Senior's Abstinence Theory of the Supply of Business Savings

Many authors have interpreted Nassau Senio's ideas on abstinence through the years to mean that a cause/effect relation exists between interest and abstinence and that interest is the reward for abstinence. Some typical examples of this treatment are as follows: “The original abstinence theory of interest for which Senior is famous has long been recognized as the most complete of the classical theories, and under various names has become incorporated in the general corpus of economic theory†(Bowley 1937, p. 137). “Nassau Senior…introduced the ‘abstinence theory’ of interest, and he is criticized both for its one-sidedness and for using it to imply that the ‘pain’ of the capitalist is in some sense proportional to the ‘reward’ he ‘earns’ by abstaining. On page 189 of Political Economy, Senior describes abstinence as the cause of interest in terms which would readily explain this general interpretation, and in his public-policy pronouncements he further supports it†(Conard 1959, p. 26). “Senior's contribution to capital theory was to identify this reward for ‘abstinence’ as interest, or the cost of waiting, during which time capital could be accumulated. Senior's description of interest as a return to abstinence was his most original contribution to economics, and it soon became assimilated into the mainstream of economic theory. In it he surpassed Smith, Malthus and Ricardo and his analysis of capital and interest stood as the most complete in British economics until the time of Jevons†(Ekelund and Hébert 1975, p. 103).