Carl Menger (1840-1921): Contribution to the Theory of Capital (1888), Section V

Abstract

This is a translation of Section V of Carl Menger's article "Zur Theorie des Kapitals" (Contribution to the Theory of Capital).

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This version has been accepted for publication at The Journal of Institutional Economics and
will appear in a revised form subsequent to peer review and editorial input by Cambridge
University Press.
The published version of this paper will be available soon at
https://www.cambridge.org/core/journals/journal-of-institutional-economics
Carl Menger (1840-1921): Contribution to the Theory of Capital (1888), Section V
Eduard Braun
Institute of Management and Economics
Clausthal University of Technology
Julius-Albert Str. 2
38678 Clausthal-Zellerfeld
Germany
eduard.braun@tu-clausthal.de
Editorial Introduction
Carl Menger is an important and well-known figure in the history of economic thought. His
habilitation thesis, Principles of Economics (1871) and his book on method, Investigations
into the Method of the Social Sciences with Special Reference to Economics (1883) both had a
major impact on the development of our science. Together with William Stanley Jevons’s
Theory of Political Economy (1871) and Léon Walras’s Elements of Pure Economics or the
Theory of Social Wealth (1874), Menger’s Principles marked the start of the marginal
revolution in economics, and his Investigations provoked the famous Methodenstreit between
the historical school of economics on one hand and Carl Menger and his pupils Eugen von
Böhm-Bawerk and Friedrich von Wieser on the other.
Menger’s contributions to the marginal revolution and the Methodenstreit gave rise to the
Austrian school of economics. This school of economic thought differs in several respects
from both neoclassical and institutional economics. As opposed to Jevons, Walras and their
neoclassical followers, Menger did not construct his economic theories on the basis of mental
constructs such as perfect competition, equilibrium or the utility calculus (Hülsmann, 2007:
134 f.). Instead, he approached the analysis of the market in a non-mathematical and non-
graphical way, thereby leaving room for the discussion of the indeterminacies of actual

market processes in the real world. It is a fundamental characteristic of the Austrian school,
distinguishing it from mainstream neoclassical economics, that it analyses the market order in
terms of dynamic processes and not in terms of equilibria (Kirzner, 1997).
It is more difficult to pinpoint the differences between Austrian and (old) institutional
economics. Until now, the relationship between the adherents of the two approaches has been
heavily influenced by the fact that the Austrian school originated as an antagonist of the
historical school of economics in the Methodenstreit. (The historical school is a predecessor
of institutional economics.) The historical and institutional schools criticize Austrian
economists for their strict adherence to methodological individualism and their corresponding
neglect of ‘the social and institutional enablers of individual cognition’ (Hodgson 2004: 62),
that is, of the institutions that form, structure or even constitute the thoughts and actions of
individuals.
Capital theory is a case in point. When it comes to defining capital, the two schools are
usually supposed to be diametrical opposites. Austrian school economists use to define capital
in a physical way, as a technical requirement for roundabout methods of production. Capital is
supposed to consist of capital goods, where ‘capital goods’ are a different expression for
‘produced means of production.’ Defined in this way, capital can easily be integrated into the
universal means–end framework of human action, which is the main element in the Austrian
version of methodological individualism.
Conversely, institutional economists advocate a non-universal approach to capital. Capital is
not understood as a physical concept that fits into the means–end framework of human action
as such; instead, it is something that is peculiar to the institutional framework of capitalism. It
is broadly defined as money invested in businesses by owners or shareholders. Capital in this
sense allows for a specific kind of human action, namely the pure pursuit of monetary profit
by enterprises, undisturbed by the ethical values of their stakeholders, be they egoistic or
altruistic (Sombart, 1919: 101, 119).
There have been several slightly successful attempts at contributing to a mutual understanding
of Austrian and institutional economics (Samuels 1989; Wynarczyk 1992). In my own work
(Braun et al. 2016; Braun 2017), I have tried to show that capital theory could well serve as a
bridge between Austrian and institutional economics. To those who are well-read in both
traditions, it will sound odd that, of all things, capital theory should be able to serve as a link
between them. It seems obvious that the two approaches to capital presented above are in
conflict with each other and that they can hardly serve as a common basis for institutional and
Austrian economics.

Nevertheless, it is possible to build bridges based on capital theory. Hodgson (2008) pointed
out that Frank Fetter’s work could be considered a synthesis of institutional and Austrian
views because his subjectivist approach to value theory did not prevent him from recognizing
the historically specific aspects of economic phenomena, in particular, capital. Furthermore,
and it may come as a surprise to many, Ludwig von Mises (1949), the most vocal advocate of
the Austrian concept of a universal and ahistorical theory of human action, deviated from
other Austrian economists and stuck to the historically specific business concept of capital, as
endorsed by institutional economists (Braun et al. 2016).
Moreover, Mises was not the only important Austrian economist who followed an
institutionalist approach to capital. Carl Menger, the founder of the school himself, wrote a
long essay on capital in 1888, entitled ‘Zur Theorie des Kapitals’ (Contribution to the Theory
of Capital), in which he foreshadowed Mises’s later deviation from a universal and physical
concept of capital. It appeared in the Jahrbücher für Nationalökonomie und Statistik, back
then a relevant German economics journal. The fragment following this short introduction is a
translation of section five of this essay.
Menger’s essay must be considered as a recantation of his earlier views on capital. In his
Principles of 1871, he had advocated a physical concept of capital. In this book, he laid the
foundations for what was later to become, following its elaboration by Böhm-Bawerk (1889),
the Austrian theory of capital, with its emphasis on physical means of production and their
role in time-consuming production processes. Menger (1871) conceptualized the role of time
in the production process and used it to explain what he considered to be a very important
cause of economic growth, namely the extension of human plans to the goods of higher
orders, i.e. producer goods (Menger, 1871: 73). Menger (1871: 155, 303-304) defined capital
as the combination of economic goods of higher order in the present for purposes that lie in
the future. Corresponding to his physical capital concept, Menger (1871) turned against the
popular notion of capital used by practical businesspeople. He (1871: 304) considered that the
interpretation of capital as a sum of money was a ‘much too narrow’ viewpoint. ‘[T]he
concept of money,’ he stated, ‘is entirely foreign to the concept of capital’ (1871: 305).
Later, in his 1888 essay, he took a completely different path. There, he considered it a
mistake that cannot be disapproved of enough, however, when a science uses
expressions of common life, not merely in a more precise conceptual sense, or in a
certain narrower or broader sense (technically!), but denotes completely new concepts
by words that, in common parlance, already describe a fundamentally different

category of phenomena – a category that is also important for the respective discipline
– correctly and properly. (Menger, 1888a: 2)
The word ‘capital’, in particular, should not be ‘used for whatever kind of new, scientific
categories that the evolving theoretical discussion brought to light’; it should only be used in
the way ‘that is familiar to business practitioners’ and that is ‘obtained from the direct
observation of life and the permanent practical occupation with capital’ (Menger, 1888a: 2).
Therefore, Menger (1888a: 2) opted for a ‘real notion of capital’, with ‘real’ meaning
‘realistic’.
From the perspective of the history of economic thought, it would be interesting to understand
the reason behind Menger’s change of mind between 1871 and 1888. Nevertheless, there is no
indication in Menger (1888a) or any of his other publications as to why he came to reject the
physical capital concept in 1888 (Braun 2015: 93 ff.). I have conjectured that Menger came to
the common parlance approach to capital through his reading of Albert Schäffle and, more
importantly, Richard Hildebrand, two scholars who were closely associated with the historical
school of economics (Braun 2015: 93 f.). In light of new evidence provided by Petrzak
(2020), it also seems probable that Menger had been volatile on the subject for several
decades. Apparently, he had already been close to a common parlance interpretation of capital
several years before Principles appeared in 1871. Why he changed his view while writing
Principles, however, and why he changed it back before 1888 is not explained by Petrzak.
Readers of the following fragment will find that Menger (1888a) strongly emphasised the
futility of developing a general theory of capital interest based on the physical capital concept
– something that Böhm-Bawerk was trying in Positive Theory of Capital (1889). It may well
be that Hayek (1934: 410 f.) was right in that it was Menger’s examination of Böhm-
Bawerk’s interest theory that brought him to realise the limits of the physical capital concept
and, instead, make the case for the capital concept used by business practice and common
parlance (and endorsed by the historical school).
A large part of Menger (1888a) is dedicated to criticizing scientific approaches that deviate
from the capital definition of common parlance. He (tacitly) included in his critique his own
earlier approach developed in 1871. I have presented and summarized his critical reflections
at length in Braun (2015). We have to bemoan, along with Stigler (1937: 249), that Menger
did not elaborate his critical reflections to a positive theory of business capital. Still, the fifth
and final section of Menger (1888a) contains an extensive discussion of the capital concept of

common parlance and business practice, the capital concept that economists should use,
according to Menger, whenever they construct theories of capital.
Menger himself published an abridged French version of his essay (Menger, 1888b), and the
German original was translated into Spanish (Menger, 2007). However, an English translation
is yet to be published. With the following fragment, the positive part of Menger’s essay
(section five) is made available to the English-speaking world.
The essay is, of course, a valuable historical document in its own right. However, the hope is
that its (partial) publication in the Journal of Institutional Economics will also serve another
purpose. It is my personal conviction that the old adversaries of the Methodenstreit – the
Austrian and the historical/institutional schools – are not mutually exclusive approaches but
actually complement each other to a large extent. Hodgson (2014: 1063) stated that it ‘might
reasonably be presumed that to understand capitalism we must understand capital.’ It appears
that in this crucial respect, two of the most important Austrian economists, Carl Menger and
Ludwig von Mises, contributed to the understanding of capital in a way that is valuable to
both Austrian and institutional economists (Hodgson, 2019: 105 ff.). If a consensus could be
achieved in relation to the fundamental issue of capital – and it seems to be within reach – it
would merely be a question of time and goodwill that Austrian and institutional economists
collaborate constructively on replacing neoclassical economics with a more realistic and,
hopefully, widely acceptable alternative.
References
Böhm-Bawerk, E. V. [1889](1930), The Positive Theory of Capital, trans. W. Smart, New
York: G. E. Stechert & Co.
Braun, E. (2015), ‘Carl Menger’s Contribution to Capital Theory’, History of Economic Ideas,
23(1): 77–99.
Braun, E. (2017), ‘The theory of capital as a theory of capitalism’, Journal of Institutional
Economics, 13(2): 305-325.
Braun, E., P. Lewin, and N. Cachanosky (2016), ‘Ludwig von Mises’s Approach to Capital as
a Bridge between Austrian and Institutional Economics’, Journal of Institutional Economics,
12(4): 847–866.
Hayek, F. A. (1934), ‘Carl Menger’, Economica 1(4): 393-420.

Hodgson, G. M. (2004), ‘Austrian Economics, Evolutionary Psychology and Individual
Actions’, Advances in Austrian Economics, 7: 61-78.
Hodgson, G. M. (2008), ‘Frank A. Fetter (1863–1949): Capital (1930)’, Journal of
Institutional Economics, 4(1): 127–132.
Hodgson, G. M. (2014), ‘What is Capital? Economists and Sociologists have Changed Its
Meaning: Should It be Changed Back?’ Cambridge Journal of Economics, 38(5): 1063–1086.
Hodgson, G. M. (2019), ‘Austrian Economics is still not Institutional Enough’, Advances in
Austrian Economics, 24: 101-110.
Hülsmann, G. (2007), Mises. The Last Knight of Liberalism, Auburn, Al: Mises Institute.
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Kirzner, I. (1997), ‘Entrepreneurial Discovery and the Competitive Market Process: An
Austrian Approach’, Journal of Economic Literature, 35(1): 60–85.
Menger, C. [1871](2007), Principles of Economics (J. Dingwall and B. F. Hoselitz Trans.),
Auburn, AL: Mises Institute.
Menger, C. [1883](1985), Investigations into the method of the social sciences with special
reference to economics (F. J. Nock Trans.), New York et al.: New York University Press.
Menger, C. (1888a), ‘Zur Theorie des Kapitals’, Jahrbücher für Nationalökonomie und
Statistik, 17: 1–49.
Menger, C. (1888b), ‘Contribution à la Théorie du Capital’, Revue d’Économie Politique,
2(6): 577-594.
Menger, C. (2007), ‘Sobre la Theoría del Capital’, Procesos de Mercado. Revista Europea de
Economía Política, 4(1): 177-228.
Mises, L. (1949), Human Action – A Treatise on Economics, New Haven, CT: Yale
University Press.
Petrzak, Y. (2020), An Outline of Carl Menger’s Capital Theory 1867-1888. Conference
paper presented on Febr. 22nd, 2020, at the Austrian Student Scholars Conference 2020 at
Grove City College.
Samuels, W. J. (1989), ‘Austrian and Institutional Economics: Some Common Elements’,
Research in the History of Economic Thought and Methodology, 6: 53–71.
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Humblot.
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229-250.
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Economics as Rivals and Possible Complements?’, Review of Political Economy, 4(1): 18–36.

Contribution to the Theory of Capital
(Zur Theorie des Kapitals)
By Carl Menger
Source: Jahrbücher für Nationalökonomie und Statistik 17 (1888), pp. 1-49
Fragment: Section V (pp. 37-49)
Translated by Eduard Braun
V.
The Capital Concept of Common Life.
(The Real Concept of Capital)
1.
In common life, and also in the language of jurisprudence that follows the views of the latter
[common life], capital is understood in a way that is fundamentally different from that of our
science. Business practitioners and lawyers use the above expression to describe neither raw
materials, nor auxiliary materials for technical production, nor commercial goods, machines,
buildings, and the like. Wherever the terminology of the [Adam] Smithian school has not
already penetrated common parlance, only sums of money are denoted by the above word.
In common life, it is not amounts of money of any kind, however, that are called capital. The
sums of money that are dedicated to the cost economy (the household!), e.g. the household
budget, even nest eggs, etc., are not regarded as capital by business practitioners and lawyers.
The term ‘capital’ is not used in common life for each sum of money that a person has at his
disposal. Only sums of money that are dedicated to the generation of income – components of
a person's acquisitive[1] assets – are designated by this word.
Common life does not confuse money and capital. There are sums of money of many different
kinds that are not called capital in the language of business and law but are actually set in
opposition to the latter.
1 [EB: ‘Acquisitive’ is my translation of the German term ‘werbend.’ Here ‘werbend’ means ‘dedicated to the
generation of income.’]

It is no objection if one points out that practitioners do not speak of ‘acquisitive money’ or of
‘money dedicated to income generation,’ but simply of ‘money,’ when they refer to ‘capital’
in the above sense. For this is merely an elliptical expression. Whoever objects to the
expressions ‘cheap money,’ ‘expensive money,’ ‘money market,’ ‘lack of money,’
‘abundance of money,’ and so forth, overlooks the fact that the business world uses similar
elliptical phrases in countless other cases as well. In spite of the above phraseology, any
practical businessman knows that there is money in his household budget, but no capital, that
the ‘money market’ is something different from the currency market, and that ‘cheaper
money’ does not mean a reduction in the market value of coins, but a reduction in the interest
rate; in spite of the peculiar idioms of business language, every practitioner knows that in
common life capital does not simply mean money, but only sums of money that are dedicated
to income generation or, as practitioners prefer to say, ‘working money.’
2.
The popular concept of capital requires some explanatory remarks in light of the diversity of
the phenomena it covers.
Interest-bearing loans (even amounts of money that are only assigned for this purpose!) are
called capital in common life everywhere; indeed, they constitute the most obvious form of a
sum of money dedicated to income generation, i.e., of capital in the popular sense of the word.
Likewise, however, amounts of money intended for other productive investments are
generally considered as capital, insofar as they are actual amounts of money. The sums
available for the purposes of an enterprise when the latter is opened, the monetary funds of a
stock company that has not yet opened its business, the sums of money intended for the
purchase of goods that are sources of permanent rent, etc. are, for example, capital in the
sense of the popular view just as interest-bearing loans are.
The subsumption of the above categories of productive assets under the popular concept of
capital cannot lead to any significant difficulties; the character of capital in the sense of a sum
of money dedicated to the generation of income is obvious in both cases.
The same is not true of a group of business phenomena that is also called capital in common
life (capital in the just presented sense of the word!) but has so far been partly misunderstood
by scientific economists, partly even completely ignored. It is peculiar to the era of the
monetary economy, and indeed, as a matter of course, only to this era, that the wealth[2] of
2 [EB: In most of the paper, I translated ‘Vermögen’ as assets. However, I translated ‘Vermögen’ as ‘wealth’
whenever ‘Vermögen’ refers explicitly to the monetary value of a sum of assets, as is the case here. A better

certain persons and individual assets are valued in sums of money. It does not seem odd to the
business practitioner when a person is said to possess wealth of 10,000 thalers, or even to
possess this sum as a part of his wealth, even if the person in question does not have a single
thaler at the given moment, either directly or in the form of a claim. Wherever it is not the
technical nature of the assets that is in question, but only their relative importance for the
business of the respective owners, the treatment of wealth and assets from the point of view of
calculable amounts of money is the relevant one – from the standpoint of economic analysis
the essential one.
What has been said applies to wealth in general and to the wealth of a business[3] (wealth in
the narrow sense of the word!) in particular. In our era of the monetary economy, the latter
[wealth of a business] also, even if it actually does not consist of money but of goods of
another kind, is able to present itself to us in terms of calculation, as an ‘acquisitive amount of
money.’ A merchant, a manufacturer, a speculator, etc., may, for example, under certain
circumstances possess productive assets that amount to many thousands of thalers, without
actually having a single thaler at his disposal (either directly or in the form of a claim on a
third party). If the above relationship is actually present, the technical nature of the goods in
which the business assets[4] consist becomes less important; their ‘monetary value’ becomes
more important for our economic consideration and our economic calculus: In this way, the
acquisitive assets in question – whatever their technical nature may be – represent, but only in
terms of calculation, an amount of money, namely one that is dedicated to the generation of
income.5 In his monetary calculations, the merchant indeed records the stock of goods, the
translation would be ‘net assets’ or ‘total assets,’ but as it is not clear whether Menger is speaking of net or total
assets, I prefer the more literal translation ‘wealth.’]
3 [EB: ‘Business’ is my translation of the German term ‘Erwerbswirtschaft.’ In its broad sense,
‘Erwerbswirtschaft’ includes the labourer as well as business, as labour is a means to acquire (erwerben) income.
It is clear from the context, however, that Menger does not use it in this broad sense.]
4 [EB: ‘Business assets’ is my translation of the German term ‘Vermögen der Erwerbswirtschaft.’]
5 Here we also get an answer to the old question of whether consumption goods (better: goods of the first order)
can obtain the character of capital – the argument being that it is possible to exchange them against means of
production – even if they are not apt, according to their technical nature, to serve as means of production (goods
of ‘higher’ order!). As the conception of capital as ‘means of technical production’ is untenable (see pp. 9 ff.
above [Menger, 1888: 9 ff.; Braun, 2015, sect. 4.3]) it is irrelevant for our question, and for capital theory in
general, that consumption goods cannot become means of production. The only question therefore can be
whether consumption goods can become ‘acquisitive assets’ by being dedicated to a business or whether their
monetary value – the sums of money represented by them – can become capital: a question that becomes clear
immediately once the nature and function of business assets is understood correctly. The disposal, even if only
for a limited period of time, of a quantity of assets that corresponds to the scope and duration of the business, is
the necessary prerequisite of any profit-oriented enterprise; under today’s trade conditions, however, this
requirement is fulfilled by assets that are disposable for the business regardless of the technical nature of the
assets in question. True, a person who is technically and economically educated properly is not able to establish
a cloth factory without having an appropriate amount of assets at his disposal for this acquisitive purpose (he
must have assets of his own or entrusted to him); the technical nature of the goods that constitute the respective
assets – whether he possesses wool itself, dyes, etc., or sums of money, or, indeed, respective quantities of
clothing, jewelry, etc. – is irrelevant in the present consideration. Those who have worked on capital theory so

industrialist his stock of raw materials, the speculator his shareholdings, etc., as a sum of
money, as capital in the sense of an amount of money dedicated to the generation of income.6
The real concept of capital includes business assets, whatever their technical nature may be,
inasmuch as their monetary value is the object of our economic calculation – that is to say, if
they represent an acquisitive sum of money. Capital is understood in common life to be sums
of money that are effectively dedicated to business, or business assets of any other kind that
represent sums of money (that are in this sense dedicated to the generation of income).7
3.
The monetary economy has led to a further development of the concept of capital, which will
be referred to here because of its practical significance. Within each individual business
year[8] (from the beginning to the end of that year), the wealth of a business comprises both
the corpus of the business (the original wealth of the business!) and the profit made within the
year. It is only when the accounts are closed at the end of a particular business year that the
profit is separated from the original wealth of the business, whereas within the business year
in question the profit acquired, but not yet separated from the original wealth, appears to be
devoted to the business as well. Insofar as it has not already been allocated to the household
within the relevant business year is it ‘acquisitive wealth,’ even if it was not originally (i.e., at
the beginning of the business year) devoted to the business. Practical life distinguishes
between the two categories of wealth mentioned above, and it is the wealth (recorded in the
accounts) that was dedicated to business at the beginning of a business year that in common
parlance is preferably referred to as ‘capital’ in regard to the business year concerned.
far tend to overlook the important function of asset ownership as such in the business enterprise. The way [Karl]
Knies (Geld und Kredit, I, 1885, pp. 44 ff.) treats the above question is a consequence of his flawed theory of
capital.
6 Accordingly, common life distinguishes between actual sums of money dedicated to business, which are capital
as such, and other types of assets dedicated to the above purpose which are ‘capital’ only in terms of calculation.
7 Business practitioners call their property, as far as it is dedicated to income generation, simply ‘assets’; if they
contrast them [assets] to the goods that are dedicated to the cost economy [the household] (or to property in the
broader sense of the word!), they call them ‘acquisitive’ or ‘productive assets’; the sums of money represented
by the latter, however, (especially vis-a-vis the monetary return generated by the productive assets) they call
‘capital.’ Stocks of raw materials, a factory, a warehouse, etc., are ‘assets,’ yet not ‘capital’ in themselves and
not as such, but only in relation to the sums of money represented by them. In themselves they are probably
understood as (productive) assets, possibly as ‘capital investments,’ but not as capital. The (economic) goods
dedicated to the cost economy [the household] are only counted as assets in the broader sense, the sums of
money intended for this purpose are called ‘household funds’ (in the business world also ‘private funds’), in
contrast to ‘business funds.’
8 [EB: ‘Business year’ is my translation of the German term ‘Wirtschaftsepoche,’ which literally means
‘business epoch’ or ‘business period.’]

Capital is in the view of common life the corpus of a business, consisting of or calculated in
money, while in a certain broader sense capital is also understood as all assets of a business,
consisting of or calculated in money.9
I would like to stress here a circumstance, the emphasis of which is of crucial importance for
understanding the real concept of capital. Monetary calculation does not necessarily comprise
the totality of the assets or the corpus of the business. It is distinctive of the epochs of
transition from the natural economy to the monetary economy, and in certain social classes
even of the more developed forms of the monetary economy, that only a part of the assets of a
business is recorded or managed in a capitalist manner. A farmer may, after all, already record
a part of his business assets through monetary calculation, but he may still not take into
account the value fluctuations of land or other real estate, e.g. of his inherited property. Under
such circumstances, he will probably consider his working assets as ‘capital’ as opposed to his
real estate holdings (which he does not conceive from the point of view of monetary
calculation, and which he probably considers as productive assets, but not as capital!),
whereas for the speculator, and even the farmer who considers his real estate to be mere
capital investment, the above contrast is not present. The fundamental dichotomy in the
conception of land and capital, as it is found with the physiocrats and, yet in a partly different
sense, with A. Smith, is not least to be attributed to the fact that they based their theories on
the observation of economic conditions in which capitalistic calculation indeed used to cover
only the working assets of a farm, but not yet land itself. In certain businesses or certain
categories of business, the productive assets may in some circumstances still be subject to
commodity calculation in their totality, and thus be recorded in marked contrast to the assets
of money-driven enterprises, a circumstance that explains why the capital phenomenon
appeared earlier, historically, in trade than in farming and even industrial enterprises.
The facts highlighted here, far from contradicting the popular conception of capital presented
above, are rather a confirmation of its universal importance.
4.
In common life, (productive) assets are divided into fixed and circulating assets and,
accordingly, capital is divided into fixed and circulating (working) capital. The latter division,
which plays such an important role in our science, is less known to business practitioners than
the former. By fixed assets are understood those components of the corpus of a business that
9 The contrast between these two concepts as used in common life is also evident in the different expressions for
capital. The words τὸ ἀρχαῖου, Stammvermögen, principal, original capital point to the first, the words
Χεφαλαῖου , caput, Hauptgut, glownica, etc. to the second concept.

we only use in the latter (that is, whose mere technical uses we employ in the business), by
circulating assets on the other hand those that are intended to be (technically!) consumed or
sold by the business.10 The fixed assets that are depicted as acquisitive sums of money are
fixed capital, the circulating assets which are depicted as acquisitive sums of money are
circulating or working capital. Not the concrete components of the fixed assets or circulating
assets as such, but only the amounts of money that represent the same are – depending on the
character of the respective assets as fixed or circulating assets – fixed or circulating (working)
capital.11 A factory building, the furnishings of a department store, a motor, if they are
intended to serve the business by means of their use, are, for their owner, components of fixed
productive assets; their calculated monetary value is a part of his fixed capital. The wool
stocks, dyes, and other raw materials of a cloth manufacturer, these goods as such, are not a
part of his circulating capital, only their calculated monetary value. The distinction between
fixed and circulating capital does not apply to the actual components of the business assets,
but only to their calculated monetary value.
10 In the corpus of a business, we must distinguish two essentially different kinds of components; first, those that,
by their nature and their special purpose, we merely use (not consume or sell) in our business, and second, those
that, by their nature and their special purpose, are consumed (technically!) or sold in the business. The economic
nature of the former (the fixed assets of a business) can be understood without any major difficulty. They are
‘durable’ goods whose (technical) uses are themselves economic goods. Whether we employ the uses of the
goods in question in our own enterprises, or sell them (by renting or leasing out the respective core assets!), – in
both cases the explanation of the phenomenon that the respective core assets remain permanently in our business
while they yield a periodically recurring income, causes relatively few difficulties.
This is not the case when it comes to understanding the economic nature of circulating assets and explaining
their return. The task of science here is to clarify how the components of the same [circulating assets] can be
sold, or consumed, and at the same time preserved in the business (as part of its corpus!), but above all how the
technical assembly of the factors of production in order to build the product, or the sale of assets, can generate a
return. The first of the two questions has been answered, by the theory prevailing at this time, in that the goods
in question are indeed consumed or sold, yet their ‘value’ is preserved (reproduced!) in the business – an
explanation that, supported by the prevailing price doctrine, which maintains the cost of production as the
determining element of product prices, encounters little resistance. This made it all the more difficult to explain
the return on circulating assets. If one does not want to add the latter [the return] to the production costs in the
form of a customary profit, which is obviously a circular argument, the prevailing doctrine can only present it
[the return] as the result of a certain (technical!) productivity of ‘capital,’ which, by the very nature of the
problem, was as easy in the case of fixed capital as it was difficult in the case of circulating assets; and yet the
explanation of the return on the latter [circulating assets] is the problem whose solution is at issue, a solution
which is thus not at all offered by the usual reference to the ‘productivity’ of ‘land,’ ‘machinery,’ ‘hunting guns,’
and ‘fixed capital.’
In reality, we are confronted, in the fixed and the circulating assets, with two essentially different categories of
business assets, different with regard to their nature, their uses, their productivity and the formation of returns.
To be sure, by being combined in monetary calculation, both categories appear as ‘acquisitive sums of money,’
as capital. It is clear, however, that the phenomenon of the return on assets can be explained in a satisfactory
manner only by a strict separation of the two above categories of acquisitive assets.
11 The fact that in the Latinate languages the opposition between fixed and circulating (productive) assets is
identified with that between fixed and circulating capital is explained by the deficient terminology of these
languages, to which I have already referred above (p. 8 [Menger 1888: 8]). As far as real estates are concerned in
particular, they are, as such, not capital of course, but rather, as far as they are dedicated to income generation,
(productive) assets. In so far as they represent acquisitive sums of money in the calculations of their owner,
however, these latter are undoubtedly just as much capital for him, and in fact usually fixed capital, in the same
way as other fixed assets.

5.
The above applies analogously to the popular concept of capital interest. Also by this concept
business practitioners do not actually and directly mean the earnings of acquisitive assets of
any kind, these earnings as such. Only the monetary income of (acquisitive) sums of money,
commonly their financial yield in proportion to the size and the duration of the principal, is
denoted with the above term, while the return on acquisitive assets of a different kind, of
estates, buildings, enterprises, etc., is called land yield, building yield, etc., and, if it is
periodically recurring, land rent, building rent, or simply rent.
However, in common life the concept of capital interest is extended in a way similar to that of
the term ‘capital.’ In practical life, not only the monetary income from actual sums of money,
especially of loan sums, is called interest, but also the monetary income of all other kinds of
acquisitive assets, as long as the term [interest] does not relate to the respective assets as such,
but to the sums of money represented by them, to the corpus of the business, evaluated in
money terms. The return on an estate, a factory, an apartment building, etc. – the return on
these assets as such – is called rent; the term capital interest only applies to monetary income
in so far as it is related to the capital that is calculated in money and represented by the above
assets.
Capital interest consists in or is valued in money and is the return on actual[12] or calculated
capital (usually in proportion to the size and operating life of the capital).
6.
If we compare the views of common life on capital and capital interest with the prevailing
scientific views, we arrive at the following conclusions:
1. Common life only recognizes monetary sums as capital, however without confusing the
latter with money; practitioners only conceive of monetary sums devoted to business as
capital. In our science, in contrast, depending on the various viewpoints of its representatives,
capital is considered by some to be all assets devoted to the ‘generation of income,’ by some
to be all means of production, and by some finally to be all the ‘products devoted to further
production.’
2. Actual sums of money devoted to income generation, especially loan sums, are equally
recognized as capital in common life and in scientific economics, while with regard to other
productive assets there are substantially different conceptions in practical life and in our
science. The former considers only the sums of money represented by productive assets to be
12 [EB: By ‘actual capital,’ Menger means ‘actual sums of money dedicated to the acquisition of income.’]

capital, but (besides actual sums of money) not the assets as such, while our science considers
productive assets as such – the objects themselves – as capital. Practical life considers as
capital, for example, the acquisitive sums of money represented by raw materials, auxiliary
materials, machines, firms, buildings, labour services, land, natural sources of water power,
mineral springs, etc., while in our science the respective productive assets are regarded as
capital in themselves, or their character as capital is denied if they are not means of production
in the technical sense of the word, or if they are not products but mere natural things.
3. In common life, the acquisitive sums of money represented by productive assets are in
general regarded as capital. For the leaseholder who uses part of the stock of his business to
acquire the right of use of a piece of land; for the manufacturer who uses part of his capital for
the purchasing of work performed by clerks and technical assistants; for the banker who uses
his capital to acquire the right of use of other people’s financial capital, etc., the sums of
money represented by the above-mentioned goods (by the respective labour services and
rights of use) are capital, whereas our science only recognizes products (partly also real
estate!) as capital, but not the mere right of using them, just as little as labour services that are
at the disposal of an entrepreneur.
4. The monetary yield on loan sums is considered, both in common life and in science, as
interest on capital, but while the return on other productive assets is only considered as capital
interest in common life insofar as it is related (similar to the yield on loan sums as such) to
certain sums of money, represented by productive assets, the prevailing economic theory
considers the return on productive assets itself to be capital interest (partly per se, partly only
insofar as the return results from productive assets that are themselves ‘products’ – not
‘natural factors’).
7.
However close the relationship between the popular concept of assets and that of capital
seems to be, and however often these concepts and the economic phenomena on which they
are based are confused with each other in economic theory, they are strictly separated by
business practitioners.
Wherever the natural consistency of assets (what I call their technical nature) is important,
practical life considers actual sums of money as capital only if they form a part of the
productive assets; other parts of productive assets, on the other hand, only insofar as their
‘monetary value’ determines the business interest (e.g. in balance sheets, in determining the
net profit of stock corporations, etc.) whereas their technical nature is not taken into account.

No practical businessman is of the opinion that his factory buildings, machines, raw materials,
auxiliary materials, etc. – these objects as such – are capital, or that his land, apartment
buildings, etc. are on the money market (even if they appear as capital for accounting
purposes and he offers their use for sale). These goods as such he calls productive assets, or
‘assets’ pure and simple, but not ‘capital.’ Nor does a practitioner regard the net return on his
productive assets per se as capital interest. Wherever practitioners relate the return on
acquisitive assets, which do not consist of actual sums of money, to the latter themselves, to
the concrete assets (the respective enterprises, the estates, the apartments, etc.), they rather
refer to it as land yield, house yield, etc., and if it is a periodically recurring return, as land
rent, house rent, or rent per se. Common life restricts the term ‘interest’ to the return on
capital, represented in the accounts by dwellings, estates, enterprises, etc., whereas it uses
only the terms ‘yield’ or ‘rent’ for the returns on the respective dwellings, estates, enterprises,
etc. as such.
Admittedly, in our monetary epoch nothing is more common than that the ‘capital value’ of
acquisitive assets is calculated from the rent that they yield, and that the rent then appears, as
a matter of course, as interest on the ‘capital’ represented by the assets in question. It is
equally common for the actual sums of money spent on the production or purchase of
acquisitive assets to be accounted for in economic calculation as ‘capital,’ and the return on
the assets concerned to appear as capital interest. However, it is clear in these cases as well
that the interest payments do not relate to the assets as such, but only to the capital they
represent.
8.
The difference between (productive) assets and capital, strictly cherished by practical life, is
of the greatest importance, especially for theory, and the failure to recognize it is one of the
main causes of the slow development[13] of the doctrine of the return on acquisitive assets.
Only the confusion of the two important categories used in business life mentioned above can
explain the misconception of a long series of scholars who put forward a mere theory of
capital interest instead of a universal theory of the return on assets, and, by trying to interpret
the phenomenon of interest on actual capital, believe that they are solving the much broader
problem of explaining the return on assets – its various categories – in general.
13 [EB: ‘Slow development’ is my translation of ‘Zurückgebliebenheit.’ Literally, it means ‘retardation.’]

Every expert in business knows that the interest rate on loan sums depends essentially on
other causes than the net return on rental houses or estates, the return on rented parks[14] on
causes other than those of rented fields, and the return on industrial or commercial enterprises
on causes other than those of the aforementioned categories of acquisitive assets. It is obvious
that the phenomena of return in question here require separate explanations, depending on
their different nature and origin. The problem of return on assets is a highly complex one in
practical life; it is different from the problem of capital interest; it should be so for our
science, too.
A theory of capital interest in the sense of an explanation of the interest on actual capital –
such as a theory of the phenomena of the money market – is inadequate for the above purpose
since it only offers us an explanation of the yield of a particular category of productive assets;
a theory of capital interest in the sense of an explanation of the interest on calculated capital,
however, already presupposes a theory of return on assets (the return on the various categories
of acquisitive assets!) since the explanation of the rents (the primary phenomenon!), as in life,
so in science, must necessarily precede the explanation of the calculated interest yield (the
secondary phenomenon!). It is not the capital value of the productive assets in question, but
the latter themselves, that are in fact the source of income, and the determination of the
interest yield of the capital represented by the above assets is merely a calculation made on
the basis of the previously determined return on assets. A mere theory of capital interest
offers, in any event, an inadequate explanation of the return on assets, even of the return on
those assets that the prevailing theory specifically calls ‘capital.’
The only way to arrive at a complete theory of return on assets is to consider the acquisitive
assets in general (all categories of the same), namely the respective assets as such – not only
their calculated or accounted monetary value15 – and to understand the characteristics of the
return phenomenon of each individual category of acquisitive assets and to try to explain its
origin and its size[16]. Our science cannot avoid the task of classifying productive assets,
which show such striking differences with regard to the generation of returns (just think of the
examples mentioned above!), according to their different behaviour in the process of
generating returns, that is, according to their different nature and causes, and, on the basis of
this knowledge, of developing a comprehensive theory of return on assets, a theory in which
the theory of capital interest in today’s sense (a theory of the return on actual capital or loan
14 [EB: Park in the sense of a green area.]
15 The actual capital used, for example, for the purchase or production of the above goods is, as a matter of
course, no longer present as such in the business and appears, for economic calculation, only as a recorded
accounting figure.
16 [EB: ‘Size’ is my translation of ‘Maß.’ Literally, it means ‘measure.’]

sums) will only have the position of a link that can be systematically integrated into the
general theory of return on assets.
The explanation of ‘interest’ on calculated capital, represented by the other categories of
acquisitive assets, and its size may then only cause us little concern, since in science, as in
life, this is only a simple calculation; the goal of our science must be a general theory of the
return on assets – a theory of the return on all categories of (productive) assets, classified with
regard to the way the return is generated – not a mere theory of capital interest.17
The prevailing doctrine, by dealing only with the problem of capital interest, i.e., with the
explanation of interest on actual capital, or by dealing directly with the explanation of interest
on calculated capital, circumvents the above fundamental problem and in actual fact offers a
theory of return on assets that is inadequate in every respect.
17 I shall confine myself here to characterizing the task of a theory of return on assets, and in particular to
pointing out the characteristic of the problem that, like no other in our science, has preoccupied the most eminent
social philosophers for centuries: the problem of capital interest, in particular its relationship to the problem of a
general theory of return on assets. It is to be hoped that monographic treatment will prepare the way for the
establishment of a general theory of asset return, based on the observation of contemporary economic life, and
thus put an end to the helplessness of our science in the face of the theories of socialism, which [the
helplessness] is such a regrettable symptom of the present state of theoretical economics and which cannot be
eliminated by mere antiquarian research. From this point of view, the great importance of E. von Böhm[-
Bawerk]’s efforts in the field of capital-interest theory can be seen. In the first part of his comprehensive work
on ‘Capital and Interest’ (1st v.: ‘A critical history of economical theory,’ 1884), B. did indeed undertake ‘an in-
depth and comprehensive critical review of the enormous material available’; the publication of the second part
of the work, announced in this journal [Jahrbücher für Nationalökonomie und Statistik] (V. XIII, 1886, p. 67) as
forthcoming, is intended to bring the author's positive theory.