The Abstinence

The lender in the preceding plate asks to be paid for the use of his money. One answer to the charge of usury is that he has given something up: the enjoyment he could have had by spending it. The borrower gets a house, a machine, or command over the goods of the present; the lender agrees to wait. Interest, on this account, is the reward for that postponement, a wage paid to the person who leaves his wealth available for someone else's use. Yet waiting is an unusual kind of work. The man with a fortune may lend without denying himself a single meal, while the man who spends his last dollar on dinner has nothing left to lend. Both will pass through the same year. Only one will be paid for it. The theory must therefore say what the lender supplies, why it commands a price, and whether the price measures anything that deserves the name of sacrifice.

Nassau William Senior gave the answer its provocative name: abstinence. In his account of production, labor and natural resources were insufficient without a third principle — the decision to forgo an available enjoyment, or to choose a remote result over an immediate one. Seed that is eaten cannot also be planted; a worker building an instrument must be supported before the instrument yields its product. Capital is the accumulated result of such decisions, rather than an independent substance that appears at the beginning of production. Senior wanted to identify the act that had made it possible. The owner who could consume the resources instead keeps them committed to a process whose return lies ahead. His restraint is distinct from the labor performed within that process, and Senior treated profit as its remuneration.¹ The insight is a real constraint on production through time: some uses of resources exclude others, and a future output may require a present commitment. The difficulty begins when that constraint is made to explain the whole return to ownership.

Abstinence in this technical sense need involve very little deprivation. A wealthy owner may save because his present wants are already amply met; a poorer household may want to save and be unable to do so. The difference matters because a return calculated on the amount advanced and the time outstanding does not measure the discomfort of the person making the advance. Two lenders supplying the same sum on the same terms can receive the same interest even when one has forgone a luxury and the other a necessity. Alfred Marshall preferred the word waiting, which kept the postponement and shed the suggestion that accumulated wealth testified to an ascetic life. He also separated the immediate economic question from the history of acquisition: resources could have come to their owner through work, inheritance, or fraud, and the question of how their use would be induced remained analytically distinct.² That separation makes the account more precise. It also limits what the account can vindicate. A price for making resources available cannot, by itself, certify the justice of the title under which they are withheld.

Even as an account of inducement, waiting does not establish that the rate must be positive. Someone providing for an old age without earnings may prefer a smaller quantity of goods then to a larger quantity now. He may willingly pay for their preservation. Marshall recognized this possibility, and he recognized another complication: a lower return can make a household save more if it is trying to provide a fixed future income. In his example, an annual income of £400 requires a fund of £8,000 at five per cent but £10,000 at four. The household's response depends on its object as well as the price it is offered.³ None of this makes the rate irrelevant. A higher return changes the terms on which present consumption can be exchanged for future consumption, and can draw additional resources into saving. It does mean that the mere passage of time does not fix either the sign or the size of the reward. The quantity people will supply has to be considered alongside their circumstances and the uses to which the supply can be put.

Marx's objection reached further back than the choice between consuming and saving. A capitalist who divides a surplus between personal expenditure and reinvestment has already obtained the surplus whose origin needs explaining. Calling the reinvested portion abstinence describes what he does with it; it does not explain why he was entitled to receive it. In Marx's account the source is unpaid labor, and competition presses the capitalist to accumulate in order to preserve his position. The decision to reinvest may be necessary to the firm's survival without becoming the independent source of the value reinvested.⁴ The argument challenges the point at which Senior's explanation begins. Senior follows resources from an owner's available consumption into a productive commitment. Marx asks how the owner came to command the resources and the resulting product. An account of the first decision cannot settle the second inquiry merely by naming the first a sacrifice. Conversely, a dispute about the distribution of the surplus leaves a practical question for any arrangement of production: who will decide how much of the present output to devote to future capacity?

The strongest version of the waiting argument therefore concerns an opportunity forgone. A household that ties up its means cannot exercise every use of them at once. A firm choosing a slow productive process commits resources that could have been directed elsewhere. A prospective return can help induce that commitment, and its absence can change the decision. But the return required at the margin is a statement about the alternatives open to the supplier, rather than a personal assessment of his virtue. If one lender would have saved at two per cent and the market pays four, the additional two points are not evidence of an additional sacrifice he has performed. If another cannot save at all, his hardship does not become an offer of capital. These are consequences of treating waiting as an economic choice. The theory becomes more useful as it becomes less commemorative: it asks what terms will alter the allocation of resources, while leaving the moral assessment of the resulting claims to an argument that actually addresses their grounds.

Something survives the dispute that neither indignation at the idle rich nor praise of the provident can remove. Production takes time, and a society must make provision for the interval between committing resources and enjoying the result. Senior gave that interval a place in the explanation of income; Marshall gave it a less misleading name. Yet provision for the future is compatible with many motives, institutions, and rates. To derive a particular rate, the analysis must connect people's willingness to postpone consumption with the opportunities for transforming what they postpone. That is the work of the next plate: the premium on present over future goods, where the supply of waiting meets the demand for it.⁵ The lender may indeed give up a present use of his wealth. The question that follows is how much future wealth will induce him to do so, and why anyone else can or will promise it. The calendar alone supplies neither answer.