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when the point of view takes into account only a short period of time, quasi-rent.

When, however, we shift our point of view so as to take into account a longer period of time, we see an important difference between the income from land and the income from capital. We see, then, that society's stock of capital is a shifting thing. On the one hand, it is being continually depleted on account of the fact that, in the process of production, capital goods are being used up, worn out, or because they are in some cases passing for other reasons below the margin of profitable use. On the other hand, the stock of capital is being continually replenished by the investment of savings in new forms of capital goods. Most of these investments merely replace capital that has been worn out or used up, but some, and in a progressive society, a considerable proportion, represent the creation of new forms of capital.

Now, as we have seen, the investment of savings in capital goods is guided by the estimates that entrepreneurs make of the profitableness of these investments, the criterion of the profitableness of any possible investment being its ability to replace the principal and provide for the interest on the money invested. When experience has shown that particular forms of capital will not measure up to this standard of profitableness, these forms will not be replaced as they wear out. When certain forms of capital enable entrepreneurs to get any considerable surplus over and above interest and replacement, the tendency will be, so far as competition rules (that is, so far as monopoly, as in the case of patented machinery, does not prevent), to increase the investments in these forms of capital, and in this way to force the earnings of these specially advantageous forms of capital down to the common level of interest and replacement. Just as the expense of producing consumption goods forms a "normal value," to which their actual prices (under competitive condition) continually tend to approximate, so the expenses incurred in investments of capital form a “normal remuneration of capital,” toward which its actual earnings continually tend. Similarly, the value of capital, although actually determined at any one time, like the value of land, by its ability to earn an income for its possessor, tends in the long run to approximate the expense of producing capital. This expense includes, it must be remembered, both the actual money cost of new capital goods and the expense of interest on this money cost. Normal interest is the interest on absolutely free capital in the form of loanable funds.

Land, of course, has no normal value, because it has no cost of production. This difference is not of mere theoretical importance, but has an important bearing upon many social problems. For example, when we take a long period of time into account, no such thing as an "unearned increment" appears in the value of capital. Moreover, while both rent and interest are alike in the sense that they are payments for productive services, interest is more clearly an earned income than is rent. For productivity has to be imputed to capital because its supply is limited on account of its expenses

of production and on account of the sacrifices involved in waiting, while productivity is imputed to the better lands simply because the supply of them is limited by nature. When we measure rent as a return per acre (or other unit) of land, and interest as a percentage on the money invested, we recognize this fundamental distinction between rent and interest. That rent may be viewed for some purposes as interest on the value of the land, and that interest (and replacement) may similarly be viewed (at any given time) as a "quasi-rent" of capital goods, does not alter the fundamental nature of the distinction.

We have seen in another connection that the shifting of investment by which the earnings of capital are made to tend toward a normal standard is easier in the case of the more transient forms of capital than in the case of the more durable forms. The more durable a capital good the more nearly is the income derived from it analogous to the rent of land. As was suggested in the discussion of rent, it is not necessary or advisable to draw a hard and fast line between capital and land. Permanent investments of capital in the form of improvements to land may very properly be regarded as land. The farmer who is contemplating installing a drainage system or an irrigation system for his land views such an investment, at the time, as an investment of capital. But when the capital is definitely incorporated with the land in these permanent forms, there is no reason why it should be called capital rather than land. The total income yielded by the improved acres will, in all essential particulars, be land rent.

Capital and Consumption Goods. — There are also some points of likeness between capital and the more durable forms of consumption goods. The person who buys a piano is not only satisfying his present wants, but expects to get from it a long period of use, extending into the future. The purchase of any durable consumption good is in this way one form of saving for the future. Moreover, such provisions for future wants will not be made unless we feel that these future wants are important enough to justify us in giving up some possible present satisfaction. In other words, we will not substitute future utilities for present utilities by the purchase of durable consumption goods unless the future utilities are enough greater than the present utilities to compensate us for the necessary waiting. This compensation for the difference between present satisfactions and future satisfactions is obviously analogous to interest.

These facts must be taken into account in any full analysis of the valuation of consumption goods, but they do not justify us in obliterating the line between capital and consumption goods. Consumption goods yield directly an income of satisfactions; capital yields a money income, but only in an indirect way does it yield an income of satisfactions. A rented house is not, from the social point of view, capital. It yields a direct income of satisfactions to its occupant; the fact that the landlord sells the annual use of it instead of selling the permanent property rights in it is a fact of minor significance.

A merchant's stock in trade is capital because it will yield a money income to its possessor;1 when sold to consumers, the same goods become consumption goods because they yield an income of satisfactions. In short, the distinction between capital and consumption goods is based upon one of the most fundamental things in the existing economic system the fact that the income which men receive for the productive services of their capital are money incomes.

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Capital and Wages. -In many undertakings wages are paid to workmen engaged in the production of goods before the goods are sold. A farmer, for example, has to pay his harvest hands and other workmen before he receives any money from the sale of his wheat. Whether he borrows the amount needed for wages, or whether he pays them out of his own savings, interest on the amount advanced has to be counted among the expenses of production, and the wages advanced are, for the time being, an investment of capital. In most manufacturing establishments a more or less lengthy average period of time elapses between work actually done by the workmen and the sale of the products of their work. In such establishments a considerable amount of capital is invested in wage advances. This does not mean that we are to consider the laborers as being in any sense capital. For the gradual process by which the raw material becomes the finished product is itself a continuous investment of capital. All of the various expenses of production are really different ways of investing money in capital goods. Add to the cost of the raw material all of the expenses (including wages and payments of rent and interest as well) incurred in order to produce the finished product of the establishment, and you have simply the total investment in capital goods in the form of the finished product. A complete inventory of capital goods would include then (in addition to buildings, machinery, etc.) not only raw materials and the finished products that are ready for sale to consumers, but also the products on hand at any one time in a partly finished state. Thus, though the payment of wages is often an investment of capital, it must be remembered that the payment of wages is only one of the ways in which money is invested in concrete, definite, capital goods. The Rate of Interest.

Interest, as the price paid for the services of capital, is determined by the supply and demand of capital. By this we mean, not the supply and demand of concrete capital goods, a matter which comes under the general laws of price,2but the supply and demand of the loanable funds, the money capital which is available for investment in concrete capital goods.

1 The relation of goods to their possessors, rather than to their owners, gives the more satisfactory basis for the distinction between capital goods and comsumption goods. The example of the rented house makes this clear.

2 See discussion of the expense and value of capital on page 428.

The demand for capital, as we have seen, is based ultimately on the demand for the products of capital; that is, on the demand for consumption goods. The entrepreneur bases his demand for capital upon his estimate of the demand for his products, together with his estimate of the relative economy of the use of different amounts of capital. In combining labor, capital, and land for productive purposes, he will be guided consciously or unconsciously by the law of diminishing productivity. He has to take into account in this connection both the technical efficiency (that is, the real productive efficiency) and the expense of land, labor, and different kinds of capital. This latter consideration means that the interest rate is itself one of the factors determining the demand for capital. The higher 'he rate of interest, the greater will be the expenses of production, and the smaller, in general, will be the demand for those goods, in the production of which the use of capital plays an especially important part. Moreover, the higher the interest rate, the smaller, other things being equal, will be the relative proportions of capital, and the larger will be the relative proportions of labor and land which it will pay entrepreneurs to use.

As the technical efficiency of capital is increased through the progress of science and invention, the more profitable does its use become. For the demand for it increases not only because the consequent reduction in the prices of goods means larger sales, but also because the use of larger proportions of capital in production becomes advisable. The entrepreneur wants simply the maximum productive efficiency at the least cost. unit of productive efficiency in the form of capital becomes cheaper, first, as the interest rate decreases, and second, as a given outlay will purchase more efficient forms of capital goods.

The supply of capital depends ultimately upon the supply of waiting. This, as we have seen in the discussion of the necessity of interest, is something which varies with the interest rate. Other things being equal, the higher the interest rate, the larger will be the parts of money incomes that will be saved rather than spent immediately in the satisfaction of wants. It has sometimes been said that saving increases as wealth increases. If this is taken to mean that the larger the income of the individual, the larger, other

things being equal, will be the amount he will save, the statement probably expresses a general truth. The larger the income, the less important are the immediate wants dependent for their satisfaction on a given amount of money. It does not follow that the proportion of the income that is saved is apt to be any larger in the case of a large income than a small income. If, on the other hand, the statement is taken to refer to the increase of wealth in society at large, we have to take account of the fact that as wealth increases new wants develop, and the net effect on saving is apt to depend on the character of the new wants, whether they call for increased current expenditures or whether they involve the accumulation of considerable sums. Convenient opportunities for saving, such as those afforded by savings banks, insurance companies, and the supply of convenient forms of investment securities have (apart from the rate of interest they offer) an important effect upon the amount of saving.

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Gross Interest and Net Interest. Net interest is pure interest the amount actually necessary to recompense marginal waiting. Gross interest the interest actually paid on loans includes payments for other things. In the first place, actual interest often includes some payment for the supervision which the capitalist has to maintain over his investment. Even the man who "lives

on his income" usually has to devote a certain amount of time to the investigation of the safety of different possible investments, to the collection of interest and principal and similar things. The net earnings of a savings bank - the difference between the interest they get on their investments and the interest they pay their depositors are partly a payment for this element of supervision.

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A second element in gross interest is the payment for the risk the lender undergoes of losing all or part of his expected income (including principal and interest). This does not mean, as some writers have said, that the interest rate contains an element of insurance, for insurance means the elimination of individual risk through the combination of risks. The fact is simply that, as every one knows, lenders will not take greater risks without the prospect of greater gains. There is some element of speculation in all loans but the very safest, and the extra income received on

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