The last plate gave the demand side of the discount — impatience, the refusal to wait — and deferred the supply side to this one. Here it is: the productivity of waiting, the technical superiority of present goods, the reason a good now is worth more than a good later not only because we are impatient to have it but because, having it, we can make it into more. This plate takes up Böhm-Bawerk's third ground and the theory of capital that grew from it: that production which goes the long way round — making the tool before catching the fish — yields more than production that goes straight at its object, and that present goods, which can be set upon this productive detour, are for that reason worth more than future goods, which arrive too late to be so used. It will show that this productivity is the supply-side spring of interest, as impatience is the spring on the side of demand; that the rate is struck where the two springs meet, and by neither alone; and that the volume's question — earned or extracted — runs through the productivity of capital as surely as it ran through the impatience of men.
Begin with the fisherman, Böhm-Bawerk's own figure. A man may catch fish with his bare hands, and take a few; or he may spend a day making a net, catching nothing that day, and thereafter take many. The net is a detour — a roundabout method — production that goes the long way about, building the means before making the end. And the detour is more productive: the day surrendered to net-making is repaid many times in the fish the net brings in. This is the fact the plate turns upon: that indirect production, the patient building-up of tools and engines and structures before the making of things to be consumed, yields more than direct production, the straight grab at the object of desire. The tools and engines so built are capital — produced means of production, goods made not to be enjoyed but to make more goods. And because the roundabout way is more productive but takes time, present goods, which can be sunk into the detour, command a premium over future goods, which cannot. The productivity of the detour is the supply-side reason that the future is discounted: not that we are loath to wait, but that waiting, rightly used, makes the waited-for thing grow.
If the roundabout way is more productive, then the means of going round it — capital — is productive too, in the plain sense that an added increment of it yields an added increment of product. And here is the supply-side theory of interest in its simplest dress: that interest is the reward of this productivity, the share that falls to capital because capital adds to the output. Lengthen the detour, add to the stock of tools, and the product rises; the rate at which it rises — the marginal product of the last increment of capital — is what capital can command; and in a settled market the rate of interest is drawn to that marginal product, so that capital earns what it adds, no more and no less. This is the productivity theory the older economists reached for, and refined into the marginal-productivity account of all distribution: interest is not, on this telling, a toll wrung from the borrower's impatience but the natural fruit of a productive thing, as the harvest is the fruit of the field. The opportunity to invest — the return the productive detour holds out — is the force that bears the rate up from the side of supply, as impatience bears it up from the side of demand.
Interest, on this telling, is not a toll wrung from the borrower's impatience, but the natural fruit of a productive thing — as the harvest is the fruit of the field.
But productivity alone will not settle the rate, any more than impatience alone. This was Böhm-Bawerk's own stroke against the cruder productivity theorists: that the mere fact that capital yields more does not, of itself, explain why the capitalist keeps the more — for if present goods were not also valued above future ones, the competition of investors would bid the price of the productive detour up until its whole extra yield was swallowed, and no net interest would be left. Productivity sets what the detour can yield; impatience is why the yield is not competed away to nothing. Fisher drew the two into a single figure: a community choosing how much of its present to sink into its future, bounded on the one hand by what the productive detour makes possible — the more it invests, the more future goods it may have, though at a falling rate of return — and drawn on the other by its own impatience, its unwillingness to starve the present for the future. The rate of interest settles where the two are reconciled, where the marginal productivity of the detour is brought level with the marginal impatience of the community and with the rate itself. Productivity and impatience are the two blades of the one pair of shears, and the rate is the cut they make together — neither blade, of supply or of demand, cutting alone.
The roundabout way requires capital — the stock of tools and engines and structures that the detour builds and then employs — and so this plate leans upon a thing it cannot here fully examine: the nature of capital itself, which a later volume must take up under the name of the stock. For the productivity theory rests on our being able to speak of "the quantity of capital" and "the marginal product of capital" as though capital were a single measurable stuff, like water or like land, of which one might have more or less. And whether it truly is — whether the tools and engines of an economy, things so unlike as a loom and a locomotive and a line of code, can be summed into one quantity whose marginal product fixes the rate — is among the hardest questions in the science, and one that a famous Cambridge controversy left unresolved, having shown that the value of the capital cannot always be reckoned without first knowing the very rate it is meant to determine. The plate flags the difficulty and passes it on: that the supply-side theory of interest is only as solid as the notion of capital it stands upon, and that notion is contested ground, reserved for the volume of the stock. Here it is enough that capital is the produced means of the productive detour, and that the detour's productivity is real, whatever the troubles of measuring its cause.
Grant that the detour is productive: a harder question follows, and it is the volume's question in its supply-side form. Whose is the fruit? The productivity theory says it is the capital's, and so the capitalist's, who furnished the capital by abstaining — by saving up the subsistence that fed the labour through the long detour, when he might himself have consumed it. But there has always been a contrary reading, and it must be given its full force. On that reading the productivity of "capital" is at bottom the productivity of the labour the capital arms — for the tools and engines are themselves only stored-up past labour, and the surplus of the roundabout way is made by the workers who walk it, not by the dead instruments in their hands. The interest the capitalist draws is then no fruit of his abstinence but a deduction from the labour's product, a share claimed by virtue of owning the means rather than of making the goods — the very charge the wage volume met in its plate upon the division of the product. And the abstinence itself, the critics add, is a strange sort of sacrifice: real enough for the poor saver who forgoes a true want, but for the rich a matter of not consuming what he could not have consumed in any case, hardly the heroic forbearance the older theory dignified with a name. The plate cannot settle the quarrel; it can only mark that the productivity of the detour, however real, does not by itself prove the return to capital earned rather than appropriated.
The net catches more fish; but whether that surplus is the net-owner's or the hands' that cast it, productivity will never, of itself, say.
So the supply side, like the demand side, gives the volume's question no clean answer. The productivity of the roundabout way is real — the net does take more fish, the engine does make more cloth, the detour does yield — and to that extent interest, the reward for undertaking the productive detour and for the abstinence that funds it, is genuinely earned: the fruit of a real addition to the world's product. A society that paid no return to waiting and to risk would weave no nets, sink no mines, lay no rail; the rate is, in part, the necessary inducement to the patient, productive detour, and the wealth it has summoned into being is no illusion. And yet the same return shades toward the extracted at its edges: insofar as it is the product of labour appropriated under the name of capital's productivity; insofar as the "sacrifice" of abstinence is no sacrifice but the idle overflow of the already-rich; insofar as the very quantity of capital whose marginal product is meant to justify the rate cannot be coherently measured apart from the rate it is meant to explain. Of all the theories of interest the productivity theory makes the return look most earned — the honest wage of a productive instrument — and it has the firmest claim to a share of the truth; but it does not slip the seam. Where the rate rewards a genuine detour and a genuine sacrifice, it is earned; where it harvests what labour grew, or dignifies an idleness as abstinence, it is extracted; and the productivity of capital, real as it is, decides which only in part.
So the two halves of the why are now in hand. We discount the future because we are impatient to have the present, and because the present, productively used, becomes more than the future would have been. Impatience is why we will not wait; productivity is why our waiting, when we do wait, bears fruit; and the rate of interest is struck where the two are made level — the marginal impatience of men brought even with the marginal productivity of their tools. Of the two, productivity lends interest its proudest title, the fruit of a genuine detour, the net's surplus of fish; and impatience lends it its urgency, the premium the present commands. But neither, this plate has tried to show, secures the rate against the volume's question. The productivity is real, yet the fruit may be the labour's and not the owner's; the impatience is real, yet it may be myopia, or mere necessity, rather than a fair price of waiting. The price of time stands, at the close of these three foundational plates, upon two real things — a real impatience and a real productivity — neither of which can tell us, of itself, whether the return it commands is earned by a contribution or extracted by a position. How the rate that these two springs feed is actually struck — by the meeting of saving and investment, by the price of holding money, by the hand of the central bank — the plates that follow will take up. But the foundation is laid: the price of time rests upon the wait and the fruit, and the question of who deserves it remains, as the table says of every price, open.