duced goods to be distinguished, is an important factor in the efforts of such producers to gain and hold the patronage of the ultimate consumers. The "good-will" of a large manufacturing establishment thus comes to be in some cases as valuable a possession as a monopoly franchise. Farmers, and other producers of standard kinds and classes of goods, have small opportunity to acquire "good-will" profits.

The Social Dividend. The significance of the statement made in an earlier chapter, that the distribution of wealth is a matter of valuation, should now be clear to the reader. But since the detailed character of the analysis may make a broad and inclusive view of this valuation process somewhat difficult, it will be worth our while to bring together the more important conclusions we have reached, and to try to see them from a somewhat different point of view.

The social dividend is made up of the scarce and valuable things (commodities and services) that are of direct use in the satisfaction of human wants. The process by which the claims of different individuals against the social dividend are adjudicated is the process of the distribution of wealth. We have seen that these claims rest upon various grounds. Some men give of their own time and energy to the production of goods. Others permit the use of the scarce and valuable natural agents (especially land) which they own. Still others exchange part of their present claims against the social dividend for future claims, thereby permitting part of the productive work of society to be turned toward the creation of indirect goods, the use of which operates, in the long run, to greatly increase the social dividend.

A unifying characteristic of these three different kinds of claims is the fact that the wages of labor, the rent of land, and the interest on capital are simply different forms of money income, paid for the services of land, labor, and capital in the production of valuable things. The valuations which society puts on the productive services of its members or of their productive goods are determined through the activities of entrepreneurs.

The relation of the activities of entrepreneurs to the money incomes of the members of society is twofold. On the one hand, the purchasing power of consumers is derived from their money incomes, which in this way constitute the means by which the demand for the entrepreneur's products expresses itself. On the other hand, the money incomes received by laborers and by those who supply capital and land are paid by entrepreneurs in return for productive services. The wages, rent, and interest expended by any one entrepreneur for these productive services are in turn paid over by the individuals who receive them to other entrepreneurs in return for their products. There

is thus a continuous flow of money income through the hands of entrepreneurs, appearing first in the form of the prices that are paid for an entrepreneur's goods, then emerging in the form of the rent, wages, and interest that the entrepreneur pays for the service of the factors in production, then reappearing in the prices paid for other goods, and so on in a continually recurring cycle of income and outgo.1

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This process is made more complicated, however, by the fact that not all of the entrepreneur's expenses appear directly as rent, wages, or interest. A considerable part, and in many cases (as in mercantile establishments), the largest part of such expenditures are for various concrete forms of capital, materials, dealers' stocks of goods, machines, and the like. Here a part of the money income received by the entrepreneur in the form of the prices paid for his own goods emerges in the prices which he pays for the goods sold by other entrepreneurs, and which, in turn, make up a part of their money incomes. But this other class of entrepreneurs who supply capital goods rather than consumption goods are subject to the same necessity of expending their money incomes in the payment of wages, rent, and interest, and in the purchase of different kinds of capital goods. To push the analysis still further would obviously lead us only into needless repetition. One important fact, however, appears clearly: If we could trace the expense of producing any consumption good back through all the long series of services and of production goods that have contributed to its making we would find that this expense reduces itself, ultimately, to rent, wages, and interest, not counting what remains in the entrepreneur's hands as profits. Part of the "flow of money income" passes through the hands of a chain of entrepreneurs, but it nevertheless originates in the prices that consumers pay for the things that satisfy their wants and emerges in the form of the payments made for the productive services of land, labor, and capital.

Yet another correction must be made, however, to fit this picture of part of the economic process more closely to the facts. The money which consumers pay for particular commodities does not usually constitute the actual fund with which the entrepreneur pays for the labor, the land, and the capital goods used in the production of those commodities. Still less does it constitute the actual fund from which the entrepreneurs who supply the necessary capital goods pay their expenses, or from which the expenses of still more remote stages in the process of production are paid. The roundabout, indirect methods which characterize modern production, and which involve the division of the productive process among countless different undertakings, take time. The goods which consumers buy to-day are the result of a long series of productive efforts extending back indefinitely into the past. Similarly the productive efforts of to-day avail but relatively little toward the

1 To a very large extent, this "flow of money income" does not take the form of the actual circulation of concrete forms of money. For the most part it takes place through the creation and cancellation of credit obligations.

satisfaction of present wants, for they are in large part directed to forwarding, often in the most indirect ways, the production of things that will come to a final fruition in the satisfaction of human wants only in the more or less remote future.

Viewed in this way the annual product of society is something very different from the social dividend. The year's work is begun with an equipment of economic goods of all kinds, - finished goods in the hands of dealers and manufacturers, goods in all stages of completion, growing crops, factory and mercantile buildings, machines, and all the auxiliary apparatus of production in a finished or unfinished state. The annual product includes all the additions made to this stock of goods, and all that is accomplished in forwarding such goods as are destined for human consumption towards the form, place, and time in which and at which they are wanted. It includes all that is done in a similar way to forward, replenish, and increase the stock of production goods. It includes also all the personal services that command a money payment which are not embodied in concrete goods, but which confer their benefits in the very instance of their performance.

But while the productive efforts of society are thus constantly building up and modifying the stock of economic goods, this stock is continually being depleted in various ways. The instruments of production are constantly wearing out, or are being cast aside on account of the introduction of either more efficient appliances or more efficient methods which utilize other kinds of appliances. Then, too, as the final outcome of this productive process there is a constant stream of finished consumption goods passing into the hands of consumers. The social dividend consists of this flow of consumption goods, together with those direct personal services which do not have to do directly or indirectly with the fitting of goods for human consumption, but which nevertheless satisfy wants and command a money payment. While the social dividend is to a large extent the outcome of past work and effort, the annual product is very largely a provision for future wants.

What is the effect of all these considerations upon our analysis of the flow of money income? It still remains true that the money which consumers pay to entrepreneurs is in turn used by them in the payment of their expenses of production, and that the money which they in turn pay to other entrepreneurs for various forms of capital goods are used in the payment of expenses of production. But the prices consumers are paying are for goods, the expenses of producing which have (at least in greater part) already been paid, and some of them (such as the prices paid for some kinds of capital instruments) may have been paid some considerable period of time back in the past. If in turn we should trace back the expenses of producing the capital goods used in producing these consumption goods our search would lead us into the more remote past, while still further analysis of the expenses of production would discover an increasing number of ramifications running back into the still more distant past. The present flow of money income, originat.

ing in the prices paid by consumers, passes, as we have seen, through the hands of a chain of entrepreneurs and in this process gets ultimately into the hands of laborers, capitalists, and landlords. But most of the productive services which are thus remunerated are services which will avail toward the satisfaction of future rather than of present wants. In other words, the prices paid for consumers' shares in the social dividend constitute (save for an important exception to be noted presently) the fund which pays for the annual product. The productive efforts of the past, which satisfy the wants of to-day, were paid for out of past income, while the present work of producing goods that will be ripe for consumption only in the future is paid for out of present income. In this fact lies the explanation of the nature and necessity of one of the various kinds of claims against the social dividend - interest. The outlays which entrepreneurs make in producing goods, so far as they are paid before they receive an income from the sale of the goods, are commonly called investments of capital. Not only, as we have seen, does the entrepreneur invest capital in production goods such as machines and buildings, but his purchases of raw materials, his advances of wages to laborers, the interest which he pays on borrowed capital, and the rent or the purchase price which he pays for land, are usually investments of capital. No such investments can be regarded as remunerative unless the entrepreneur gets in the selling prices of his products enough to provide interest upon such outlays as well as to cover the outlays themselves. These facts were noted in connection with the discussion of interest in an earlier chapter, but there, for simplicity's sake, the analysis was confined to the capital expenditures of the individual entrepreneur. The full significance of the rôle which capital plays in production does not appear until we view the activities of the individual entrepreneur as only a link in the continuous chain of activities that make up the productive process.

The point of special significance in this connection is the fact that the finished products sold by some entrepreneurs constitute the capital goods (raw materials, productive appliances, etc.) bought by other entrepreneurs. When one entrepreneur sells his products to another entrepreneur his period of "waiting" is completed, so far as his advances of capital funds in the production of these particular units of goods are concerned. But the "waiting" is only transferred to the other entrepreneur, who adds further expenditures of capital and, in turn, gets his remuneration from the sale of his product. The important conclusion to which this analysis leads is that (so far as the entrepreneurs have been accurate in their estimates) the prices which consumers are paying to-day for finished goods cover not only all the actual money expenditures which have been made in the past in the production of these goods, but also the interest on all such expenditures from the time they were made up to the time of the sale of the finished goods to the ultimate consumer. Similarly the expenditures made by entrepreneurs to-day in the production of goods that will directly or indirectly satisfy future wants will (so far as

these entrepreneurs and those who will control the remaining steps in the productive process are accurate in their estimates) be covered, together with accrued interest, by the prices which consumers will pay in the future. Present wants are satisfied by means of the productive efforts of the past. These productive efforts were paid for out of past income, but the outlays were made in the expectation that present prices would suffice to repay them, with interest. A particular entrepreneur may be interested only in disposing of his products at remunerative prices to the entrepreneurs who stand next to him in the productive series, but this does not alter the essential nature of capital investment, which, from the social point of view, is a cumulative pro

cess.

The flow of money income which originates in the prices consumers pay to the entrepreneurs with whom they deal emerges in the form of capital expenditures, and so far as these take the form of the purchase of capital goods they constitute the fund from which other capital expenditures are made by other entrepreneurs. The gross money income of entrepreneurs, then, furnishes by far the most important part of the current supply of capital funds, and the most important form of capital investment is the entrepreneur's customary practice of "putting money back into the business." That this way of investing capital is customary, even habitual, does not mean that the amount as well as the particular forms of such investments is not a matter subject to the discretion of the entrepreneur. So far as the entrepreneur is not hampered by contracts (with customers, other entrepreneurs, money lenders, landlords, or laborers) he is free to do as he pleases with his income. As a matter of fact he is apt to devote a fairly constant proportion of it to the replacement of the capital goods that are being used up or worn out and to the other necessary expenses of continued production.

It rarely happens, however, in any undertaking, that income and expenditure are so nicely adjusted and so evenly distributed through the year that the one always suffices to provide for the other. A temporary surplus may be followed by a temporary deficit. Transfers of goods on credit smooth over some of these irregularities, while the institution of banking provides a mechanism whereby the temporary surpluses of some entrepreneurs are made use of in meeting the temporary deficits of others. Moreover, while the entrepreneur need not continue to renew his capital investments unless he chooses, he is at liberty to do even more than this if he deems it advisable. That is, his profits the excess of his gross income over and above his current and normal capital expenditures ditional capital expenditures.

may be used for ad

Still another source of capital funds is found in the rent, wages, and interest into which, as we have seen, the expenses of production ultimately resolve themselves. For so far as these forms of income are saved, rather than expended immediately for consumption goods, they may be loaned directly or through savings institutions to entrepreneurs for productive employment.