law and which used to exist in our own legal practice, seems rather irrelevant, and the arbitrary time limit now adopted in our country of five or ten years’ ownership respectively of the property in question, probably only leads to an otherwise necessary or useful sale being delayed to a less suitable time—in order to evade the tax.

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The position on financial policy that Professor Davidson expounds so skilfully in his essay in the final issue of this journal last year, has the great practical advantage over my own standpoint that it is directly linked with current law. For the most part, his proposals are merely intended to remedy obvious lacunae or inconsistencies in the legislation. To be sure, the theoretical principle he applies throughout, the principle of ability to pay, is, as he himself admits, rather vague and indeterminate (in my opinion it has the far graver disadvantage of failing to solve the problem, except in certain specific cases), but he avoids these difficulties, at least in this essay, by completely brushing aside the issue of the gradation of the taxation in cases of differing ability to pay—and of course by ignoring even more completely the question of the actual level of the taxes. For the time being he merely demands that those who have the same ability to pay, which of course in general means the same economic position, ought also to be taxed alike. This demand is so self-evident that it comes into play in about the same way no matter which theoretical conception one proceeds from. After all, from the point of view of the benefit principle, too, it is true that by and large, and ignoring special circumstances, people who are in the same financial position also have an equal interest in the various branches of the state’s activity and ought therefore to contribute equally to their maintenance. The changes in our income taxation for which Davidson thus argues, with no theoretical support other than easily comprehensible analogies and generally accepted principles of fairness, are in my opinion, too, almost exclusively improvements, and I can only wish him success for them when the income tax law is revised. By way of contrast, the position I took in my last essay, as in my earlier writings, departs so radically from present legal regulations that I should not even consider it worth attempting to frame it in specific legal clauses, even if I could manage to do that anyway, of which I am far from certain. Nevertheless, I can confidently say that my position more closely approximates reality than Davidson’s, if by reality is understood not merely the reality that has Originally published as ‘Några erinringar’, Ekonomisk Tidskrift, 1923.

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found expression in current law, and that may already be a thing of the past, but also and above all the reality that is presently striving to work its way into legal expression or, in the exceptional cases where this has already occurred, has given rise to legal regulations that most closely resemble anomalies in the existing system. When, for example, Davidson says that I ‘near enough completely and utterly reject a distribution of taxes according to ability to pay’, it should be observed that my criticism is merely directed at ability to pay as a theoretical principle—except of course in the moderate and as it were neutral sense in which Davidson himself has mostly used it. On the other hand, I certainly do not reject unconditionally the ways in which this so-called principle has actually manifested itself in tax legislation. It is just that I ascribe these symptoms to another cause, which is far more plausible, though rarely made explicit, namely an incipient rejection of the right to certain ways of acquiring wealth. In my opinion, this underlying cause ought to be developed so as to acquire greater clarity and consistency. How can it be argued, for example, that a person who receives his income in the form of a dividend paid by a joint-stock company has a greater ability to pay than he would have if he received the same income from interest on bonds and the like? His ability to pay is surely less in the former case, not more, since a greater risk is involved, even if the future prospects may be brighter. If any explanation can be found for the special taxation of jointstock companies, it must therefore lie in the quasi-monopolistic position these large amalgamations of capital occupy, which makes their income less justified in social terms than income earned under completely free competition (of course, this does not prevent the form of the joint-stock company being in itself an extremely useful and necessary social institution, until some better form can be found). This interpretation also fits best with the way the progression of joint-stock company taxation is actually organized. However, as I emphasized in my previous essay, the prime example is probably the modern evolution of the inheritance tax. Does Davidson really imagine that the place he himself seems inclined to give this institution within the tax system (ordinary income tax, perhaps with tax exemption for inheritances between parents and children) has the least prospect of being accepted in the tax legislation of our own or any other country? Surely it is obvious that developments are heading in the opposite direction. As early as six years before the war, the German government of the time, which of course could not exactly be accused of radicalism, proposed the abolition of all rights of inheritance to relatives more distant than siblings (and descendants of siblings). As for the attempts to salvage tax exemption for inheritances to direct descendants, which still existed in Germany until recently, Lotz, who is anything but a radical, has expressed his opposition in extremely sharp terms.1 Similarly, the powerful movement in Germany—to which the present Chancellor is said to have attached himself—in favour of the appropriation 241

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to the state of net land rent ought to make it fairly clear what tendencies are to be reckoned with in fiscal policy, perhaps in the near future. It would be futile to regard these tendencies as non-existent. I now proceed more specifically to the criticisms Davidson levels against me. On one point, however, I feel myself completely innocent. Davidson claims that I want to turn taxes into ‘voluntary payments’, whereas he ‘continues to build on the current state of affairs, namely, that as far as individual citizens are concerned, taxes have to be in the nature of compulsory payments’ (p. 205). However, I have neither said nor meant to say anything to the contrary. Once the taxes have been decided on by Parliament, they are or ought quite certainly to be compulsory payments; I even consider it a great failing in a tax if it is organized in such a way that the individual can evade its payment at will, as is the case with some consumption taxes. The voluntarism I talked about only applied to the actual passing of tax bills. Incidentally, formally speaking, according to the constitution this process is already founded on voluntarism or self-taxation; what I have demanded is that it should be so in reality too, so that the rights of minorities are also protected. In my earlier writings I have attempted to show that there are no theoretical limits to the extent that this must be possible, as long as the issues of taxes and appropriations are treated as a connected whole, and I do not see why it should not be possible in practice, too. Admittedly, this procedure will not lead to an ideal tax distribution, but the result will be equitable in so far as the maxim ‘volenti non fit injuria’ (‘no injustice is done to a person who has given his consent’) applies. Further, this method obviously also constitutes a guarantee—in my view the only reliable guarantee—against a wasteful, uneconomical administration of public finances. It would have pleased me if Davidson had been willing to state his position on this question instead of dismissing it with a few slogans. Of greater importance, however, is Davidson’s next criticism concerning the distinction between a tax in the true sense of the word and the appropriation of undeserved income.2 I note with satisfaction that Davidson does not unconditionally reject the latter ‘institution’, as he calls it, though of course it has hardly become an institution yet, at least not one that is publicly acknowledged. He even includes ‘the appropriation to the state of moneys earned undeservedly’ as part of his third category of public revenues. He also says a few very sensible words about the distinction I have mentioned and the danger of overlooking it. But in the end he steals away, so to speak, from the whole issue by means of an argument which I find extremely hard to accept and do not even really understand. I had said that fully rational taxation is impossible without the simultaneous appropriation of unjustified income. Davidson takes my words to mean that it would otherwise be necessary to ‘use taxation as a form for appropriation’, which ‘would be inconsistent with 242

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a rational system of taxation’ (p. 207). However, my statement applied not to forms but to realities. My claim is that the very concept of taxation presupposes that all incomes are equally justified. This applies no matter which principle of taxation one wishes to put into practice. A tax that only reduces by a certain amount what a person unjustly possesses cannot be regarded as an appropriate compensation on his part for the efforts the state has made on his behalf, nor can it be seen as a sacrifice comparable to the sacrifice another person has to bear out of the income he or she has earned in legitimate ways. It is another matter entirely that it can often be extremely difficult to determine the extent to which an income or a new acquisition of wealth is justified or not, and that in case of doubt one ought quite certainly to choose the alternative that is most to the advantage of the person taxed. But I fail to comprehend Davidson’s claim that the very fact that the state does not avail itself of its ‘right to appropriate undeserved gains’ (a right Davidson, too, here assumes) makes taxation undertaken on the usual basis (i.e. on the tacit assumption that all incomes are equally justified) rational. One might just as well claim that if society employs neither the principle of ability to pay nor the benefit principle in taxation, but instead covers its expenses quite simply by so-called poll taxes, as was once the case to a large extent, then this form of taxation, too, becomes rational. This formalistic handling of the problems at issue means that one sometimes finds oneself puzzled and bewildered as to Davidson’s real opinion about the justice of taxation in cases where he considers the use of ‘the institution of appropriation’ to be particularly apposite. Take, for example, the second of the three cases Davidson discusses on page 230. He wants to demonstrate the absurdity of the regulation which exempts from tax capital gains realized fully five or ten years after acquisition, taking a drastic example, though there are probably various precedents in the field of speculation in undeveloped sites in the vicinity of large cities. He compares two people, A and B, under the following circumstances: A has an income of 10,000 crowns a year for ten years; B owns an undeveloped site worth 100,000 crowns, which rises in value and of which he retains possession. B supports himself by borrowing 10,000 crowns each year, which he thus consumes. After ten years, he sells the site for 230,000 crowns, pays his debts, which with compound interest amount to 130,000 crowns, and thus has 100,000 crowns or the original value of the site left. What is the relation in this case between B’s and A’s ability to pay during these ten years? B’s actual freedom from taxes here appears to be extremely unfair—there are no two ways about it. But when Davidson comes to the conclusion on the following page that in this case A and B have an equal ability to pay, and that B therefore ought to pay as much in taxes as A, neither more nor less, then I can no longer go along with him. After all, B’s ability to pay compared with 243

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A’s can only mean the size of the tax B could pay without bearing either a greater or a lesser burden than A in consequence. Can that be said to be the case if both have to pay the same amount here? Hardly. The fact that B uses up the expected rise in value in advance naturally cannot make this appreciation less of a profit of fortune. It may of course be very difficult to decide to what extent the profit ought to be considered as due to good luck. Keeping a free building site out of the market ought not to be criticized as such; on the contrary, it can be a means to prevent premature and therefore probably uneconomical building on the site. The owner ought therefore at least to be allowed compensation for the loss of interest he has suffered by keeping the site undeveloped. In addition, due account should be taken of the risk he has taken on, which can only be judged in the actual economic situation. Finally, it is of course possible that he may have contributed to the profit realized by fully legitimate measures of his own, e.g. measures intended to draw public attention to the favourable location of the site, etc. Due allowance must be made for all such factors, but to the portion of the profit that is clearly none of his own doing he has of course no legitimate claim, and he can therefore not be considered to bear a ‘burden’ if the state takes possession of this portion. If, on the other hand, he gets off with paying a normal tax rate on it, then he has not been taxed according to his ability to pay; in fact, he has not been taxed at all but has rather received a gift from the state, in that he is still permitted to demand an unjustified tribute from the members of the society. In Davidson’s two other examples, which deal with mining concessions, he completely avoids going into the circumstances in which the concession is taken out, and this is fully consistent with his general position (see above). However, in my opinion it is impossible to ignore these circumstances. If the discovery of the deposit has been preceded by lengthy and laborious exploration or, as is probably generally the case, the working of the mine has at first been associated with a high risk of losses, then perhaps the entire value of the mine can be regarded as a reasonable income from labour, plus compensation for the risk. But if the discovery has occurred by chance or—as in the case of the landowner’s share in the concession—has been made by another person, and if the risk has been low or non-existent in these particular circumstances, then here, too, we encounter a profit due to a greater or lesser extent to good luck, and in this case, too, it is impossible to undertake an equitable taxation without first considering this factor. In an Australian colony in the 1850s, gold-bearing strata were discovered in areas that had already been sold by the state to private individuals, but had not yet been occupied by their owners. But when these owners came blithely along to take possession of their plots of land with the accompanying gold sand, the government dashed their hopes by invoking its own authority to annul the contracts of sale, which was probably the right thing to do, since in reality these contracts were for the acquisition of land, not of gold. It 244

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seems to me that this shows how principles which in themselves are correct but have hitherto been neglected can under extreme conditions compel acknowledgement. In the same way, it is my opinion that the unprecedented financial upheavals that took place during and because of the World War ought to open our eyes to the great distinction between earned and unearned incomes or increases in wealth. With respect to the latter category, normal taxation becomes a mere caricature of justice. Davidson himself has coined the phrase ‘capitalistic Bolshevism’ in talking about such cases, so it seems to me that he ought not to be capable of indifference towards endeavours to find a necessary remedy for this ill, using the means available. On the other hand, of course, Davidson is quite right when he emphasizes that observations on the relation of taxation to the so-called national income (and national wealth) are much too vague and indeterminate to be able to provide an adequate norm for taxation (pp. 250ff). To be sure, he has misunderstood me here to some extent. What I meant was that even in an advancing society, the national income ought to be understood exclusively as the consumption ‘fund’, so that before one gets down to the net national income, one has to allow for the deduction of the expenditure required not just to maintain the means of production at the present level but also to increase them in line with the growth of the population, or (if the goal is to raise the general level of prosperity) even beyond that. But even if the matter is understood in this way, and indeed, even if all private income added to savings were accordingly made tax-exempt, there could of course be no guarantee that an excessively high tax on income intended for consumption would come to affect the accumulation of capital. In addition, as I stressed in my essay, although the national income understood in this limited way certainly ought to have some influence on the scope of those parts of the public sector that provide us with consumable products or services, it cannot provide any measure for the part of the public sector that is designed to protect, support and facilitate our production. I concede that what I said about this on pp. 222–3 [in this volume] of my previous essay is not as rigorous as it should be, and may not even be free of contradictions. But these are complicated issues, and the literature on public finance provides no assistance towards solving them, since most aspects of the problem of taxation are still treated there, as in Adam Smith’s day, as if we were concerned only with stationary societies, in spite of the obvious departure from reality that this gives rise to. Nevertheless, observations of this kind about national income and national wealth are probably not completely devoid of value.3 They can at least serve to illuminate and support our assessments of the effects of the tax system. Davidson writes that it ‘seems very open to question whether the basis for the distribution of taxes that the taxpayers or their representatives agree on’ will indeed result in the state’s ‘tax revenues only being drawn out of the national income’. However, since everyone must be assumed to strive to 245

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improve the position he and his dependants enjoy, surely no one would voluntarily consent to tax measures that worsen this position. To be sure, the individual does not always understand his own best interests, unless he has the information needed to do so; but the idea that others understand his interests so much better is probably generally an illusion. Similarly, when it comes to the inheritance tax, it must be considered improper—at least in the stationary society—for the state to use for its current expenses means that are obviously not a part of the national income. But this was not my only reason for disputing that the inheritance tax is a true tax. Davidson poses the casuistic question, ‘But what if public opinion were to place acquisitions by inheritance on exactly the same footing as other acquisitions?’ My answer is that public opinion cannot do (and never has done) this, because they are two fundamentally different things. The right to an inheritance is dependent on the heir being considered to have a claim to the inherited property, a claim that may be regarded as latent even during the lifetime of the person leaving the inheritance. To the extent that this claim is accepted, and must be accepted (as in the case of children otherwise unprovided for, for their necessary maintenance), there is hardly any reason for charging a tax. Why should the state levy taxes here? To be sure, it ‘protects’ the transmission of the inheritance, but this protection costs the state virtually nothing. It must therefore be the degree and range of the justification of the heir’s claim that is at issue; the ‘state’s right of inheritance’, on the other hand, seems to me a rather unfortunate fiction. These days, taxation is actually exercised by, and by means of, the taxpayers themselves. That the result must then be taxation according to perceived benefits, as far as these are capable of making themselves felt, seems to be not merely, as Davidson would put it, ‘a postulate’, but a real axiom. However, there are undoubtedly cases where the interests of the individual, even if not entirely absent, are as it were swamped by some collective interest, and in such cases it may be quite correct to understand public expenditure as a common burden that has to be borne by each and every individual according to the measure of his or her strength. But unless expenses to the society of just this kind are at stake, to insist on making ability to pay the pre-eminent principle for the distribution of taxes—it can certainly never become the principle of taxation as such since it sheds no light at all on the actual level of taxes—this insistence looks like a mannerism, an instance of formalism that will unfailingly pay its user out. And indeed, a number of the tax problems Davidson discusses could probably be solved far more easily by taking into account the benefit to the taxpayers of the public enterprise. If, for example, the state levies higher taxes at one time than at another, Davidson thinks that, even given a purely proportional tax rate, a person with a relatively high income at the first juncture but a relatively low income at the second juncture ‘bears a heavier burden relative to his income’ than someone for 246

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whom the opposite conditions hold (p. 210). However, if one bears in mind that the state presumably did more for its citizens at the first juncture than at the second—why else would it have needed larger tax revenues?—then in that respect the injustice disappears. Similarly, when dealing with the proposition that only the returns yielded by wealth ought to be subject to taxation, not wealth itself. From the point of view of benefits the matter is clear, since after all it is chiefly for the earning of income that we claim the aid of society (though it can be said that the very preservation of wealth, too, requires the protection of society, and that to this extent a certain wealth tax may be justified). Davidson, however, bases the proposition exclusively on the fact that the wealth was already subjected to tax (income tax or inheritance tax, etc.) when it was accumulated, and he considers that if this principle were applied consistently no further wealth tax would be required. This conclusion, however, seems dubious for the reasons given above. Moreover, here of course he runs into the difficulty that at the time the wealth was accumulated, taxation may have been quite different and possibly far lower than at present. Further, there is a great disparity between the tax rates applied, if the wealth has only undergone inheritance taxation. Davidson really only gets out of these difficulties by, as it were, shrugging them off. Finally, Davidson exhibits an obvious interest in the method of making the size of consumption, not of income, the norm for taxation. And indeed, from the point of view of ability to pay there is some truth in the view that a person’s consumption provides a measure for the tax to which it ought to be possible to subject him, even if this measure is not very precise—even the person who consumes his capital does not lack ability to pay. However, from the point of view of the benefit principle, it has to be said that consumption has nothing at all to do with taxation, except when it comes to the directly consumable services or undertakings of the state (in so far as these are paid for by taxes at all). We do not need the aid of society in order to consume— we can manage that entirely on our own. It is in order to earn the means to consumption that we claim the co-operation of society in many different ways, but these earnings extend not merely to what we consume but also to what we save—whether in order to consume it later or as a means to further earnings.4 However, these reservations cannot detract from my admiration for Davidson’s astute and well carried-out presentation. In practical terms, his proposals probably mark the limit of what can at present be accomplished, if even that much is possible. I should merely like to suggest a modification to one point. It seems reasonable to me, too, that capital gains ought not to be regarded as income for the years in which they have been realized, which generally leads to very high progressive tax rates. However, in my view, another gradation ought to take effect here, namely, progressive rates calculated according to 247

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the size of the profit relative to the value of the capital item sold—i.e. applying more or less the same principle as in the taxation of joint-stock companies. This would be a first step towards bringing out the fact that these capital gains are profits of fortune. As for so-called capital losses, the application of my principles would of course lead vastly further than Davidson goes, and further even than I myself proposed in my previous essay. For if undeserved profits are appropriated to the state, strictly speaking this should mean that undeserved losses should not merely be deductible on tax returns but ought rather, as far as possible, to be reimbursed by the state. And indeed, it is my opinion that this ought to be done, above all with respect to the conglomeration of giant profits and giant losses the war has left us with. However, since I have so far stood almost entirely alone in arguing for something of this kind, I shall be pleased if at least Davidson’s skilfully argued and humane proposal for a general deduction of losses on income tax returns gains acceptance.

ERRATUM In my previous essay [p. 213, this volume] I wrote: ‘the concept of income in civil law, e.g. as used in bookkeeping…’. This is incorrect. The concept of income in civil law, being based chiefly on the Roman theory of fructus, is undoubtedly less comprehensive than the concept underlying business bookkeeping. Possibly the words ‘commercial law’ could have been used instead.

NOTES 1 At the most recent Congress of Scandinavian Lawyers, it was revealed that a proposal to restrict the right to collateral inheritance was under discussion by our own law-drafting committee. On the same occasion, weighty voices were raised in favour of an upper limit on the size of all individual inheritances and also, in this connection, that the means thus appropriated to the state should be invested in funds. All this of course conflicts with the idea that the inheritance tax is a tax in the usual sense of the word. 2 Davidson seems to find the word ‘confiscation’ distasteful, presumably because it usually has punitive associations. But these associations are not universal. For example, people often talk about ‘confiscatorily high taxation’, without meaning that the taxpayer is being treated like a criminal. 3 When it comes to national wealth, its Protean nature must of course be borne in mind. In an isolated society, the national wealth is significant only as a fund of means of production, but the financial value of these means is not directly related to their abundance, indeed, the relation can in part even be an inverse one. The discovery of new natural resources, e.g. of extremely rich mineral deposits, undoubtedly adds to the country’s assets, but does not necessarily increase the national wealth. It can even diminish it, as the mineral in question may thus 248

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become a free commodity, so that all previous finds of the same kind lose their financial value. However, it is possible that certain other means of production may acquire increased financial value in the process. 4 If society disapproves of certain forms of consumption, it ought to take direct measures against them, not tax them. Nothing can be more undemocratic than to allow certain people, as it were, to buy the right to commit antisocial actions by paying taxes.

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Part III UNEMPLOYMENT

13 WHY ARE FACTORY OPERATIONS BEING CURTAILED?

In recent weeks, numerous reports have appeared in the newspapers about companies in various branches of manufacturing—the textile industry, the lumber business, ironworks, etc.—which have found themselves forced by the present hard times to make more or less sweeping cutbacks in their operations, to reduce working hours, or to dismiss redundant labour. As everyone knows, this phenomenon very frequently accompanies economic crises, it is their saddest and at the same time their most irrational, almost incomprehensible consequence. Everything else makes sense—but not unemployment. That prices go up and down, that wages are raised or cut according to the circumstances, is a natural and perhaps inevitable consequence of the vagaries of the business cycle. But that it can ever pay to do nothing, to leave the available productive forces unused, in other words, that it should be possible to reverse an economic decline by means of inactivity—this seems, at least at first glance, like a self-contradiction, a pure paradox. Looked at in the abstract, it only seems possible on one condition, namely, that the product of the labour has sunk so much in value that it does not even correspond to the quantity of foodstuffs and other necessities that are required to maintain the actual muscular exertion associated with the labour, in other words, the difference between the worker’s vital needs at work and at rest. As a matter of fact, a suspension of work for this very reason is met with as a regularly recurring phenomenon among peoples living in primitive conditions. When the harvest has been brought in, the Russian peasant and his whole family go to bed and sleep the winter away, like hibernating bears, in order to conserve their stocks of food as far as possible—at least if the harvest has turned out below average. This used to be the case with Irish farm labourers, too, and others. But it would be surprising, to say the least, if the same thing were possible in countries with an advanced material culture, and the issue therefore seems to require more thorough investigation. To be sure, among the poorer classes the food eaten by the working-family father still constitutes a major item in the total family budget. According to Originally published as ‘Varför inskränkes fabriksdriften’, Ekonomisk Tidskrift, 1908.

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the well-known study by the medical doctors Hultgren and Landergren,1 the food consumed by even a married labourer can require from 30 up to as much as 50 per cent of his total daily wage, or even more, and of course this wage generally makes up the entire monetary income of the family, or by far the largest part of it. Since, further, according to the same study, in cases of hard physical labour the need for food can rise to virtually double what is required for normal, not especially strenuous work, and no doubt a similar difference obtains between normal work and a condition in which all muscular labour ceases and absolute rest sets in, it is of course conceivable that the entire value of the product of the labour might not even amount to this difference. In other words, and seen in a social perspective, it might be cheaper for society to maintain the worker and his family by charitable means or by unemployment insurance without the performance of any work on his part than to pay him the minimum wage necessary for him to carry out the work. So the matter is conceivable, but in truth, it would be a sad surprise if closer examination showed that we really had not progressed beyond this stage in our physical culture; and under any other conditions unemployment must be regarded as due not to absolute necessity, but to faults in the organization of the economy that can and should be corrected. The problem is very closely bound up with the controversial old issue as to the possibility of general overproduction. The occasional occurrence of partial overproduction, extending over the range of one group of industrial items or another, is of course a commonplace phenomenon and is not disputed by anyone. Even such overproduction, when severe and prolonged, can naturally have bad enough effects, because of the difficulties involved for both labour and capital in moving sufficiently rapidly and in sufficient quantities away from the branches of industry that have become less profitable because of overproduction and into other industries where in contrast production is unable to satisfy demand and where there is therefore a great need for this labour and capital. But these difficulties are not as great as is sometimes claimed. For it must be remembered that the body of workers undergoes constant turnover and renewal: old workers die or become unfit for work, and new workers from younger age groups are continually joining the workforce. So in general, ignoring extraordinary calamities, it is less a matter of moving old, trained workers from one trade to another than of directing the fresh stream of young labour to the occupational fields where it is most needed and best paid, avoiding the trades already oversupplied with workers. And this is something that ought to happen automatically, as it were, given a well-organized system of education and work placement. The same thing applies, incidentally, to capital, too, at least in a rapidly advancing society, where new (i.e. newly accumulated) capital is constantly required: this capital naturally directs itself by preference to the most profitable or promising industrial enterprises, and in general, the mere drying up of the supply of fresh capital to an ‘overstocked’ trade ought to be enough to bring its normal 254

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production into line with the demands of consumption (which will meanwhile have expanded), and thus to all other parts of the production of the society. So-called general overproduction, on the other hand—i.e. a situation in which labour and capital are in over-supply in certain trades without any compensating shortfall of labour and capital in other areas—must be fundamentally a quite different phenomenon with radically different causes, and it must therefore also require substantially different treatment both in theory and in practice. To deny the possibility of this phenomenon is of no avail, since it manifests itself in real life with a force that is only too apparent. This makes it all the more important for both theorists and those engaged in economic practice to seek to understand this puzzling phenomenon and its causes. Without wishing to enter into a detailed discussion of these causes here, I think I can state that modern crisis theory has shown that overproduction is not to be understood as the cause of crises, as has been so commonly assumed in the past, but is rather a result of them, in that the collapse in speculative business creates relatively reduced demand for the different products of industry. Further, and still more importantly, overproduction should not be understood as an evil in itself, but on the contrary by and large as a necessary and useful thing. After all, it is impossible to have too much of a good thing, of goods and commodities; if we do not need them at present, they can always come in useful later, and in the meantime, the stocks of goods that are built up form an accumulated capital, a fund of latent productive resources for the future. The most distinctive characteristic of an upswing is always that labour and natural forces, i.e. current or present productive resources, are largely withdrawn from the production of consumer goods for immediate use, and therefore from current consumption, in order to be devoted instead to the making of fixed capital goods, of all kinds of plants for future production. In these circumstances, contemporary consumption would inevitably be left short, if it could not be partially supplied out of the stocks of goods accumulated during a preceding downturn. From the perspective of the national economy, or of the society, downturns, slumps, are therefore just as natural and necessary as upswings, booms—the only thing that is not natural, and ought not to be necessary, either, is the dispiritedness, the loss of confidence and of business enterprise, the unemployment. On the contrary, during a downturn in the economy, all available productive resources ought to be carefully employed to create as large a stock of available goods as possible: without these a subsequent recovery can only be moderate in scope, for want of the necessary working fixed capital. As far as I can see, this is the view that is increasingly coming to the fore in modern crisis theory, e.g. in Spiethoff and others, and even if it cannot be said to have attained the final degree of incontrovertibility, for lack of reliable commercial statistics, it is still so simple and self-evident and supported by so many facts for which there is ample testimony, that it can hardly be completely off the mark. 255

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However, in this respect the interests of private businesses unfortunately diverge significantly from the interests of the society, and it is probably precisely this fact that constitutes the real difficulty in overcoming the problem of the crisis in practice. For the society, as I have said, the stocks of goods that have been built up are an unequivocal asset, but for the individual producer or businessman they can be a grave danger, indeed, they can threaten him with ruin. But this should not be understood to mean that working to build up inventories is always bad business for the individual manufacturer; commonly held ideas to this effect are certainly highly exaggerated. To be sure, it is true that the capital invested in goods in stock that for the time being are unsaleable, or at least unsold, fails to yield any return during this period, but it by no means follows that the interest on the manufacturer’s own capital has been sacrificed for good. I think the following brief mathematical example will show this quite clearly. A manufacturing company, say, a joint-stock industrial company, which under normal conditions operates exclusively on its own resources, has a capital of 1 million crowns, and spends 300,000 crowns annually on raw materials, wages, administration and the necessary repairs or replacement of equipment that has been worn out or used up. Let us assume that the sales of finished products bring in 350,000 crowns a year, so that the company’s net profit comes to 50,000 crowns or 5 per cent of its total capital wealth. If this rate is in line with the current rate of interest on the loan market, the company would therefore still get the same interest on its own capital even if it operated in part on borrowed money. Now as a result of a depression and reduced sales, this company decides to work to build up inventories rather than cutting back on its operations. For the sake of simplicity, we shall assume that for all of three years it does not sell anything on the market at all, but instead lays up its entire output in its warehouses. We assume that it procures the necessary funds, 900,000 crowns in total, by bank loans, using its products or other assets as security. The company has to pay interest on this loan, but as the interest rate must be assumed to have gone down while the market is dull, it only has to pay, say, 3 per cent. In the fourth year, when a recovery sets in, the company may manage to sell its entire accumulated inventories (plus its normal annual output) at normal prices, i.e. for a total of 1,050,000 crowns. Now of this sum it owes the bank, first, the borrowed capital of 900,000 crowns, and, in addition to this, the interest, i.e. three years’ interest on the first 300,000 crowns it received, two years’ interest on the second year’s loan and one year’s interest on the third year’s, or altogether 6×3/ 100×300,000=54,000 crowns (because of compound interest, even a little more). At all events, it is left with somewhat more than 90,000 crowns, or just over 3 per cent per year on its own capital of 1 million crowns. Its own capital has therefore certainly yielded poorer returns than in good times, but the rate has still been equivalent to the prevailing rate of interest during the recession. 256

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We have not assumed any decline either in wages or in the price of materials. If such a decline occurs, as is usual in depressions, warehousing goods for far more than three years can be fully compatible with reasonable and fair profits on the company’s own capital. Nevertheless, it is of course obvious that the large-scale warehousing of finished products over a period of years must seem like a risky business to the private industrialist. In some cases, if the goods are easily spoiled—fresh fish, meat, milk, butter, eggs, potatoes, vegetables, etc.—it is virtually impossible, or at least demands special preservation measures which entail costs and risk. In other cases, e.g. in the case of finished articles of clothing, it is fashion that reigns supreme: changes in fashion can make goods that are otherwise perfectly usable virtually worthless. Sometimes gentlemen’s trousers are supposed to be broad at the top or the bottom, sometimes tight, at some times coat pockets are supposed to be horizontal, at others slanting, or vertical. Ladies’ clothing is subject to even more rapid change, if such a thing is possible: a few years ago, anyone could purchase at extremely low prices elegant ladies’ coats whose only fault was that the sleeves had the natural shape of the arms and lacked the baggy swellings around the shoulders that fashion demanded at that time. But most other goods, particularly raw materials and semi-manufactures, textiles (if not too, too extravagantly patterned), leather (and finished footwear), lumber and other wood, bricks, most metal and glass goods, among foodstuffs grain and sugar, cheese, salted and smoked meat and meat products, preserves, wines and many other drinks—these can undoubtedly be kept for years without any deterioration worth mentioning, indeed, storage can even improve their quality. What makes the storing of products so risky for the individual producer even under these conditions are probably two principal factors: the impossibility of calculating in advance possible future price changes, and the difficulty of obtaining the credit necessary for warehousing at terms that are sufficiently inexpensive and sufficiently secure. How these difficulties are to be overcome in each individual case is a matter for those with practical expertise; in the broader perspective, however, they are just one side of the general problem whose solution doubtless belongs to the future, namely, the regulation of the exchange value of money and the general level of commodity prices at as constant a level as possible by the agency of the banks and the authorities in charge of the financial system.2 In my opinion, this would also substantially solve the second part of the problem (the provision of inexpensive credit), since this kind of regulation of the price level would necessitate a steep rise in the bank rate even at an early stage of the recovery, and it would then go down all the more rapidly and vigorously in a recession. In the absence of regulation of this kind—which incidentally cannot be a matter for one country in isolation, but must rather be enforced by all countries in co-operation—the question is far more difficult to solve, but surely something could still be done towards this end. One thing is sure: 257

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no measures to combat or alleviate unemployment could stand the least comparison for effectiveness with the provision of inexpensive credit to manufacturers who were willing to work to build up inventories during depressions. As far as prices are concerned, incidentally, the risk of a general and sustained decline in prices probably barely exists under present conditions, because of the heavy production of gold. Opportunities to build up the fixed capital, on the other hand, are only present to a lesser extent during a recession: there is an inherent contradiction, after all, in wanting to expand one’s business and purchase new machines at a time when one’s warehouses are steadily filling up, particularly since even machines can easily become obsolete. Further, the new inventions that would help to create a new boom have not yet been made, or do not yet inspire the necessary confidence. However, two important kinds of fixed capital formation should be able to take place even during a depression, indeed, above all during a depression: housing construction and soil improvement. Both involve things that will be necessary for consumption sooner or later and that do not become obsolete very easily, and both entail very long-term financial investment, which for this very reason ought not to be made dependent on the vagaries of the business cycle. Houses should never be built when it ‘pays’ to build, but only ever when it ‘does not pay’. Anyone who builds in good times, when the demand for apartments is high and rents are rising, is bound to discover as the work progresses that wages and the prices of materials are also rising. This makes the construction of the house considerably more expensive than calculated, and if housing prices then decline or merely stop rising, the builder may never get to enjoy a normal rate of return on the capital he has expended. But if building is undertaken in times of depression, when many apartments stand empty and rents are falling, the opposite of all this ought to occur: the house will cost less than calculated, as time goes on rents will go up again, and if the builders just have the backbone to stand up to the less-good incomes of the first few years, in all subsequent years their enterprise will show a good rate of return. These are not the speculations of a mere theoretician, but are rather the findings of experience, confirmed many times over. One example that is often cited is the resolve shown by some capitalists in Chicago in undertaking large-scale housing construction during the crisis of 1873: the returns these homes later yielded more than made up for the initial lack of demand. The same thing applies to soil improvements, and here—as is the case with housing construction, too, incidentally—public authorities, both national and local, are certainly faced with a major task, though one that has been very much neglected in our country. The old dispute about what the state ought or ought not to do in the economic sphere has fortunately become less heated in recent times: increasingly, there is general agreement that the state ought quite simply to do all the good it can in this area. In most parts of our country there are great expanses of both cultivated and non-cultivated land 258

WHY ARE FACTORY OPERATIONS BEING CURTAILED?

that can probably be made considerably more productive by large-scale drainage; however, to carry this out is beyond the powers of the local population, which is not well equipped with capital. Might there not be a task for the state here, and would it not be possible for the state to recoup the capital outlays required, in greater part or in their entirety, by means of socalled improvement taxes? This ought at least to be investigated. In many other areas of the economy, too, the state ought to have informers deployed to look out for and report all promising innovations. It is said that astounding results have been achieved in America in recent years with gas turbines. Using gas turbines, low-grade lignite releases as much energy per unit of weight as top-grade coal does in conventional steam engines. Peat could probably also be used successfully in energy production—in some places, e.g. in Sweden in Scania, near Svedala, this has already been done for several years, but it is possible that methods have been further improved in the meantime. The state ought at least to maintain an information office, which always keeps up to date with all advances. An interesting prospectus lies before me on my desk, entitled The Conditions and Prospects for Chemical Industry in Sweden by E.Larsson. I am not enough of an expert in this field to be able to evaluate the accuracy of the author’s data and calculations, but if, as he claims, in several cases the conditions for starting an industry of this kind are just as good in our country as in Germany, he is probably right when he ascribes our backwardness in this area above all to a lack of interest on the part of the public authorities—though this does not mean I concur in the least with his conclusions about the benefits of increased protective tariffs. But finally, every crisis also means a renewed, though unfortunately consistently disregarded, reminder that all economic progress is fundamentally in vain, if our ideal of society still continues to be development chiefly in breadth, instead of a deepening and raising of the prosperity of the existing population. Here, too, appearances deceive: ‘overproduction’ looks at first glance like an overabundance of commodities and a lack of consumers; looked at more closely, however, it resolves itself into the increasing difficulty a growing population experiences in extracting from its natural resources with the aid of the available technology a sufficiently valuable product—i.e. ultimately, to produce enough to feed itself. The pessimistic statements made recently by the latest forestry school committee, above all its chairman and most expert member, concerning our future prospects of gaining from the forests of our country the fuel and building materials we require just to meet our own needs, entails a warning that should not be allowed to pass unheard. It really is not acceptable to deliberately expose future generations of Swedes to being frozen to death, even if they can avoid starving to death. ‘To know what can be done, and how to do it’, says Malthus in his Principles of Political Economy, ‘is beyond a doubt, the most valuable species of information. The next to it is, to know what cannot be done, and why we cannot do it.’ True indeed. If we only look reality in the eye, as it is, without 259

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fear, we need never lose heart, never lack profitable fields for our labour and enterprise. What gives rise to exaggerated discouragement are exaggerated expectations: both are equally irrational, equally harmful. And this is how we arrive at the peculiar situation, which would be comical if it were not so sad, that having complained high and low about the ‘ca’canny’ system and the slow rate of work achieved by the working population of the country, people suddenly start admonishing the same population, politely but firmly, to do their bit for national productivity by—doing nothing. NOTES 1 E.O.Hultgren and E.Landergren, Die Ernährung schwedischer Arbeiter bei frei gewählter Kost [The Nutrition of Swedish Workers on Self-determined Diets], Lorénska Stiftelsens Skrifter, no. 4 (1891). 2 I am delighted to see that Professor G.Cassel has recently advocated this idea in Svenska Dagbladet.

260

INDEX

ability to pay principle 31, 193, 236, 240–1, 243–4 above-normal dispersion 30 account duty 129 ad valorem taxation 66, 71 agriculture 187; remuneration of productive resources 90, 91, 94–5; tariffs 156–7, 163–4 Annalen des deutschen Reiches 38 annual product/produce 187 army maintenance contribution (Sweden) 139 Aschehoug, T.H. 173 Ascher, C.W. 189 assets 16, 20 Bastable, C.F. 58 Beccaria, C.B. 10 Begging Ordinance (Sweden) 130 below-normal dispersion 29 benefit principle 193–4, 240, 243, 247 Bentham, Jeremy 10, 120, 192 bequests 131–2, 140, 148, 221 Bernhardi, F.T.von 189 Bernoulli, D. 5 Bing, F. 76 binomial theorem 9, 29 Bluntschli, J.K. 121, 193 Böhm-Bawerk, Eugen von 26; capital theory 15–16, 18–20, 22, 24, 27–8, 30–8, 76–7, 79–82, 91; marginal utility theory 4, 6, 10; theory of interest 27, 35–7, 41–51, 60, 62, 85 Bortkiewicz 35, 43 Brisman, Sven 15–24 Brock, F.H. 34, 158–61, 163, 165 Bruzelius, M.G. (lawyer) 134 Buchanan, James 182

business cycle 228, 229–30, 234, 253, 258 buyers (in marginal utility theory) 6–7, 10, 11 capital 232; accumulation 20–2, 24, 33, 35–6, 47, 81, 107, 124–6, 222–4, 225, 255; Böhm-Bawerk 15–16, 18–22, 24, 27–8, 30–8, 76–7, 79–82, 91; circulating 17, 23–4, 75, 77, 125, 164, 186, 197; in concept of income 170–209; fixed 17, 23–4, 32–3, 50–1, 75, 77, 111, 125, 186, 189, 197, 215, 258; gainful/productive 17, 18–19; gains 226, 233, 234, 247–8; investment see investment; labour relations 17, 19, 22, 31, 47–51; loss 234, 248; marginal productivity 35, 36, 41–51; remuneration (tax incidence) 89–98; and return to capital 15–24; stock 21, 31–2, 75, 77, 173, 197; uneven taxation 98–107; wage fund theory 31–2, 41, 62, 73–5, 82, 109, 111, 183–4 capital goods 12, 50–1, 93 Capital and Interest (Böhm-Bawerk) 30, 36 capitalistic production 18–20, 32, 33–4, 41 Cassel, G. 3–13, 20, 21, 168 Cavalli, H. (on Treasury Committee) 134 Charta Sigillata Ordinance (1660) 131 Cicero, Marcus Tullius 175 circulating capital 17, 23–4, 75, 77, 125, 164, 186, 197 civil law 141; concept of income in 170–8 civil service departments (Sweden) 139–40 classical income theories 178–85

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INDEX Classical School 59, 60 co-proprietorship 128 Cohn, Gustav 57 Commercial Code (Sweden) 130 Commissioners of Inland Revenue 129 Committee of Ways and Means (Sweden) 133, 140–1 commodity prices 7, 9, 59 community (inheritance rights) 121–2 comparative advantage 28 comparative costs 160 competition, free 34–5, 50, 185; marginal utility theory 6, 10, 11, 12; tax incidence under 72–88 compulsory payments 242 Conditions and Prospects for Chemical Industry in Sweden, The (Larsson) 259 Conigliani, C.A. 58 Conrad, J. 10, 26, 30, 91, 119, 120, 122, 126 consumer goods 7, 8, 11, 13, 72, 74, 77, 80, 85, 255 consumption 50, 51, 162, 167–8, 197, 199, 255; fund 172–3, 187, 190–1, 204, 221, 245; goods 17–18, 156–7; loans 23; tax 62–3, 67, 69, 192, 214, 247; value 8–9, 10, 73 cost of living 31 cost value (of commodity labour) 73 costs 59, 60; comparative 160; overheads 66, 70; production 67, 71, 93, 159, 160–1 Cournot, A.A. 64 credit 257–8 Criminal Code (Sweden) 137 crisis theory 36, 255–6 Dagens Nyheter 166, 168 Dahlberg, B.H. 131 Davidson, David 203, 219, 240–8 debt 235 demand 9, 11, 75 Dietzel, Heinrich 4 direct taxation 57, 61, 66, 69, 84–5, 102, 107, 150–1, 153 divisible at will (consumer goods) 7, 8 division of labour 79 donatio mortis causa 128–9, 137–8 double taxation 223, 227 ‘dumping’ policies 160 duties:tariffs and wages 153–7; tariffs and wages (with high prices) 158–75

earnings: gross 66, 71; net 64–9 Economic Society 26, 28 economics, concept of income in 178–85 Ekonomisk Tidskrift 15, 189, 192, 202 England, inheritance tax in 126–30 English school 189–95, 201 entails (Sweden) 132, 145, 146 entrepreneurs 12, 13, 31, 33, 75, 83, 85, 182 Eschenbach 119, 121 estate duty:England 127, 129; Sweden 131, 135 estate inventory (Sweden) 131–7, 139, 140–1, 147, 149 exchange: rates 100; ratios 11–12, 13; relations 98; value 4, 11, 16, 18, 22–3, 50, 179, 257 excise duties 57 exploitation theory 24 ‘Extraordinary Pledges’ 134

factory production (unemployment) 253–60 Falck, G. von 58, 108, 109 family (inheritance tax) 121–2, 136, 138–9, 145–6, 147–50 ‘Farmers’ Party’ 60 Fechner, Gustav T. 5 fee element of inheritance tax 118–19 Fetter, Frank 35 finance, concept of income in 178–85 Finanzarchiv 200, 202 Finanzwissenschaft (Wagner) 57 fiscal duties 154–5 Fisher, Irving 35, 36, 42–3, 46, 191, 204–8 fixed capital 17, 23–4, 32, 33, 50–1, 75, 77, 111, 125, 186, 189, 197, 215, 258 food consumption 253–4 foreign products, taxation of 100–1 fortune morale/physique 5 Fredholm (on Ways and Means Committee) 141 free competition see competition, free free income 119, 179, 180, 181, 187, 192, 193 free trade 28, 156, 159–61, 164–5; doctrine 98–107 French Revolution 201 fructus/fructus servi 171–2, 173–5, 176, 179

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INDEX Gaius 175 Gegenleistung 119 George, Henry 74 German Civil Code 172 German school 185–95, 201 Gibbon, Edward 178 gifts 175–6, 202–3, 208; lottery win as 236–7; taxation of 129–32, 137–8, 140–1, 148, 150, 219, 221 gold 28, 162, 244, 258 Goschen, George J. 128 Göta Court of Appeals 131, 146 gross earnings 66, 71 gross income 234–5 gross revenue 186, 187, 189, 195, 201 Grundzüge der Finanzwissenschaft (Vocke) 57 Handbook and Theory of Political Science (Kleinwächter) 199 Handbuch (Schönberg) 26, 28, 31, 119 Handwörterbuch der Staatswissenschaft (Vocke) 57 Harcourt, William 121, 128 Hasselrot, C.B. (lawyer) 134 Held, Adolf 59–60, 112, 189 Helfferich, Karl T. 168 Hermann, F.B.W.von 24, 190, 191, 193, 196, 199 Hildebrands Jahrbücher (Roesler) 194 Hirsch, Baron 125 History of Poor Relief Legislation, The (Dahlberg) 131 Hock, C.F.von 65, 84 horse market 6 housing construction 24, 258 Hultgren, E.O. 254 illegitimate children (Swedish inheritance policies) 147–8 income: concept (tax issues) 213–27; differentiation 232–3; tax incidence 57–113 income (concept development):in civil law 170–8; in economics/finance 178–85; English school 185–95, 201; German school 185–95, 201; Meyer’s The Nature of Income 195–9; recent work 199–209 Income and its Distribution (Kleinwächter) 199

income taxation 57, 61, 65, 84, 117, 150–1, 182, 192, 202–3, 213–37 indifference, law of 6 indirect taxation 57–8, 101, 103, 113, 153, 154 industrial monopolies 227, 241 industrial reserve army 73 industrial tariffs 163, 164 inheritance 175–6, 191, 202–3, 208; share 138 Inheritance Code (Sweden) 135, 137 inheritance taxation 178, 214, 219–21, 241, 248; in England 126–30; Sweden 130–51; taxation system 116–26 Inhülsen, C.H.P. 126 interest 16–17, 20–4, 82, 256; first ground 35, 36, 43, 46, 47; second ground 35, 36, 43, 47; tax incidence and 72–88; third ground 35, 36, 37, 41–51 intermediate products 41 inventory duty 127 investment 33, 37, 226; period 45–9; time (tax incidence) 75–88 Jahrbücher (Conrad) 10, 30, 91, 126 Jahrbücher (Schmoller) 28, 68, 74 Jenkin, C.P.Fleeming 58 Jevons, W.S. 6, 16, 20–1, 27, 31, 32, 36, 37, 50, 60, 77, 79 Johansson. J. (on Treasury Committee) 134 joint-stock companies 227, 241, 248, 256 jus culturae et curae 171 jus soli 171 Kaizl, J. 58 ‘Kapital und kein Ende’ (Wicksell) 15–24 Karl Marx and the Close of his System (Böhm-Bawerk) 27 kinship (inheritance tax) 121–2, 136, 138–9, 145–6, 147–50 Kleinwächter, F.von 189–90, 199–201 labour 31, 33, 34; in classical theory of income 178–85; costs 161; and investment time 75–88; marginal productivity of 51, 154, 155, 157; month of 42, 43–4, 48–9, 50; productivity 21–2, 79, 81–5, 87–8, 93, 97; remuneration (tax incidence)

263

INDEX 89–98; unemployment 253–60; uneven taxation 98–107; see also wages ‘labour donation’ 32 land 19, 224; productive powers 89–98; rents 23–4, 62, 77, 179–80, 182, 225, 242; tax 59–60, 139, 182; uneven tax 98–107 Landergren, E. 254 Laplace, Marquis de 5 Larsson, E. 259 Launhardt, W. 7 legacies 175–6 legacy duty: England 127, 128, 129; Sweden 132, 135 Lehre von der Uberwälzung der Steuern, Die (Kaizl) 58 Leistung 119, 123 Leman, P. 147 Leroy-Beaulieu, P. 57 ‘letters of administration duty’ 126–7 Lexis, Wilhelm 26–9, 74, 79–81, 93 levy on inheritances (Sweden) 131–2, 133–4, 140 liabilities 16 Liefmann, Robert 15 life insurance 129, 235–6 loans 23–4; forced 166, 167, 168–9 Lorén Foundation for the Promotion of the Social Sciences 112 lottery winnings 236–7 McCulloch, John Ramsay 99, 179 Macleod, Henry Dunning 74 Malthus, T.R. 27, 73, 180, 189, 197, 201, 259 manual labour, prices of 75–6 manufacturing ratios 12–13 marginal buyers/sellers 10 marginal productivity: of capital 35, 36, 41–51; of labour 51, 154, 155, 157; tax incidence and 102–3 marginal utility 30; theory of 3–13 Marshall, Alfred 27 Marx, Karl 73, 74 Menger, Carl 60, 74 mercantilism 16, 179 Meyer, Robert 187, 190, 195–9, 204 Mill, John Stuart 16, 27, 31, 116, 124; income concept 181, 191, 208, 219, 223, 237; tax incidence 57, 59, 61–2, 89, 94, 99, 110–12 minimum distinguible 5

mining concessions 244–5 Mithoff, T. 31–2 Modern Culture (Lexis) 26 monetary theory 28 money 21, 160; function of 16–17; marginal utility theory 3–5, 11–12 monopoly prices 63–8, 217 monopoly profits 177, 180; taxation of 60, 63, 64–72, 228 morning gifts 136, 151 Napoleonic Wars 182 national bank notes 166, 167 National Economic Distribution 31 national economy 16, 84–5, 171, 178, 185, 190–1, 199, 204 national income 32, 190–2, 196, 198–204, 215, 219, 222–3, 245–6 National Law Code (Sweden) 130 natural resources 23 natural wage 62, 76, 109 Nature of Capital and Income, The (Fisher) 204–8 Nature of Culture, The (Lexis) 26 Nature of Income, The (Meyer) 187, 195– 9 Nature and Necessity of Interest (Cassel) 21 Natürliche Wert, Der (Wieser) 13 needs (marginal utility theory) 3–5, 8 net earnings 64–9 passim net income 187–8, 197, 234–8 net revenue 186–9, 195, 201 Newton, Isaac 9, 29 Nobel estate 125, 147 Nordling 120 ‘normal dispersion’ 29 On the Norm for Taxation in the Case of Income Tax (Davidson) 219 On the Shifting and Incidence of Taxation (Seligman) 58–9 Östberg, Johan (judge) 140 overhead costs (of monopolist) 66, 70 overproduction 254–5, 259 Pantaleoni, M. 58, 60, 65 Pareto, Vilfredo 160 partial taxes 102, 103 ‘paupers’ per cent’ 130 peculium 174 personal income 218

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INDEX Petersen, Julius 76 Petrazycki, Leon 170–7 physical productivity 22–3 Physiocrats 16, 153, 179–81, 186, 187, 197 Poincaré, Henri 125 poor relief 112–13, 122, 130–1 population/population growth 73, 181, 186, 195–6, 221–2, 227, 229 Positive Theory of Capital (BöhmBawerk) 18, 30–8 premium bonds 237 premium level (production periods) 44–7, 49 price ratio 6–7, 11–12 prices:commodity 7, 9, 59, 60; high 28, 158–65; marginal utility theory 3–13; monopoly 63–8, 217; of public-sector products 216–18; technical progress and 75 Principles of Equitable Taxation, The (Meyer) 195 Principles of Political Economy (Malthus) 259 Principles of Political Economy and Taxation (Ricardo) 154, 182 private capital 16, 223 private property (inheritance tax) 122 probate duty:England 126, 127, 128, 129; Sweden 132 producer goods 11–12, 13 producers, taxation of 62–3, 66, 67, 69 production:cost 67, 71, 93, 159–61; expansion 93; period 33, 34, 44–9, 51, 79–80, 85; roundabout methods 19, 21, 22, 28, 32–3, 41–2, 47, 49; uneven taxation of 98–107 production processes 21–2, 28, 38, 50, 76, 78; capitalistic 18–20, 32–4, 41 productive capacity 161–2, 164, 168 productive resources 89–98 productivity 21–2, 79, 81–5, 87–8, 93, 97 produit net 179, 180, 181, 187 profit 20, 81–2; maximization 12 progressive taxation 62, 70, 134, 138–9, 140, 227, 231, 247–8 property law (inheritance taxation) 122–3, 128 property owners 24 proprietorship 128–9, 143, 145, 146 protective tariffs 154–5, 157, 158–9, 160–3

psychophysics/psychophysical law 5 public expenditure 61, 246 Public Finance (Bastable) 58 public sector prices 215–17 purchasing power 11, 24, 31, 198–9 quadratic rate 68, 71 quaestus 171–2, 175–6, 209 quantity tax 66, 67, 70–1 quasi-monopolies 227, 241 Quesnay, François 179–80 Rau, Karl 192 raw materials 11–12, 13, 164, 179 Recovery of Paid Stamp Fees (Sweden) 137 reditus 171 remuneration of productive resources, taxation and 89–98 rent 20, 24, 59–60, 163, 164; on land 23–4, 62, 77, 179–80, 182, 225, 242; taxation incidence 89–98 Restadius, D.G. (lawyer) 134 Reutersvärd, Court Marshal 141 Ricardo, David 27–8, 31, 33; income concept (development) 180, 182–5, 187, 189, 192, 194–5, 197, 201; tax incidence 57, 62, 73, 76, 83, 89, 94–5, 99, 104, 108–9; theory of interest 16, 37, 50, 73, 76, 83; wages 153–4, 160 Riksdag (in Sweden) 131, 134, 139–40, 141–2, 144, 147, 149–50 Robinson example (production period) 47–9 Roesler, C.F.H. 194 Roscher, W.G.F. 201, 202 roundabout methods of production 19, 21, 22, 28, 32–3, 41, 43, 47, 49 Rudebeck, G. 141 Sabinus, Masurius 175–6, 209 savings 21, 24, 36, 46, 47, 49, 75, 124, 222, 224, voluntary/forced 166–9 Say, J.B. 188, 189 Schade 38 Schäffle, A. 57, 120, 192, 193 Schall, K.F.von 119 Schanz, G. 69, 120–1, 202–4, 213, 221, 237 Scheel, von 121, 122 Schmoller, Gustav von 28, 68, 74, 189, 190–4, 196, 197

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INDEX Schönberg, G. Handbuch 26, 28, 31, 119 Schumpeter, J.A. 15 sellers (marginal utility theory) 6–7, 10 Seligman, E.R.A. 58–9, 60, 63, 65–6, 71, 94, 109, 183 semi-manufactured goods 164 Senior, N.W. 37, 62 settlement duty 130 Silverstolpe, G. 166, 167, 168, 169 Sismondi, J.C.L.S. 189 slave capital 171–2, 174–7, 179 Smith, Adam 16, 17, 27, 245; income concept (development) 179–80, 182, 185–94, 196–7, 199, 201, 205, 215, 228; tax incidence 57, 83; wages theory 153, 154 social capital 20, 22, 23, 32, 51 social justice 179, 228, 230 social subsistence fund 32, 41 social wealth 16 society (inheritance rights) 121–2 soil:improvement 258–9; productive powers 89–98 Some Controversial Issues in Capital Theory (Böhm-Bawerk) 28 Stahl, F.J. 193 Stamp Committee (1893) 126 Stamp Ordinance (Sweden) 116, 132–4, 135–7, 141–2, 145–6, 147–9 state (inheritance rights) 121–2 stationary society 23, 35–6, 50, 186, 190–1, 199, 215, 218–19, 221–2, 224, 229, 245–6 statistical theory/analysis 29–30 Stein, Lorenz von 57 Stockholm Stock Exchange 147 subjective value (marginal utility theory) 3–9, 10 subsistence 44, 179; factor (First Ground) 35, 36, 43, 46; fund 32, 41; wages 73, 74, 154, 197 succession duty 127, 129 supertax 228–9, 233 supply 75 Supreme Court (Sweden) 138, 144–5, 146, 147–8 surplus production 187, 188–9 surplus value 73 Svea Court of Appeal 131, 144–5, 147 Sweden (inheritance tax) 130–51 Swedish Politics (pamphlet) 153

tariffs 28; free trade doctrine 100–1, 104–7; high prices and 158–65; tax on foreign products 100–1; wages and 153–7 Tax Adjustment Committee 133 tax incidence 57–63, 180; free competition 72–88; monopoly profits 64–72; remuneration of productive resources 89–98; uneven taxation of production 98–107; wages 107–13 Tax Ordinance (1880) 133, 142–3 taxation:classical theories of income 178–85; in concept of income 213–27; Davidson’s proposals 240–8; direct 57, 61, 65, 69, 84–5, 102, 107, 150–1, 153; evasion 65, 88; indirect 57–8, 101, 103, 113, 153–4; of land 59–60, 139, 182; progressive 61, 70, 134, 138–9, 140, 227, 231, 247–8; shifting see tax incidence; system 61, 116–26 technical progress 33, 222; and tax incidence 75–85 technical ratios 12–13 Teoria delta traslazione dei Tributi (Pantaleoni) 58 Theory of Political Economy (Jevons) 31 Third Ground theory 35, 36, 37, 41–51 Thünen, J.H.von 27, 37, 76, 104 Thyrén, J. 153, 154, 155, 157 Torrens, R. 160 trading bodies 6 Traité de législation (Bentham) 10 transportation 80 treasure trove 174–5, 176–7 Turgot, A.R.J. 62, 197 Ulpian 175, 176 unemployment 253–60 universal protectionist system (tariffs) 158–9, 160–1 value 27, 28; cost and 59, 60; marginal utility theory 3–13; productivity 22–3 Value, Capital and Rent (Wicksell) 6, 7, 10, 28, 74, 77, 79, 84–5, 91, 93, 99 Vocke, W. 57–9 voluntary payments 242 Wachtmeister, H. (Treasurer) 134 wages 20, 23, 33–5, 50–1; fund theory 31–2, 41, 62, 73–5, 82, 109, 111, 183–4; investment time and 75–85, 87–8;

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INDEX natural 62, 76, 109; tariffs and 153–7; tariffs and (with high prices) 28, 158–65; tax incidence (influence) 72–88, 91–4, 99, 104–5; taxation of 107–13; technical progress and 75–85 Wagner, Adolph 57–8, 60, 65, 84, 113, 121–2, 124, 201, 231 Walras, L. 3, 9, 11, 12, 28, 51, 60, 161 war economy tax 227 war loans 166, 168–9 wealth 5, 16, 17, 32, 38, 190–1, 245, 247, 256; inheritance tax 116–51; tax 198,

213, 219, 222, 224, 227, 232, 236; tax incidence and 75, 104, 110–11 Wealth of Nations (Smith) 182, 186, 205 Weber, E.H. 5 Weiss, B. 194, 195 Wieser, Friedrich von 12–13, 89 wills (Sweden) 131, 132, 136–7, 147–8 windfall gains 122–3, 202–3 wine (investment period) 45–7 working-class 161, 162–3; industrial reserve army 73; taxation of 108–13 working capital 82

267