H. J. Davenport's Loan Fund Theory of Capital

The loan fund theory of capital was developed by the unheralded American economist, Herbert J. Davenport (1861-1931). Davenport's name has virtually disappeared from writings on the history of economic thought. Today, he seems best known as a teacher of Frank Knight at Cornell around 1915. Davenport wrote three major books during an 18-year period between 1896 and 1914. The first (1896) was a treatise based on what he called the “principle of sacrifice,” or subjective opportunity cost. His second book, Value and Distribution (1908), covered much of the same ground but also presented some original contributions. It marked his emergence as a professional economist, since he presented his ideas within the context of an appraisal of classical and neoclassical economic doctrine. Among other things, the book contained a penetrating, subjectivist critique of four ideas in the history of subjectivist economics: marginal utility, Eugen von Bohm-Bawerk's theory of capital, Friedrich Wieser's theory of cost, and Frank Fetter's theory of market interest. It also introduced the loan fund theory of capital, which is the topic of this paper.