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Capital and interest theories - Chapter 3
American Journal of Economics and Sociology, The, Dec, 2002
In 1944, Brown published an article, "An Off-line Switch in the Theory of Value and Distribution," wherein he suggested that Bohm-Bawerk had erred on two counts and misled those who elaborated on his theory. First, Brown felt that Bohm-Bawerk's concept of direct production, which involved only the "naked fist," was misleading. Brown proposed an alternative concept to distinguish direct from roundabout methods of production: immediacy of the end product regardless of the mixture of capital, labor and land utilized in the process. Thus, Brown would broaden the alternatives of a worker in the sense that his (or her) minimum offer price for one's labor would be set by the augmented opportunities available in "direct" production or the production of "present" (immediately consumable or nearly so) goods. Assuming some general degree of possible substitution in the production of "present" versus capital goods, Brown maintained that the marginal cost of the production of capital goods was the "present" goods that the factors producing capital might produce instead. In this manner then, Brown argued for a direct influence of the cost of production on the value of capital as in his earlier writing. In a 1962 article, Brown noted the current acceptance, if not dominance, of Fisherian interest theory and took the occasion to reiterate his dissent. (52)
Conclusion
IN SUMMARIZING BROWN'S CONTRIBUTIONS to this area of economic thought, especially in the years 1913 to 1931, his influence on Fisher's revision of The Rate of Interest is of the greatest interest. Fisher commented in the book that anything new he offered in his revision "was chiefly on the objective side"; (53) he cited only Brown's text Economic Science and the Common Welfare as a "somewhat similar treatment" (54) in a nonmathematical form. Gottfried Haberler commented in his review that Fisher was at great pains to clarify the role of productivity in interest determination but that his explanation still left doubts. (55) The emphasis Brown wished to lend to the role of productivity in interest rate determination was greater in Fisher's revision; however, it was less than that desired by Brown. As noted previously, Brown saw productivity as having a direct effect on interest rates coordinate with time preference but for practical purposes dominating time preference.
Brown's disagreements with Fisher stem, I believe, from the following considerations. First, Brown was unable, as was Bohm-Bawerk, to convince Fisher of an independent influence of productivity on interest rates. Second, Brown's arguments, that employed the broad opportunity cost concepts of Jevons and Davenport, were not accepted by Fisher. Brown's attempt to portray a supply and demand interdependency in the capital market received no comment from Fisher or any other critic. Although conceivable, the possibility was, and still is, viewed as having a negligible effect, at least under competitive conditions. Third, Brown as well as Seager found Fisher's and even more so Fetter's emphasis on time preference to be deficient as a realistic explanation for interest rate determination and capital evaluation. (56) This may be due in part to their strong assumption of perfect foreknowledge. Lastly, although it does not appear in their published arguments or correspondence, Fisher and Brown were mutually aware of a b asic disagreement exemplified by Fisher's comment in a 1930 letter to Dennis Robertson: "Interest and rent are different ways of measuring." (57) Of course, for Brown this was not true.
