In Capital, Interest, and Rent, Fetter criticizes Böhm-Bawerk’s attempt to construct a coherent, non-circular theory of interest. There are three issues involved here–three (and a half) questions both authors are trying to answer:
- What is capital? (1a) What is it’s value?
- What is the relationship between capital and the roundaboutness of production?
- Where does interest come from?
Fetter quotes Böhm-Bawerk as answering the “What is capital?” question with “Previous labor is a rough but essentially true definition.” Böhm-Bawerk clarifies in a footnote: “It is more exact to say, stored-up, previously applied productive force, which can be not only labor, but also valuable natural forces or uses of land.” Fetter claims that this is a “value concept of capital” and therefore “comes near to the discredited labor value theory.” I think we can give Böhm-Bawerk the benefit of the doubt and assume that he didn’t mean the value of capital is solely based on the number of labor hours involved in producing capital, but was just trying to measure the average length of production. Fetter thinks Böhm-Bawerk is answering question #1, when he is probably on his way to answering #2. It’s worth mentioning that in the ERE, there is no difference between the value of capital and the value of the labor that goes toward its production, except for interest because of time preference, which gives us the answer to #3.
Fetter summarizes his objections to Böhm-Bawerk’s argument that an increase of capital in production is the same as an increase in the production period via the labor hours involved in the production of the former:
If we put together these objections to the argument, we have it in this form: if it were true in any case, it would be true (1) only when the diminishing returns of natural agents did not offset it; (2) when the change in the amount of capital is not merely the expression of a change in the rate of interest; (3) when the increase does not represent accumulated interest or monopoly gains embodied in capital; and (4) when the increase is not the capitalization of the uses of natural agents. There is involved in Böhm-Bawerk’s argument, therefore, the fallacy of an unsound premise. If all capital does not consist of, or owe its value to, previous labor, a false conclusion is drawn when the length of the production period is assumed to be fixed by the relation between the stock of capital, counted as previous labor, and the annual amount of labor.
Again, it seems Böhm-Bawerk is trying to answer a different question than Fetter thinks he is answering. Böhm-Bawerk is trying to conceive of a real, tangible, and physical concept (the length of production) while Fetter is focused on the intangible, subjective nature of value and capital accounting.