An appreciable advance in the industrial arts is commonly followed or

accompanied by an increase of population. The difficulty of procuring a

livelihood may be no greater after such an increase; it may even be

less; but there results a relative curtailment of the available area and

raw materials, and commonly also an increased accessibility of the

several portions of the community. A wide-reaching control becomes

easier. At the same time a larger unit of material equipment is needed

for the effective pursuit of industry. As this situation develops, it

becomes worth while--this is to say, it becomes feasible--for the

individual with the strong arm to engross, or "corner," the usufruct of

the commonplace knowledge of ways and means by taking over such of the

requisite material as may be relatively scarce and relatively

indispensable for procuring a livelihood under the current state of the

industrial arts.[4] Circumstances of space and numbers prevent escape

from the new technological situation. The commonplace knowledge of ways

and means cannot be turned to account, under the new conditions, without

a material equipment adapted to the then current state of the industrial

arts; and such a suitable material equipment is no longer a slight

matter, to be compassed by workmanlike initiative and application.

_Beati possidentes._

The emphasis of the technological situation, as one might say, may fall

now on one line of material items, now on another, according as the

exigencies of climate, topography, flora and fauna, density of

population, and the like, may decide. So also, under the rule of the

same exigencies, the early growth of property rights and of the

principles (habits of thought) of ownership may settle on one or another

line of material items, according as one or another affords the

strategic advantage for engrossing the current technological efficiency

of the community.

Should the technological situation, the state of the industrial arts, be

such as to throw the strategic emphasis on manual labor, on workmanlike

skill and application, and if at the same time the growth of population

has made land relatively scarce, or hostile contact with other

communities has made it impracticable for members of the community to

range freely over outlying tracts, then it would be expected that the

growth of ownership should take the direction primarily of slavery, or

of some equivalent form of servitude, so effecting a naive and direct

monopolistic control of the current knowledge of ways and means.[5]

Whereas if the development has taken such a turn, and the community is

so placed as to make the quest of a livelihood a matter of the natural

increase of flocks and herds, then it should reasonably be expected that

these items of equipment will be the chief and primary subject of

property rights. In point of fact, it appears that a pastoral culture

commonly involves also some degree of servitude, along with the

ownership of flocks and herds.

Under different circumstances the mechanical appliances of industry, or

the tillable land, might come into the position of strategic advantage,

and might come in for the foremost place in men's consideration as

objects of ownership. The evidence afforded by the known (relatively)

primitive cultures and communities seems to indicate that slaves and

cattle have in this way come into the primacy as objects of ownership at

an earlier period in the growth of material civilisation than land or

the mechanical appliances. And it seems similarly evident--more so,

indeed--that land has on the whole preceded the mechanical equipment as

the stronghold of ownership and the means of engrossing the community's

industrial efficiency.

It is not until a late period in the life-history of material

civilisation that ownership of the industrial equipment, in the narrower

sense in which that phrase is commonly employed, comes to be the

dominant and typical method of engrossing the immaterial equipment.

Indeed, it is a consummation which has been reached only a very few

times even partially, and only once with such a degree of finality as to

leave the fact indisputable. If it may be said, loosely, that mastery

through the ownership of slaves, cattle, or land comes on in force only

after the economic development has run through some nine-tenths of its

course hitherto, then it may be said likewise that some ninety-nine

one-hundredths of this course of development had been completed before

the ownership of the mechanical equipment came into undisputed primacy

as the basis of pecuniary dominion. So late an innovation, indeed, is

this modern institution of "capitalism,"--the predominant ownership of

industrial capital as we know it,--and yet so intimate a fact is it in

our familiar scheme of life, that we have some difficulty in seeing it

in perspective at all, and we find ourselves hesitating between denying

its existence, on the one hand, and affirming it to be a fact of nature

antecedent to all human institutions, on the other hand.

In so speaking of the ownership of industrial equipment as being an

institution for cornering the community's intangible assets, there is

conveyed an unavoidably implied, though unintended, note of

condemnation. Such an implication of merit or demerit is an untoward

circumstance in any theoretical inquiry. Any sentimental bias, whether

of approval or disapproval, aroused by such an implied censure, must

unavoidably hamper the dispassionate pursuit of the argument. To

mitigate the effect of this jarring note as far as may be, therefore, it

will be expedient to turn back for a moment to other, more primitive and

remoter forms of the institution,--as slavery and landed wealth,--and so

reach the modern facts of industrial capital by a roundabout and gradual

approach.

These ancient institutions of ownership, slavery and landed wealth, are

matters of history. Considered as dominant factors in the community's

scheme of life, their record is completed; and it needs no argument to

enforce the proposition that it is a record of economic dominion by the

owners of the slaves or the land, as the case may be. The effect of

slavery in its best day, and of landed wealth in mediaeval and early

modern times, was to make the community's industrial efficiency serve

the needs of the slave-owners in the one case and of the land-owners in

the other. The effect of these institutions in this respect is not

questioned now, except in such sporadic and apologetical fashion as need

not detain the argument.

But the fact that such was the direct and immediate effect of these

institutions of ownership in their time by no means involves the instant

condemnation of the institutions in question. It is quite possible to

argue that slavery and landed wealth, each in its due time and due

cultural setting, have served the amelioration of the lot of man and the

advance of human culture. What these arguments may be that aim to show

the merits of slavery and landed wealth as a means of cultural advance

does not concern the present inquiry, neither do the merits of the case

in which the arguments are offered. The matter is referred to here to

call to mind that any similar theoretical outcome of an analysis of the

productivity of "capital goods" need not be admitted to touch the merits

of the case in controversy between the socialistic critics of capitalism

and the spokesmen of law and order.

The nature of landed wealth, in point of economic theory, especially as

regards its productivity, has been sifted with the most jealous

precautions and the most tenacious logic during the past century; and

any economic student can easily review the course of the argument

whereby that line of economic theory has been run to earth. It is only

necessary here to shift the point of view slightly to bring the whole

argument concerning the rent of land to bear on the present question.

Rent is of the nature of a differential gain, resting on a differential

advantage in point of productivity of the industry employed upon or

about it. This differential advantage attaching to a given parcel of

land may be a differential as against another parcel or as against

industry applied apart from land. The differential advantage attaching

to agricultural land--_e.g._, as against industry at large--rests on

certain broad peculiarities of the technological situation. Among them

are such peculiarities as these: the human species, or the fraction of

it concerned in the case, is numerous, relatively to the extent of its

habitat; the methods of getting a living, as hitherto elaborated, the

ways and means of life, make use of certain crop-plants and certain

domestic animals. Apart from such conditions, taken for granted in

arguments concerning agricultural rent, there could manifestly be no

differential advantage attaching to land, and no production of rent.

With increased command of methods of transportation, the agricultural

lands of England, _e.g._, and of Europe at large, declined in value, not

because these lands became less fertile, but because an equivalent

result could more advantageously be got by a new method. So, again, the

flint- and amber-bearing regions that are now Danish and Swedish

territory about the waters at the entrance to the Baltic were in the

neolithic culture of northern Europe the most favored and valuable lands

within that cultural region. But, with the coming of the metals and the

relative decline of the amber trade, they began to fall behind in the

scale of productivity and preference. So also in later time, with the

rise of "industry" and the growth of the technology of communication,

urban property has gained, as contrasted with rural property, and land

placed in an advantageous position relatively to shipping and railroads

has acquired a value and a "productiveness" which could not be claimed

for it apart from these modern technological expedients.

The argument of the single-tax advocates and other economists as to the

"unearned increment" is sufficiently familiar, but its ulterior

implications have not commonly been recognised. The unearned increment,

it is held, is produced by the growth of the community in numbers and in

the industrial arts. The contention seems to be sound, and is commonly

accepted; but it has commonly been overlooked that the argument involves

the ulterior conclusion that all land values and land productivity,

including the "original and indestructible powers of the soil," are a

function of the "state of the industrial art." It is only within the

given technological situation, the current scheme of ways and means,

that any parcel of land has such productive powers as it has. It is, in

other words, useful only because, and in so far, and in such manner, as

men have learned to make use of it. This is what brings it into the

category of "land," economically speaking. And the preferential position

of the landlord as a claimant of the "net product" consists in his legal

right to decide whether, how far, and on what terms men shall put this

technological scheme into effect in those features of it which involve

the use of his parcel of land.

* * * * *

All this argument concerning the unearned increment may be carried over,

with scarcely a change of phrase, to the case of "capital goods." The

Danish flint supply was of first-rate economic consequence, for a

thousand years or so, during the stone age; and the polished-flint

utensils of that time were then "capital goods" of inestimable

importance to civilisation, and were possessed of a "productivity" so

serious that the life of mankind in that world may be said to have been

balanced on the fine-ground edge of those magnificent polished-flint

axes. All that lasted through its technological era. The flint supply

and the mechanical expedients and "capital goods," whereby it was turned

to account, were valuable and productive then, but neither before nor

after that time. Under a changed technological situation the capital

goods of that time have become museum exhibits, and their place in human

economy has been taken by technological expedients which embody another

"state of the industrial arts," the outcome of later and different

phases of human experience. Like the polished-flint ax, the metal

utensils which gradually displaced it and its like in the economy of the

Occidental culture were the product of long experience and the gradual

learning of ways and means. The steel ax, as well as the flint ax,

embodies the same ancient technological expedient of a cutting edge, as

well as the use of a helve and the efficiency due to the weight of the

tool. And in the case of the one or the other, when seen in historical

perspective and looked at from the point of view of the community at

large, the knowledge of ways and means embodied in the utensils was the

serious and consequential matter. The construction or acquisition of the

concrete "capital goods" was simply an easy consequence. It "cost

nothing but labor," as Thomas Mun would say.

Yet it might be argued that each concrete article of "capital goods" was

the product of some one man's labor, and, as such, its productivity,

when put to use, was but the indirect, ulterior, deferred productiveness

of the maker's labor. But the maker's productivity in the case was but a

function of the immaterial technological equipment at his command, and

that in its turn was the slow spiritual distillate of the community's

time-long experience and initiative. To the individual producer or

owner, to whom the community's accumulated stock of immaterial equipment

was open by common notoriety, the cost of the concrete material goods

would be the effort involved in making or getting them and in making

good his claim to them. To his neighbor who had made or acquired no such

parcel of "productive goods," but to whom the resources of the

community, material and immaterial, were open on the same easy terms,

the matter would look very much the same. He would have no grievance,

nor would he have occasion to seek one. Yet, as a resource in the

maintenance of the community's life and a factor in the advance of

material civilisation, the whole matter would have a different meaning.

So long, or rather in so far, as the "capital goods" required to meet

the technological demands of the time were slight enough to be compassed

by the common man with reasonable diligence and proficiency, so long

the draft upon the common stock of immaterial assets by any one would be

no hindrance to any other, and no differential advantage or disadvantage

would emerge. The economic situation would answer passably to the

classical theory of a free competitive system,--"the obvious and simple

system of natural liberty," which rests on the presumption of equal

opportunity. In a roughly approximate way, such a situation supervened

in the industrial life of western Europe on the transition from mediaeval

to modern times, when handicraft and "industrial" enterprise superseded

landed wealth as the chief economic factor. Within the "industrial

system," as distinct from the privileged non-industrial classes, a man

with a modicum of diligence, initiative, and thrift might make his way

in a tolerable fashion without special advantages in the way of

prescriptive right or accumulated means. The principle of equal

opportunity was, no doubt, met only in a very rough and dubious fashion;

but so favorable became the conditions in this respect that men came to

persuade themselves in the course of the eighteenth century that a

substantially equitable allotment of opportunities would result from the

abrogation of all prerogatives other than the ownership of goods. But so

precarious and transient was this approximation to a technologically

feasible system of equal opportunity that, while the liberal movement

which converged upon this great economic reform was still gathering

head, the technological situation was already outgrowing the possibility

of such a scheme of reform. After the Industrial Revolution came on, it

was no longer true, even in the roughly approximate way in which it

might have been true some time earlier, that equality before the law,

barring property rights, would mean equal opportunity. In the leading,

aggressive industries which were beginning to set the pace for all that

economic system that centered about the market, the unit of industrial

equipment, as required by the new technological era, was larger than one

man could compass by his own efforts with the free use of the

commonplace knowledge of ways and means. And the growth of business

enterprise progressively made the position of the small, old-fashioned

producer more precarious. But the speculative theoreticians of that time

still saw the phenomena of current economic life in the light of the

handicraft traditions and of the preconceptions of natural rights

associated with that system, and still looked to the ideal of "natural

liberty" as the goal of economic development and the end of economic

reform. They were ruled by the principles (habits of thought) which had

arisen out of an earlier situation, so effectually as not to see that

the rule of equal opportunity which they aimed to establish was already

technologically obsolete.[6]

During the hundred years and more of this ascendancy of the

natural-rights theories in economic science, the growth of technological

knowledge has unremittingly gone forward, and concomitantly the

large-scale industry has grown great and progressively dominated the

field. This large-scale industrial regime is what the socialists, and

some others, call "capitalism." "Capitalism," as so used, is not a neat

and rigid technical term, but it is definite enough to be useful for

many purposes. On its technological side the characteristic trait of

this capitalism is that the current pursuit of industry requires a

larger unit of material equipment than one individual can compass by

his own labor, and larger than one person can make use of alone.

So soon as the capitalist regime, in this sense, comes in, it ceases to

be true that the owner of the industrial equipment (or the controller of

it) in any given case is or may be the producer of it, in any naive

sense of "production." He is under the necessity of acquiring its

ownership or control by some other expedient than that of industrially

productive work. The pursuit of industry requires an accumulation of

wealth, and, barring force, fraud, and inheritance, the method of

acquiring such an accumulation of wealth is necessarily some form of

bargaining; that is to say, some form of business enterprise. Wealth is

accumulated, within the industrial field, from the gains of business;

that is to say, from the gains of advantageous bargaining.[7] Taking the

situation by and large, looking to the body of business enterprise as a

whole, the advantageous bargaining from which gains accrue and from

which, therefore, accumulations of capital are derived, is necessarily,

in the last analysis, a bargaining between those who own (or control)

industrial wealth and those whose work turns this wealth to account in

productive industry. This bargaining for hire--commonly a wage

agreement--is conducted under the rule of free contract, and is

concluded according to the play of demand and supply, as has been well

set forth by many writers.

On this technological view of capital, as here spoken for,

the relations between the two parties to the bargain, the

capitalist-employer and the working class, stand as follows. More or

less rigorously, the technological situation enforces a certain scale

and method in the various lines of industry.[8] The industry can, in

effect, be carried on only by recourse to the technologically requisite

scale and method, and this requires a material equipment of a certain

(large) magnitude; while material equipment of this required magnitude

is held exclusively by the capitalist-employer, and is _de facto_ beyond

the reach of the common man.

A corresponding body of immaterial equipment--knowledge and practice of

ways and means--is likewise requisite, under the rule of the same

technological exigencies. This immaterial equipment is in part

drawn on in the making of the material equipment held by the

capitalist-employers, in part in the use to be made of this material

equipment in the further processes of industry. This body of immaterial

equipment so drawn on in any line of industry is, relatively, still

larger, being, on any exhaustive analysis, virtually the whole body of

industrial experience accumulated by the community up to date. A free

draft on this common stock of technological wisdom must be had both in

the construction and in the subsequent use of the material equipment;

although no one person can master, or himself employ, more than an

inconsiderable fraction of the immaterial equipment so drawn on for the

installation or operation of any given block of the material equipment.

The owner of the material equipment, the capitalist-employer, is, in the

typical case, not possessed of any appreciable fraction of the

immaterial equipment necessarily drawn on in the construction and

subsequent use of the material equipment owned (controlled) by him. His

knowledge and training, so far as it enters into the question, is a

knowledge of business, not of industry.[9] The slight technological

proficiency which he has or needs for his business ends is of a general

character, wholly superficial and impracticable in point of workmanlike

efficiency; nor is it turned to account in actual workmanship. He

therefore "needs in his business" the service of persons who have a

competent working mastery of this immaterial technological equipment,

and it is with such persons that his bargains for hire are made. By and

large, the measure of their serviceability for his ends is the measure

of their technological competency. No workman not possessed of some

fractional mastery of the technological requirements is

employed,--imbeciles are useless in proportion to their imbecility; and

even unskilled and "unintelligent" workmen, so called, are of relatively

little use, although they may be possessed of a proficiency in the

commonplace industrial details such as would bulk large in absolute

magnitude. The "common laborer" is, in fact, a highly trained and widely

proficient workman when contrasted with the conceivable human blank

supposed to have drawn on the community for nothing but his physique.

In the hands of these workmen--the industrial community, the bearers of

the immaterial, technological equipment--the capital goods owned by the

capitalist become a "means of production." Without them, or in the

hands of men who do not know their use, the goods in question would be

simply raw materials, somewhat deranged and impaired through having been

given the form which now makes them "capital goods." The more proficient

the workmen in their mastery of the technological expedients involved,

and the greater the facility with which they are able to put these

expedients into effect, the more productive will be the processes in

which the workmen turn the employer's capital goods to account. So,

also, the more competent the work of "superintendence," the foreman-like

oversight and correlation of the work in respect of kind, speed, volume,

the more will it count in the aggregate of productive efficiency. But

this work of correlation is a function of the foreman's mastery of the

technological situation at large and his facility in proportioning one

process of industry to the requirements and effects of another. Without

this due and sagacious correlation of the processes of industry, and

their current adaptation to the demands of the industrial situation at

large, the material equipment engaged would have but slight efficiency

and would count for but little in the way of capital goods. The

efficiency of the control exercised by the master-workman, engineer,

superintendent, or whatever term may be used to designate the

technological expert who controls and correlates the productive

processes,--this workmanlike efficiency determines how far the given

material equipment is effectually to be rated as "capital goods."

Through all this functioning of the workman and the foreman the

capitalist's business ends are ever in the background, and the degree of

success that attends his business endeavors depends, other things equal,

on the efficiency with which these technologists carry on the processes

of industry in which he has invested. His working arrangements with

these workmen, the bearers of the immaterial equipment engaged, enables

the capitalist to turn the processes for which his capital goods are

adapted to account for his own profit, but at the cost of such a

deduction from the aggregate product of these processes as the workmen

may be able to demand in return for their work. The amount of this

deduction is determined by the competitive bidding of other capitalists

who may have use for the same lines of technological efficiency, in the

manner set forth by writers on wages.

With the conceivable consolidation of all material assets under one

business management, so as to eliminate competitive bidding between

employers, it is plain that the resulting business concern would command

the undivided forces of the technological situation, with such deduction

as is involved in the livelihood of the working population. This

livelihood would in such a case be reduced to the most economical

footing, as seen from the standpoint of the employer. And the employer

(capitalist) would be the _de facto_ owner of the community's aggregate

knowledge of ways and means, except so far as this body of immaterial

equipment serves also the housekeeping routine of the working

population. How nearly the current economic situation may approach to

this finished state is a matter of opinion. There is also place for a

broad question whether the conditions are more or less favorable to the

working population under the existing business regime, involving

competitive bidding between the several business concerns, than they

would be in case a comprehensive business consolidation had eliminated

competition and placed the ownership of the material assets on a footing

of unqualified monopoly. Nothing but vague surmises can apparently be

offered in answer to these questions.

But as bearing on the question of monopoly and the use of the

community's immaterial equipment it is to be kept in mind that the

technological situation as it stands to-day does not admit of a complete

monopolisation of the community's technological expedients, even if a

complete monopolisation of the existing aggregate of material property

were effected. There is still current a large body of industrial

processes to which the large-scale methods do not apply and which do not

presume such a large unit of material equipment or involve such rigorous

correlation with the large-scale industry as to take them out of the

range of discretionary use by persons not possessed of appreciable

material wealth. Typical of such lines of work, hitherto not amenable to

monopolisation, are the details of housekeeping routine alluded to

above. It is, in fact, still possible for an appreciable fraction of the

population to "pick up a living," more or less precarious, without

recourse to the large-scale processes that are controlled by the owners

of the material assets. This somewhat precarious margin of free recourse

to the commonplace knowledge of ways and means appears to be what stands

in the way of a neater adjustment of wages to the "minimum of

subsistence" and the virtual ownership of the immaterial equipment by

the owners of the material equipment.

It follows from what has been said that all tangible[10] assets owe

their productivity and their value to the immaterial industrial

expedients which they embody or which their ownership enables their

owner to engross. These immaterial industrial expedients are necessarily

a product of the community, the immaterial residue of the community's

experience, past and present; which has no existence apart from the

community's life, and can be transmitted only in the keeping of the

community at large. It may be objected by those who make much of the

productivity of capital that tangible capital goods on hand are

themselves of value and have a specific productive efficiency, if not

apart from the industrial processes in which they serve, then at least

as a prerequisite to these processes, and therefore a material

condition-precedent standing in a causal relation to the industrial

product. But these material goods are themselves a product of the past

exercise of technological knowledge, and so back to the beginning. What

there is involved in the material equipment, which is not of this

immaterial, spiritual nature, and so what is not an immaterial residue

of the community's experience, is the raw material out of which the

industrial appliances are constructed, with the stress falling wholly on

the "raw."

The point is illustrated by what happens to a mechanical contrivance

which goes out of date because of a technological advance and is

displaced by a new contrivance embodying a new process. Such a

contrivance "goes to the junk-heap," as the phrase has it. The specific

technological expedient which it embodies ceases to be effective in

industry, in competition with "improved methods." It ceases to be an

immaterial asset. When it is in this way eliminated, the material

repository of it ceases to have value as capital. It ceases to be a

material asset. "The original and indestructible powers" of the material

constituents of capital goods, to adapt Ricardo's phrase, do not make

these constituents capital goods; nor, indeed, do these original and

indestructible powers of themselves bring the objects in question into

the category of economic goods at all. The raw materials--land,

minerals, and the like--may, of course, be valuable property, and may be

counted among the assets of a business. But the value which they so have

is a function of the anticipated use to which they may be put, and that

is a function of the technological situation under which it is

anticipated that they will be useful.

* * * * *

All this may seem to undervalue or perhaps to overlook the physical

facts of industry and the physical nature of commodities. There is, of

course, no call to understate the importance of material goods or of

manual labor. The goods about which this inquiry turns are the products

of trained labor working on the available materials; but the labor has

to be trained, in the large sense, in order to be labor, and the

materials have to be available in order to be materials of industry. And

both the trained efficiency of the labor and the availability of the

material objects engaged are a function of the "state of the industrial

arts."

Yet the state of the industrial arts is dependent on the traits of human

nature, physical, intellectual, and spiritual, and on the character of

the material environment. It is out of these elements that the human

technology is made up; and this technology is efficient only as it meets

with the suitable material conditions and is worked out, practically, in

the material forces required. The brute forces of the human animal are

an indispensable factor in industry, as are likewise the physical

characteristics of the material objects with which industry deals. And

it seems bootless to ask how much of the products of industry or of its

productivity is to be imputed to these brute forces, human and

non-human, as contrasted with the specifically human factors that make

technological efficiency. Nor is it necessary to go into questions of

that import here, since the inquiry here turns on the productive

relation of capital to industry; that is to say, the relation of the

material equipment and its ownership to men's dealings with the physical

environment in which the race is placed. The question of capital goods

(including that of their ownership and therefore including the question

of investment) is a question of how mankind as a species of intelligent

animals deals with the brute forces at its disposal. It is a question of

how the human agent deals with his means of life, not of how the forces

of the environment deal with man. Questions of the latter class belong

under the head of Ecology, a branch of the biological sciences dealing

with the adaptive variability of plants and animals. Economic inquiry

would belong under that category if the human response to the forces of

the environment were instinctive and variational only, including nothing

in the way of a technology. But in that case there would be no question

of capital goods, or of capital, or of labor. Such questions do not

arise in relation to the non-human animals.

In an inquiry into the productivity of labor some perplexity might be

met with as to the share or the place of the brute forces of the human

organism in the theory of production; but in relation to capital that

question does not arise, except so far as these forces are involved in

the production of the capital goods. As a parenthesis, more or less

germane to the present inquiry into capital, it may be remarked that an

analysis of the productive powers of labor would apparently take account

of the brute energies of mankind (nervous and muscular energies) as

material forces placed at the disposal of man by circumstances largely

beyond human control, and in great part not theoretically dissimilar to

the like nervous and muscular forces afforded by the domestic animals.

FOOTNOTES:

[1] Reprinted by permission from _The Quarterly Journal of Economics_,

Vol. XXII, Aug., 1908.

[2] "Assets" is, of course, not to be taken literally in this

connection. The term properly covers a pecuniary concept, not an

industrial (technological) one, and it connotes ownership as well as

value; and it will be used in this literal sense when, in a later

article, ownership and investment come into the discussion. In the

present connection it is used figuratively, for want of a better term,

to convey the connotation of value and serviceability without thereby

implying ownership.

[3] Barrows.

[4] Motives of exploit and emulation, no doubt, play a serious part in

bringing on the practice of ownership and in establishing the principles

on which it rests; but this play of motives and the concomitant growth

of institutions cannot be taken up here. _Cf._ _The Theory of the

Leisure Class_, chaps. i, ii, iii.

[5] _Cf._ H. Nieboer, _Slavery as an Industrial System_, chap. iv, sect.

12.

[6] For a more extended discussion of this point see the _Quarterly

Journal of Economics_, July, 1899, "The Preconceptions of Economic

Science"; also _The Theory of Business Enterprise_, chap. iv, especially

pp. 70-82.

[7] Marx holds that the "primitive accumulation" from which capitalism

takes its rise is a matter of force and fraud (_Capital_, Book I, chap.

xxiv.). Sombart holds the source to have been landed wealth (_Moderne

Kapitalismus_, Book II, Part II, especially chap. xii). Ehrenberg and

other critics of Sombart incline to the view that the most important

source was usury and the petty trade (_Zeitalter der Fugger_, chaps. i,

ii).

[8] The phrase "more or less" covers a certain margin of tolerance in

respect of scale and method, which may be very appreciably wider in some

lines of industry than in others, and which cannot be more adequately

defined or described here within such space as could reasonably be

allowed. The requirement of scale and method is enforced by competition.

The force and reach of this competitive adjustment can also not be dealt

with here, but the familiar current acceptance of the fact will dispense

with details.

[9] _Cf._ _Theory of Business Enterprise_, chap. iii.

[10] "Tangible assets" is here taken to signify serviceable capital

goods considered as valuable possessions yielding income to their owner.

ON THE NATURE OF CAPITAL[1]

II. INVESTMENT, INTANGIBLE ASSETS, AND THE PECUNIARY MAGNATE

What has been said in the earlier section of this paper[2] applies to

"capital goods," so called, and it is intended to apply to these in

their character of "productive goods" rather than in their character of

"capital"; that is to say, what is had in mind is the industrial, or

technological, efficiency and subservience of the material means of

production, rather than the pecuniary use and effect of invested wealth.

The inquiry has dealt with the industrial equipment as "plant" rather

than as "assets." In the course of this inquiry it has appeared that out

of the profitable engrossing of the community's industrial efficiency

through control of the material equipment there arises the practice of

investment, which has further consequences that merit more detailed

attention.

Investment is a pecuniary transaction, and its aim is pecuniary

gain,--gain in terms of value and ownership. Invested wealth is capital,

a pecuniary magnitude, measured in terms of value and determined in

respect of its magnitude by a valuation which proceeds on an

appraisement of the gain expected from the ownership of this invested

wealth. In modern business practice, capital is distinguished into two

cooerdinate categories of assets, tangible and intangible. "Tangible

assets" is here taken to designate pecuniarily serviceable capital

goods, considered as a valuable possession yielding an income to their

owner. Such goods, material items of wealth, are "assets" to the amount

of their capitalisable value, which may be more or less closely related

to their industrial serviceability as productive goods. "Intangible

assets" are immaterial items of wealth, immaterial facts owned, valued,

and capitalised on an appraisement of the gain to be derived from their

possession. These are also assets to the amount of their capitalisable

value, which has commonly little, if any, relation to the industrial

serviceability of these items of wealth considered as factors of

production.

* * * * *

Before going into the matter of intangible assets, it is necessary to

speak further of the consequences which investment--and hence

capitalisation--has for the use and serviceability of (material) capital

goods. It has commonly been assumed by economists, without much

scrutiny, that the gains which accrue from invested wealth are derived

from and (roughly) measured by the productivity of the industrial

process in which the items of wealth so invested are employed,

productivity being counted in some terms of material serviceability to

the community, conduciveness to the livelihood, comfort, or consumptive

needs of the community. In the course of the present inquiry it has

appeared that the gainfulness of such invested wealth (tangible assets)

is due to a more or less extensive engrossing of the community's

industrial efficiency. The aggregate gains of the aggregate material

capital accrue from the community's industrial activity, and bear some

relation to the productive capacity of the industrial traffic so

engrossed. But it will be noted that there is no warrant in the

analysis of these phenomena as here set forth for alleging that the

gains of investment bear a relation of equality or proportion to the

material serviceability of the capital goods, as rated in terms of

effectual usefulness to the community. Given capital goods, tangible

assets, may owe their pecuniary serviceability to their owner, and so

their value, to other things than their serviceability to the community;

although the gains of investment in the aggregate are drawn from the

aggregate material productivity of the community's industry.

The ownership of the material equipment gives the owner not only the

right of use over the community's immaterial equipment, but also the

right of abuse and of neglect or inhibition. This power of inhibition

may be made to afford an income, as well as the power to serve; and

whatever will yield an income may be capitalised and become an item of

wealth to its possessor. Under modern conditions of investment it

happens not infrequently that it becomes pecuniarily expedient for the

owner of the material equipment to curtail or retard the processes of

industry,--"restraint of trade." The motive in all such cases of

retardation is the pecuniary expediency of the measure for the owner

(controller) of capital,--expediency in terms of income from investment,

not expediency in terms of serviceability to the community at large or

to any fraction of the community except the owner (manager). Except for

the exigencies of investment, _i.e._, exigencies of pecuniary gain to

the investor, phenomena of this character would have no place in the

industrial system. They invariably come of the endeavors of business men

to secure a pecuniary gain or to avoid a pecuniary loss. More

frequently, perhaps, manoeuvers of inhibition--advised idleness of

plant--in industry aim to effect a saving or avoid a waste than to

procure an increase of gain; but the saving to be effected and the waste

to be avoided are always pecuniary saving to the owner and pecuniary

waste in the matter of ownership, not a saving of goods to the community

or a prevention of wasteful consumption or wasteful expenditure of

effort and resources on the part of the community. Pecuniary--that is to

say, differential--advantage to the capitalist-manager has, under the

regime of investment, taken precedence of economic advantage to the

community; or rather, the differential advantage of ownership is alone

regarded in the conduct of industry under this system.

Business practices which inhibit industrial efficiency and curtail the

industrial output are too well known to need particular enumeration. Nor

is it necessary to cite evidence to show that such inhibition and

curtailment are resorted to from motives of pecuniary expediency. But an

illustrative example or two will make the theoretical point clearer, and

perhaps more plainly bring out the wholly pecuniary grounds of such

business procedure. The most comprehensive principle involved in this

class of business management is that of raising prices, and so

increasing the net gains of business, by limiting the supply, or

"charging what the traffic will bear." Of a similar effect, for the

point here in question, are the obstructive tactics designed to hinder

the full efficiency of a business rival. These phenomena lie along the

line of division between tangible and intangible assets. Successful

strategy of this kind may, by force of custom, legislation, or the

"freezing-out" of rival concerns, pass into settled conditions of

differential advantage for the given business concern, which so may be

capitalised as an item of intangible assets and take their place in the

business community as articles of invested wealth.

But, aside from such capitalisation of inefficiency, it is at least an

equally consequential fact that the processes of productive industry are

governed in detail by the exigencies of investment, and therefore by the

quest of gain as counted in terms of price, which leads to the

dependence of production on the course of prices. So that, under the

regime of capital, the community is unable to turn its knowledge of ways

and means to account for a livelihood except at such seasons and in so

far as the course of prices affords a differential advantage to the

owners of the material equipment. The question of advantageous--which

commonly means rising--prices for the owners (managers) of the capital

goods is made to decide the question of livelihood for the rest of the

community. The recurrence of hard times, unemployment, and the rest of

that familiar range of phenomena, goes to show how effectual is the

inhibition of industry exercised by the ownership of capital under the

price system.[3]

So also as regards the discretionary abuse of the community's industrial

efficiency vested in the owner of the material equipment.

Disserviceability may be capitalised as readily as serviceability, and

the ownership of the capital goods affords a discretionary power of

misdirecting the industrial processes and perverting[4] industrial

efficiency, as well as of inhibiting or curtailing industrial processes

and their output, while the outcome may still be profitable to the owner

of the capital goods. There is a large volume of capital goods whose

value lies in their turning the technological inheritance to the injury

of mankind. Such are, _e.g._, naval and military establishments,

together with the docks, arsenals, schools, and manufactories of arms,

ammunition, and naval and military stores, that supplement and supply

such establishments. These armaments and the like are, of course, public

and quasi-public enterprises, under the current regime, with somewhat

disputable relations to the system of current business enterprise. But

it is no far-fetched interpretation to say that they are, in great part,

a material equipment for the maintenance of law and order, and so enable

the owners of capital goods with immunity to inhibit or pervert the

industrial processes when the exigencies of business profits make it

expedient; that they are, further, a means--more or less ineffectual, it

is true--for extending and protecting trade, and so serve the

differential advantage of business men at the cost of the community; and

that they are also in large part a material equipment set apart for the

diversion of a livelihood from the community at large to the military,

naval, diplomatic, and other official classes. These establishments may

in any case be taken as illustrating how items of material equipment may

be devoted to and may be valued for the use of the technological

expedients for the damage and discomfort of mankind, without sensible

offset or abatement.

Typical of a class of investments which derive profits from capital

goods devoted to uses that are altogether dubious, with a large

presumption of net detriment, are such establishments as race-tracks,

saloons, gambling-houses, and houses of prostitution.[5] Some spokesmen

of the "non-Christian tribes" might wish to include churches under the

same category, but the consensus of opinion in modern communities

inclines to look on churches as serviceable, on the whole; and it may be

as well not to attempt to assign them a specific place in the scheme of

serviceable and disserviceable use of invested wealth.

There is, further, a large field of business, employing much capital

goods and many technological processes, whose profits come from products

in which serviceability and disserviceability are mingled with waste in

the most varying proportions. Such are the production of goods of

fashion, disingenuous proprietary articles, sophisticated household

supplies, newspapers and advertising enterprise. In the degree in which

business of this class draws its profits from wasteful practices,

spurious goods, illusions and delusions, skilled mendacity, and the

like, the capital goods engaged must be said to owe their capitalisable

value to a perverse use of the technological expedients employed.

These wasteful or disserviceable uses of capital goods have been cited,

not as implying that the technological proficiency embodied in these

goods or brought into effect in their use, intrinsically has a

disserviceable bearing, nor that investment in these things, and

business enterprise in the management of them, need aim at

disserviceability, but only to bring out certain minor points of theory,

obvious but commonly overlooked: (_a_) technological proficiency is not

of itself and intrinsically serviceable or disserviceable to

mankind,--it is only a means of efficiency for good or ill; (_b_) the

enterprising use of capital goods by their businesslike owner aims not

at serviceability to the community, but only at serviceability to the

owner; (_c_) under the price system--under the rule of pecuniary

standards and management--circumstances make it advisable for the

business man at times to mismanage the processes of industry, in the

sense that it is expedient for his pecuniary gain to inhibit, curtail,

or misdirect industry, and so turn the community's technological

proficiency to the community's detriment. These somewhat commonplace

points of theory are of no great weight in themselves, but they are of

consequence for any theory of business or of life under the rules of the

price system, and they have an immediate bearing here on the question of

intangible assets.

* * * * *

At the risk of some tedium it is necessary to the theory of intangible

assets to pursue this analysis and piecing together of commonplaces

somewhat farther. As has already been remarked, "assets" is a pecuniary

concept, not a technological one; a concept of business, not of

industry. Assets are capital, and tangible assets are items of material

equipment and the like, considered as available for capitalisation. The

tangibility of tangible assets is a matter of the materiality of the

items of wealth of which they are made up, while they are assets to the

amount of their value. Capital goods, which typically make up the

category of tangible assets, are capital goods by virtue of their

technological serviceability, but they are capital in the measure, not

of their technological serviceability, but in the measure of the income

which they may yield to their owner. The like is, of course, true of

intangible assets, which are likewise capital, or assets, in the measure

of their income-yielding capacity. Their intangibility is a matter of

the immateriality of the items of wealth--objects of ownership--of which

they are made up, but their character and magnitude as assets is a

matter of the gainfulness to their owner of the processes which their

ownership enables him to engross. The facts so engrossed, in the case of

intangible assets, are not of a technological or industrial character;

and herein lies the substantial disparity between tangible and

intangible assets.

Mankind has other dealings with the material means of life, besides

those covered by the community's technological proficiency. These other

dealings have to do with the use, distribution, and consumption of the

goods procured by the employment of the community's technological

proficiency, and are carried out under working arrangements of an

institutional character,--use and wont, law and custom. The principles

and practice of the distribution of wealth vary with the changes in

technology and with the other cultural changes that are going forward;

but it is probably safe to assume that the principles of

apportionment,--that is to say, the consensus of habitual opinion as to

what is right and good in the distribution of the product,--these

principles and the concomitant methods of carrying them out in practice

have always been such as to give one person or group or class something

of a settled preference above another. Something of this kind, something

in the way of a conventionally arranged differential advantage in the

apportionment of the common livelihood, is to be found in all cultures

and communities that have been observed at all carefully; and it is

perhaps needless to remark that in the higher cultures such economic

preferences, privileges, prerogatives, differential advantages and

disadvantages, are numerous and varied, and that they make up an

intricate fabric of economic institutions. Indeed, peculiarities of

class difference in some such respect are among the most striking and

decisive features that distinguish one cultural era from another. In all

phases of material civilisation these preferential advantages are sought

and valued. Classes or groups which are in a position to make good a

claim to such differential advantages commonly come, in due course, to

put forward such claims; as, _e.g._, the priesthood, the princely and

ruling class, the men as contrasted with the women, the adults as

against minors, the able-bodied as against the infirm. Principles

(habits of thought) countenancing some form of class or personal

preference in the distribution of income are to be found incorporated in

the moral code of all known civilisations and embodied in some form of

institution. Such items of immaterial wealth are of a differential

character, in that the advantage of those who secure the preference is

the disadvantage of those who do not; and it may be mentioned in

passing, that such a differential advantage inuring to any one class or

person commonly carries a more than equal disadvantage to some other

class or person or to the community at large.[6]

When property rights fall into definite shape and the price system comes

in, and more particularly when the practice of investment arises and

business enterprise comes into vogue, such differential advantages take

on something of the character of intangible assets. They come to have a

pecuniary value and rating, whether they are transferable or not; and if

they are transferable, if they can be sold and delivered, they become

assets in a fairly clear and full sense of that term. Such immaterial

wealth, preferential benefits of the nature of intangible assets, may be

a matter of usage simply, as the vogue of a given public house, or of a

given tradesman, or of a given brand of consumable goods; or may be a

matter of arrogation, as the King's Customs in early times, or the once

notorious Sound Dues, or the closing of public highways by large

land-owners; or of contractual concession, as the freedom of a city or a

guild, or a franchise in the Hanseatic League or in the Associated

Press; or of government concession, whether on the basis of a bargain or

otherwise, as the many trade monopolies of early modern times, or a

corporation charter, or a railway franchise, or letters of marque, or

letters patent; or of statutory creation, as trade protection by import,

export, or excise duties or navigation laws; or of conventionalised

superstitious punctilio, as the creation of a demand for wax by the

devoutly obligatory consumption of consecrated tapers, or the similar

devout consumption of and demand for fish during Lent.

Under the regime of investment and business enterprise these and the

like differential benefits may turn to the business advantage of a given

class, group, or concern, and in such an event the resulting

differential business advantage in the pursuit of gain becomes an asset,

capitalised on the basis of its income-yielding capacity, and possibly

vendible under the cover of a corporation security (as, _e.g._, common

stock), or even under the usual form of private sale (as, _e.g._, the

appraised good-will of a business concern).

But the regime of business enterprise has not only taken over various

forms of institutional privileges and prerogatives out of the past: it

also gives rise to new kinds of differential advantage and capitalises

them into intangible assets. These are all (or virtually all) of one

kind, in that their common aim and common basis of value and

capitalisation is a preferentially advantageous sale. Naturally so,

since the end of all business endeavor, in the last analysis, is an

advantageous sale. The commonest and typical kind of such intangible

assets is "good-will," so called,--a term which has come to cover a

great variety of differential business advantages, but which in the

original business usage of it meant the customary resort of a clientele

to the concern so possessed of the good-will. It seems originally to

have implied a kindly sentiment of trust and esteem on the part of a

customer, but as the term is now used it has lost this sentimental

content. In the broad and loose sense in which it is now currently

employed it is extended to cover such special advantages as inure to a

monopoly or a combination of business concerns through its power to

limit or engross the supply of a given line of goods or services. So

long as such a special advantage is not specifically protected by

special legislation or by a due legal instrument,--as in the case of a

franchise or a patent right,--it is likely to be spoken of loosely as

"good-will."

The results of the analysis may be summed up to show the degree of

coincidence and the distinctions between the two categories of assets:

(_a_) the value (that is to say, the amount) of given assets, whether

tangible or intangible, is the capitalised (or capitalisable) value of

the given articles of wealth, rated on the basis of their

income-yielding capacity to their owner; (_b_) in the case of tangible

assets there is a presumption that the objects of wealth involved have

some (at least potential) serviceability at large, since they serve a

materially productive work, and there is therefore a presumption, more

or less well founded, that their value represents, though it by no means

measures, an item of serviceability at large; (_c_) in the case of

intangible assets there is no presumption that the objects of wealth

involved have any serviceability at large, since they serve no

materially productive work, but only a differential advantage to the

owner in the distribution of the industrial product;[7] (_d_) given

tangible assets may be disserviceable to the community,--a given

material equipment may owe its value as capital to a disserviceable use,

though in the aggregate or on an average the body of tangible assets are

(presumptively) serviceable; (_e_) given intangible assets may be

indifferent in respect of serviceability at large, though in the

aggregate, or on an average, intangible assets are (presumably)

disserviceable to the community.

On this showing it would appear that the substantial difference between

tangible and intangible assets lies in the different character of the

immaterial facts which are turned to pecuniary account in the one case

and in the other. The former, in effect, capitalise such fraction

of the technological proficiency of the community as the ownership

of the capital goods involved enables the owner to engross. The

latter capitalise such habits of life, of a non-technological

character,--settled by usage, convention, arrogation, legislative

action, or what not,--as will effect a differential advantage to the

concern to which the assets in question appertain. The former owe their

existence and magnitude to the usufruct of technological expedients

involved in the industrial process proper; while the latter are in like

manner due to the usufruct of what may be called the interstitial

correlations and adjustments both within the industrial system and

between industry proper and the market, in so far as these relations are

of a pecuniary rather than a technological character. Much the same

distinction may be put in other words, so as to bring the expression

nearer the current popular apprehension of the matter, by saying that

tangible assets, commonly so called, capitalise the processes of

production, while intangible assets, so called, capitalise certain

expedients and processes of acquisition, not productive of wealth, but

affecting only its distribution. Formulated in either way, the

distinction seems not to be an altogether hard-and-fast one, as will

immediately appear if it is called to mind that intangible assets may be

converted into tangible assets, and conversely, as the exigencies of

business may decide. Yet, while the two categories of assets stand in

such close relation to one another as this state of things presumes, it

is still evident from the same state of things that they are not to be

confounded with one another.

Taking "good-will" as typical of the category of "intangible assets," as

being the most widely prevalent and at the same time the farthest

removed in its characteristics from the range of "tangible assets," some

slight further discussion of it may serve to bring out the difference

between the two categories of assets and at the same time to enforce

their essential congruity as assets as well as the substantial

connection between them. In the earlier days of the concept, in the

period of growth to which it owes its name, when good-will was coming

into recognition as a factor affecting assets, it was apparently looked

on habitually as an adventitious differential advantage accruing

spontaneously to the business concern to which it appertained; an

immaterial by-product of the concern's conduct of business,--commonly

presumed to be an adventitious blessing incident to an upright and

humane course of business life. Poor Richard would express this sense of

the matter in the saying that "honesty is the best policy." But

presently, no doubt, some thought would be taken of the acquirement of

good-will, and some effort would be expended by the wise business man in

that behalf. Goods would be given a more elegant finish for the sake of

a readier sale, beyond what would conduce to their brute serviceability

simply; smooth-spoken and obsequious salesmen and solicitors, gifted

with a tactful effrontery, have come to be preferred to others, who,

without these merits, may be possessed of all the diligence, dexterity,

and muscular force required in their trade; something is expended on

convincing, not to say vain-glorious, show-windows that shall promise

something more than one would like to commit one's self to in words;

itinerant agents, and the like, are employed at some expense to secure a

clientele; much thought and substance is spent on advertising of many

kinds.

This last-named item may be taken as typical of the present stage of

growth in the production or generation of good-will, and therefore in

the creation of intangible assets. Advertising has come to be an

important branch of business enterprise by itself, and it employs a

large and varied array of material appliances and processes (tangible

assets). Investment is made in certain material items (productive

goods), such as printed matter, billboards, and the like, with a view to

creating a certain body of good-will. The precise magnitude of the

product may not be foreseen, but, if sagaciously made, such investment

rarely fails of the effect aimed at--unless a business rival with even

greater sagacity should out-manoeuver and offset these endeavors with

a superior array of appliances (productive goods) and workmen for the

generation of good-will. The product aimed at, commonly with effect, is

good-will,--an intangible asset,--which may be considered to have been

generated by converting certain tangible assets into this intangible; or

it may be considered as an industrial product, the output of certain

industrial processes in which the given items of material equipment are

employed and give effect to the requisite technological proficiency.

Whichever view be taken of the causal relation between the material

equipment and processes employed, on the one hand, and the output of

good-will, on the other hand, the result is substantially the same for

the purpose in hand.

The ulterior end of the advertising is, it may be said, the sale of an

increased quantity of the advertised articles, at an increased net gain;

which would mean an increased value of the material items offered for

sale; which, in turn, is the same as saying an increase of tangible

assets. It may be assumed without debate that the end of business

endeavor is a gain in final terms of tangible values. But this ulterior

end is, in the case of advertising enterprise, to be gained only by the

intermediate step of a production of an immaterial item of good-will, an

intangible asset.

So the case in illustration shows not only the conversion of tangible

assets (material capital goods, such as printed matter) into intangible

wealth, or, if that formula be preferred, the production of immaterial

wealth by the productive use of material wealth, but also, conversely,

in the second step of the process, it shows the conversion of intangible

assets into tangible wealth (enhanced value of vendible goods), or, if

the expression seems preferable, the production of tangible assets by

the use of intangible wealth.

This creation of tangible wealth out of intangible assets is seen

perhaps at its neatest in the enhancement of land values by the

endeavors of interested parties. Real estate is, of course, a tangible

asset of the most authentic tangibility, and it is an asset to the

amount of its value, which is determined, say, by the figures at which

the real estate in question is currently bought and sold. This is the

current value of the real estate, and therefore its current actual

magnitude as a tangible asset. The value of the real estate might also

be computed by capitalising its rental value; but, where the current

market value does not coincide with the capitalised rental value, the

former must, according to business conceptions, be accepted as the

actual value. In many parts of this country, perhaps in most, but

particularly in the Western States and in the neighborhood of

flourishing towns, these two methods of rating the pecuniary magnitude

of real estate will habitually not coincide. Due allowance, often very

considerable, being made, the capitalised rental value of the land may

be taken as measuring its current serviceability as an item of material

equipment; while the amount by which the market value of the land

exceeds its capitalised rental value may be taken as the product, the

tangible residue, of an intangible asset of the nature of good-will,

turned to account, or "productively employed," in behalf of this parcel

of land.[8]

Some of the lands of California may be taken as a very good, though

perhaps not an extreme, example of such a creation of real estate by

spiritual instrumentalities. It is probably well within the mark to say

that some of these lands owe not more than one-half their current market

value to their current serviceability as an instrument of production or

use. The excess may be attributable to illusions touching the chances of

future sale, to anticipation of a prospective enhanced usefulness, and

the like; but all these are immaterial factors, of the nature of

good-will. Like other assets, these lands are capitalised on the basis

of the anticipated income from them, part of which income is anticipated

from profitable sales to persons who, it is hoped, will be persuaded to

take a very sanguine view of the land situation, while part of it may be

due to over-sanguine anticipations of usefulness generated by the

advertising matter and the efforts of the land agents directed to what

is called "developing the country."

To any one preoccupied with the conceit that "capital" means "capital

goods" such a conversion of intangible into tangible goods, or such a

generation of intangible assets by the productive use of tangible

assets, might be something of a puzzle. If "assets" were a physical

concept, covering a range of physical things, instead of a pecuniary

concept, such conversion of tangible into intangible assets, and

conversely, would be a case of transubstantiation. But there is nothing

miraculous in the matter. "Assets" are a pecuniary magnitude, and belong

among the facts of investment. Except in relation to investment the

items of wealth involved are not assets. In other words, assets are a

matter of capitalisation, which is a special case of valuation; and the

question of tangibility or intangibility as regards a given parcel of

assets is a question of what article or class of articles the valuation

shall attach to or be imputed to. If, _e.g._, the fact to which value is

imputed in the valuation is the habitual demand for a given article of

merchandise, or the habitual resort of a given group of customers to a

particular shop or merchant, or a monopolistic control or limitation of

price and supply, then the resulting item of assets will be

"intangible," since the object to which the capitalised value in

question is imputed is an immaterial object. If the fact which is by

imputation made the bearer of the capitalised value is a material

object, as, _e.g._, the merchantable goods of which the supply is

arbitrarily limited or the price arbitrarily fixed, or if it is the

material means of supplying such goods, then the capitalised value in

question is a case of tangible assets. The value involved is, like all

value, a matter of imputation, and as assets it is a matter of

capitalisation; but capitalisation is an appraisement of a pecuniary

"income-stream" in terms of the vendible objects to the ownership of

which the income is assumed to inure. To what object the capitalised

value of the "income-stream" shall be imputed is a question of what

object of ownership secures to the owner an effectual claim on this

"income-stream "; that is to say, it is a question of what object of

ownership the strategic advantages is assumed to attach to, which is a

question of the play of business exigencies in the given case.

The "income-stream" in question is a pecuniary income-stream, and is in

the last resort traceable to transactions of sale. Within the confines

of business--and therefore within the scope of capital, investments,

assets, and the like business concepts--transactions of purchase and

sale are the final terms of any analysis. But beyond these confines,

comprehending and conditioning the business system, lie the material

facts of the community's work and livelihood. In the final transaction

of sale the merchantable goods are valued by the consumer, not as

assets, but as livelihood;[9] and in the last analysis and long run it

is to some such transaction that all business imputations of value and

capitalistic appraisement of assets must have regard and by which they

must finally be checked. Dissociated from the facts of work and

livelihood, therefore, assets cease to be assets; but this does not

preclude their relation to these facts of work and livelihood being at

times somewhat remote and loose.

Without recourse, immediately or remotely, to certain material facts of

industrial process and equipment, assets would not yield earnings; that

is to say, wholly disjoined from these material facts, they would in

effect not be assets. This is true for both tangible and intangible

assets, although the relation of the assets to the material facts of

industry is not the same in the two cases. The case of tangible assets

needs no argument. Intangible assets, such as patent right or

monopolistic control, are likewise of no effect except in effectual

contact with industrial facts. The patent right becomes effective for

the purpose only in the material working of the innovation covered by

it; and monopolistic control is a source of gain only in so far as it

effectually modifies or divides the supply of goods.

In the light of these considerations it seems feasible to indicate both

the congruence and the distinction between the two categories of assets

a little more narrowly than was done above. Both are assets,--that is to

say, both are values determined by a capitalisation of anticipated

income-yielding capacity; both depend for their income-yielding capacity

on the preferential use of certain immaterial factors; both depend for

their efficiency on the use of certain material objects; both may

increase or decrease, as assets, apart from any increase or decrease of

the material objects involved. The tangible assets capitalise the

preferential use of technological, industrial expedients,--expedients of

production, dealing with the facts of brute nature under the laws of

physical cause and effect,--this preferential use being secured by the

ownership of material articles employed in the processes in which these

expedients are put into effect. The intangible assets capitalise the

preferential use of certain facts of human nature--habits, propensities,

beliefs, aspirations, necessities--to be dealt with under the

psychological laws of human motivation; this preferential use being

secured by custom, as in the case of old-fashioned good-will, by legal

assignment, as in patent or copyright, by ownership of the instruments

of production, as in the case of industrial monopolies.[10]

* * * * *

Intangible assets are capital as well as tangible assets; that is to

say, they are items of capitalised wealth. Both categories of assets,

therefore, represent expected "income-streams" which are of such

definite character as to admit of their being rated in set terms per

cent. per time unit; although the expected income need not therefore be

anticipated to come in an even flow or to be distributed in any equable

manner over a period of time. The income-streams to be so rated and

capitalised are associated in such a manner with some external fact

(impersonal to their claimant), whether material or immaterial, as to

permit their being traced or attributed to an income-yielding capacity

on the part of this external fact, to which their valuation as a whole

may be imputed and which may then be capitalised as an item of wealth

yielding this income-stream. Income-streams which do not meet these

requirements do not give rise to assets in the accepted sense of the

term, and so do not swell the volume of capitalised wealth.

There are income-streams which do not meet the necessary specifications

of capitalisable wealth; and in modern business traffic, particularly,

there are large and secure sources of income that are in this way not

capitalisable and yet yield a legitimate business income. Such are,

indeed, to be rated among the most consequential factors in the current

business situation. Under the guidance of traditions carried over from a

more primitive business situation, it has been usual to speak of

income-streams derived in such a manner as "wages of superintendence,"

or "undertaker's wages," or "entrepreneur's profits," or, latterly, as

"profits" simply and specifically. Such phenomena of this class as are

of consequence in business are commonly accounted for, theoretically,

under this head; and the effort so to account for them is to be taken

as, at least, a laudable endeavor to avoid an undue multiplication of

technical terms and categories.[11] Yet the most striking phenomena of

this class, and the most consequential for modern business and industry,

both in respect of their magnitude and in respect of the pecuniary

dominion and discretion which they represent, cannot well be accounted

undertaker's gains, in the ordinary sense of that term. The great gains

of the great industrial financiers or of the great "interests," _e.g._,

do not answer the description of undertaker's gains, in that they do not

accrue to the captain of industry on the basis of his "managerial

ability" alone, apart from his wealth or out of relation to his wealth;

and yet it is not safe to say that such gains (which are over and above

ordinary returns on his investments) accrue on the ground of the

requisite amount of wealth alone, apart from the exercise of a large

business direction on the part of the owner of such wealth, or on the

part of his agent to whom discretion has been delegated. Administrative,

or strategic, discretion and activity must necessarily be present in the

case: otherwise, the income in question would rightly be rated as income

from capital simply.

The captain of industry, the pecuniary magnate, is normally in receipt

of income in excess of the ordinary rate per cent. on investment; but

apart from his large holdings he is not in a position to get these large

gains. Dissociated from his large holdings, he is not a large captain of

industry; but it is not the size of his holdings alone that determines

what the gains of the pecuniary magnate in modern industry shall be.

Gains of the kind and magnitude that currently come to this class of

business men come only on condition that the owner (or his agent) shall

exercise a similarly large discretion and control in the affairs of the

business community; but the magnitude of the gains, as well as of the

discretion and control exercised, is somewhat definitely conditioned by

the magnitude of the wealth which gives effect to this discretion.

The disposition of pecuniary forces in such matters may be well seen in

the work and remuneration of any coalition of "interests," such as the

modern business community has become familiar with. The "interests" in

such a case are of a personal character,--they are "interested

parties,"--and the sagacity, experience, and animus of these various

interested parties counts in the outcome, both as regards the aggregate

gains of the coalition and as regards the distribution of these gains

among the several parties in interest; but the weight of any given

"interest" in a coalition or "system" is more nearly proportioned to the

wealth controlled by the given "interest," and to the strategic position

of such wealth, than to any personal talents or proficiency of the

"interested party." The talents and proficiency involved are not the

main facts. Indeed, the movements of such a "system," and of the several

component "interests," are largely a matter of artless routine, in which

the greatest ingenuity and initiative engaged in the premises are

commonly exercised by the legal counsel working for a fee.

A dispassionate student of the current business traffic, who is not

overawed by round numbers, will be more impressed by the ease and

simplicity of the manoeuvers that lead to large pecuniary results in the

higher business finance than by any evidence of preeminent sagacity and

initiative among the pecuniary magnates. One need only call to mind the

simple and obvious way in which the promoters of the Steel Corporation

were magnificently checkmated by the financiers of the Carnegie

"interest," when that great and reluctant corporation was floated, or

the pettyfogging tactics of Standard Oil in its later career. In

extenuation of their visible lack of initiative and insight it may not

be ungraceful to call to mind that many of the discretionary heads of

the great "interests" are men of advanced years, and that in the nature

of the case the pecuniary magnates of the present generation must

commonly be men of a somewhat advanced age; and it is only during the

present generation that the existing situation has arisen, with its

characteristic opportunities and demands. To take their present foremost

rank in the new business finance which is here under inquiry, they have

had to accumulate the great wealth on which alone their discretionary

control of business affairs rests, and their best vigor has been spent

in this work of preparation; so that they have commonly attained the

requisite strategic position only after they had outlived their "years

of discretion."

But there is no intention here to depreciate the work of the pecuniary

magnates or the spokesmen of the great "interests." The matter has been

referred to only as it bears on this category of capitalistic income

which accrues on other grounds than the "earning-capacity" of the assets

involved, and which still cannot be imputed to the "earning-capacity" of

these business men apart from these assets. The case is evidently not

one of "wages of superintendence" or "undertaker's profits"; but it is

as evidently not a case of the earning-capacity of the assets. The proof

of the latter point is quite as easy as of the former. If the gains of

the "system" or of its constituent "interests" and magnates were

imputable to the earning-capacity of the assets involved,--in any

accepted sense of "earnings,"--then it would immediately follow that

these assets would be recapitalised on the basis of these extraordinary

earnings, and that the income derived in this class of traffic should

reappear as interest or dividends on the capital so increased to

correspond with the increased earnings. But such recapitalisation takes

place only to a relatively very limited extent, and the question then

bears on the income which is not so accounted for in the

recapitalisation.

The gains of this class of traffic are, of course, themselves

capitalised,--for the most part they accrue in the capitalised form, as

issues of securities and the like; but the sources of this income are

not capitalised as such. The (large) accumulated wealth, or assets,

which gives weight to the movements of the "interests" and magnates in

question, and which affords the ground for the discretionary control of

business affairs exercised by them, are, for the most part at least,

invested in ordinary business ventures, in the form of corporation

securities and the like, and are there earning dividends or interest at

current rates; and these assets are valued in the market (and thereby

capitalised) on the basis of their current earnings in the various

enterprises in which they are so invested. But their being so invested

in profitable business enterprises does not in the least hinder their

usefulness in the hands of the magnates as a basis or means of carrying

on the large and highly profitable transactions of the higher industrial

finance. To impute these gains to these assets as "earnings," therefore,

would be to count the assets twice as capital, or rather to count them

over and over.

An additional perplexity in endeavoring to handle gains of this class

theoretically as earnings, in the ordinary sense, arises from the fact

that they stand in no definable time relation to their underlying

assets. They have no definable "time-shape," as Mr. Fisher might put

it.[12] Such gains are timeless, in the sense that the time relation

does not count in any substantial manner or in any sensible degree in

their determination.[13]

* * * * *

In a more painstaking statement of this point of theory it would be

necessary to note that these gains are "timeless," in the sense

indicated, in so far as the enterprise from which they accrue is

dissociated from the technological circumstances and processes of

industry, and only in so far. Technological (industrial) procedure,

being of the nature of physical causation, is subject to the time

relation under which causal sequence runs. This is the basis of such

discussions of capital and interest as those of Boehm-Bawerk, and of

Fisher. But business traffic, as distinguished from the processes of

industry, being not immediately concerned with the technological

process, is also not immediately or uniformly subject to the time

relation involved in the causal sequence of the technological process.

Business traffic is subject to the time relation because and in so far

as it depends upon and follows up the processes of production. The

commonplace or old-fashioned business enterprise, the competitive system

of investment in industrial business simply, commonly rests pretty

directly on the due sequence of the industrial processes in which the

investments of such enterprise are placed. Such enterprise, as conceived

by the current theories of capital, does business at first hand in the

industrial efficiency of the community, which is conditioned by the time

relation of the causal sequence, and which is, indeed, in great measure

a function of the time consumed in the technological processes.

Therefore, the gains, as well as the transactions, of such enterprise

are also commonly somewhat closely conditioned by the like time

relation, and they typically emerge under the form of a per-cent. per

time unit; that is to say, as a function of the lapse of time. Yet the

business transactions themselves are not a matter of the lapse of time.

Time is not of the essence of the case. The magnitude of a pecuniary

transaction is not a function of the time consumed in concluding it, nor

are the gains which accrue from the transaction. In business enterprise

on the higher plane, which is here under inquiry, the relation of the

transactions, and of their gains, to the consecution of the

technological processes remotely underlying them is distant, loose, and

uncertain, so that the time element here does not obtrude itself:

rather, it somewhat obviously falls into abeyance, marking the degree of

its remoteness. Yet this phase of business enterprise, like any other,

of course takes place in time; and, it is also to be remarked, the

volume of the traffic and the gains derived from it are, no doubt,

somewhat closely conditioned in the long run by the time relation which

dominates that technological (industrial) efficiency on which this

enterprise, too, ultimately and indirectly rests and from which in the

last resort its gains are finally drawn, however remotely and

indirectly.

An analysis of these phenomena on lines similar to those which have been

followed in the discussion of assets above is not without difficulty,

nor can it fairly be expected to yield any but tentative and provisional

results. The matter has received so little attention from economic

theoreticians that even significant mistakes in this connection are of

very rare occurrence.[14] The cause of this scant attention to these

matters lies, no doubt, in the relative novelty of the facts in

question. The facts may be roughly drawn together under the caption

"Traffic in Vendible Capital"; although that term serves rather as a

comprehensive designation of the class of business enterprise from which

these gains accrue than as an adequate characterisation of the play of

forces involved.[15] Traffic in vendible capital has not been unknown

in the past, but it is only recently that it has come into the

foreground as the most important line of business enterprise. Such it

now is, in that it is in this traffic that the ultimate initiative and

discretion in business are now to be found. It is at the same time the

most gainful of business enterprise, not only in absolute terms, but

relatively to the magnitude of the assets involved as well. One reason

for this superior gainfulness is the fact that the assets involved in

this traffic are at the same time engaged as assets to their full extent

in ordinary business, so that the peculiar gains of this traffic are of

the nature of a bonus above the earnings of the invested wealth. "It is

like finding money."

As was said above, the method, or the ways and means, characteristic of

this superior business enterprise is a traffic in vendible capital. The

wealth gained in this field is commonly in the capitalised form, and

constitutes in each transaction, or "deal," a deduction or abstraction

from the capitalised wealth of the business community in favor of the

magnates or "interests" to whom the gains accrue. Its proximate aim is a

transfer of capitalised wealth from other capitalists to those who so

gain. This transfer or abstraction of capitalised wealth from the former

owners is commonly effected by an augmentation of the nominal capital,

based on a (transient) advantage inuring to the particular concerns

whose capitalisation is so augmented.[16] Any such increase of the

community's aggregate capitalisation, without a corresponding increase

of the material wealth on which the capitalisation is based, involves,

of course, in effect a redistribution of the aggregate capitalised

wealth; and in this redistribution the great financiers are in a

position to gain. The gains in question, it will be seen, come out of

the business community, out of invested wealth, and only remotely and

indirectly out of the community at large from which the business

community draws its income. These gains, therefore, are a tax on

commonplace business enterprise, in much the same manner and with much

the like effects as the gains of commonplace business (ordinary profits

and interest) are a tax on industry.[17]

In a manner analogous to the old-fashioned capitalist-employer's

engrossing of the industrial community's technological efficiency does

the modern pecuniary magnate engross the business community's

capitalistic efficiency. This capitalistic efficiency lies in the

capitalist-employer's ability--by force of the ownership of the material

equipment--to induce the industrial community, through suitable

bargaining, to turn over to the owner of the material equipment the

excess of the product above the industrial community's livelihood. The

fortunes of the capitalist-employer are closely dependent on the run of

the market,--the conjunctures of advantageous purchase and sale; and it

is his constant endeavor to create or gain for himself some peculiar

degree of advantage in the market, in the way of monopoly, good-will,

legalised privilege, and the like,--something in the way of intangible

assets. But the pecuniary magnate, in the measure in which he truly

answers to the concept, is superior to the market on which the

capitalist-employer depends, and can make or mar its conjunctures of

advantageous purchase and sale of goods; that is to say, he is in a

position to make or mar any peculiar advantage possessed by the given

capitalist-employer who comes in his way. He does this by force of his

large holdings of capital at large, the weight of which he can shift

from one point of investment to another as the relative

efficiency--earning-capacity--of one and another line of investment may

make it expedient; and at each move of this kind, in so far as it is

effective for his ends, he cuts into and assimilates a fraction of the

invested wealth involved, in that he cuts into and sequesters a fraction

of the capital's earning-capacity in the given line. That is to say, in

the measure in which he is a pecuniary magnate, and not simply a

capitalist-employer, he engrosses the capitalistic efficiency of

invested wealth; he turns to his own account the capitalist-employer's

effectual engrossing of the community's industrial efficiency. He

engrosses the community's pecuniary initiative and proficiency. In the

measure, therefore, in which this relatively new-found serviceability of

extraordinarily large wealth is effective for its peculiar business

function, the old-fashioned capitalist-employer loses his discretionary

initiative and becomes a mediator, an instrumentality of extraction and

transmission, a collector and conveyer of revenue from the community at

large to the pecuniary magnate, who, in the ideal case, should leave him

only such an allowance out of the gross earnings collected and

transmitted as will induce him to continue in business.

To the community at large, whose industrial efficiency is already

virtually engrossed by the capitalist-employer's ownership and control

of the material equipment, this later step in the evolution of the

economic situation should apparently not be a matter of substantial

consequence or a matter for sentimental disturbance. On the face of it,

it should appear to have little more than a speculative interest for

those classes of the community who do not derive an income from

investments; particularly not for the working classes, who own nothing

to speak of and whose only dependence is their technological efficiency,

which has virtually ceased to be their own. But such is not the current

state of sentiment. This inchoate new phase of capitalism, this business

enterprise on the higher plane, is in fact viewed with the most lively

apprehension. In a maze of consternation and solicitude the boldest,

wisest, most public-spirited, most illustrious gentlemen of our time are

spending their manhood in an endeavor to make the hen continue sitting

on the nest after the chickens are out of the shell. The modern

community is imbued with business principles--of the old dispensation.

By precept and example, men have learned that the business interests

(of the authentic superannuated scale and kind) are the palladium

of our civilisation, as Mr. Dooley would say; and it is felt

that any disturbance of the existing pecuniary dominion of the

capitalist-employer--as contrasted with the pecuniary magnate--would

involve the well-being of the community in one common agony of

desolation.

The merits of this perturbation, or of the remedies proposed for saving

the pecuniary life of the old-fashioned capitalist-employer, of course

do not concern the present inquiry; but the matter has been referred to

here as evidence that the pecuniary magnate's work, and the dominion

which his extraordinarily large wealth gives him, are, in effect,

substantially a new phase of the economic development, and that these

phenomena are distastefully unfamiliar and are felt to be consequential

enough to threaten the received institutional structure. That is to

say, it is felt to be a new phase of business enterprise,--distasteful

to those who stand to lose by it.

The basis of this business enterprise on the higher plane is

capital-at-large, as distinguished from capital invested in a given line

of industrial enterprise, and it becomes effective when wealth has

accumulated in holdings sufficiently large to give the holder (or

combination of holders, the "system") a controlling weight in any group

or ramification of business interests into which he may throw his weight

by judicious investment (or by underwriting and the like). The pecuniary

magnate must be able effectually to engross the pecuniary initiative and

the business opportunities on which such a section or ramification of

the business community depends for its ordinary gains. How large a

proportion of the business community's capital is needed for such an

effectual engrossing of its capitalistic efficiency, in any given

bearing, is a question that cannot be answered in anything like absolute

terms, or even in relative terms of a satisfactorily definite kind. It

is, of course, evident that a relatively large disposable body of

capital is needed for such a purpose; and it is also evident, from the

current facts of business, that the body of capital so disposed of need

not amount to a majority, or anything near a majority, of the

investments involved,--at least not at the present relatively inchoate

phase of this larger business enterprise. The larger the holdings of the

magnate, the more effectual and expeditious will be his work of

absorbing the holdings of the smaller capitalist-employer, and the more

precipitately will the latter yield his assets to the new claimant.

Evidently, this work of the pecuniary magnate bears a great resemblance

to the creation of intangible assets under the ordinary competitive

system. This is, no doubt, the point of its nearest relation to the

current capitalistic enterprise. But, as has already been indicated

above, it cannot be said that the magnate's peculiar work is the

creation of intangible, or other assets, although there is commonly some

recapitalisation involved in his manoeuvers, and although his gains

commonly come as assets, _i.e._, in the capitalised form. Nor can it, as

has also been indicated above, be said that the wealth which serves him

as the means of his peculiar enterprise stands in the relation of assets

to this enterprise or to the gains in question, since this wealth

already stands in an exhaustive relation as assets to some corporate

enterprise in ordinary business and to the corresponding items of

interest and dividends. It may, of course, be contended that the present

state of things on this higher plane of enterprise is transient and

transitional only, and that in the settled condition which may

conceivably supervene, the magnate's relation to business at large will

be capitalised in some form of intangible assets, after the manner in

which the monopoly advantage of an ordinary "trust" is now capitalised.

But this is at the best only a surmise, guided by inapplicable

generalisations drawn from a past situation in which this higher

enterprise has not engrossed the pecuniary initiative and played the

ruling part.

FOOTNOTES:

[1] Reprinted by permission from _The Quarterly Journal of Economics_,

Vol. XXIII, Nov., 1908.

[2] See this Journal for August, 1908.

[3] For the connection between prices and prosperity, hard times,

unemployment, etc., see _The Theory of Business Enterprise_, chap. vii

(pp. 185-252, especially 196-212).

[4] By "perversion" is here meant such disposition of the industrial

forces as entails a net waste or detriment to the community's

livelihood.

[5] Should the connection at this point with the main argument of the

paper as set forth in the earlier section seem doubtful or obscure, it

may be called to mind that these dubious enterprises in dissipation are

cases of investment for a profit, and that the "capital goods" engaged

are invested wealth yielding an income, but that they yield an income

only on the fulfillment of two conditions: (_a_) the possession and

employment of these capital goods enables their holder to turn to

account the common stock of technological proficiency, in those bearings

in which it may be of use in his enterprise; and (_b_) the limited

amount of wealth available for the purpose enables their holder to

"engross" the usufruct of such a fraction of the common stock of

technological proficiency, in the degree determined by this limitation

of the amount available. In so far, these enterprises are like any other

industrial enterprise; but beyond this they have the peculiarity that

they do not, or need not, even ostensibly, turn the current knowledge

and use of ways and means to "productive" account for the community at

large, but simply take their stand on the (institutionally sacred)

"accomplished fact" of invested wealth. They have less of the fog of

apology about them than the common run of business enterprise.

[6] This statement may not seem clear without indicating in a more

concrete manner some terms in which to measure the relative differential

advantage and disadvantage which so emerge in such a case of prerogative

or privilege. Where, as in the earlier, non-pecuniary phases of culture,

no price test is applicable, the statement in the text may be taken to

mean that the differential disadvantage at the cost of which the

differential benefit in question is gained is greater than the

beneficiary would be willing to undergo in order to procure this

benefit.

[7] A doubt has been offered as to the applicability of this

characterization to such intangible assets as a patent right and other

items of the same class. The doubt seems to arise from a misapprehension

of the analysis and of its intention. It should be remarked that there

is no intention to condemn or disapprove any of the items here spoken of

as intangible assets. The patent right may be justifiable or it may not:

there is no call to discuss that question here. Other intangible assets

are in the same case in this respect.

Further, as to the character of a patent right considered as an asset.

The invention or innovation covered by the patent right is a

contribution to the common stock of technological proficiency. It may be

(immediately) serviceable to the community at large, or it may

not;--_e.g._, a cash register, a bank-check punch, a streetcar fare

register; a burglar-proof safe, and the like are of no immediate service

to the community at large, but serve only a pecuniary use to their

users. But, whether the innovation is useful or not, the patent right,

as an asset, has no (immediate) usefulness at large, since its essence

is the restriction of the usufruct of the innovation to the patentee.

Immediately and directly the patent right must be considered a detriment

to the community at large, since its purport is to prevent the community

from making use of the patented innovation, whatever may be its ulterior

beneficial effects or its ethical justification.

[8] Neither as a physical magnitude ("land") nor as a pecuniary

magnitude ("real estate") is the capitalised land in question an item of

"good-will"; but its value as real estate--_i.e._, its magnitude as an

asset--is in part a product of the "good-will" (illusions and the like)

worked up in its behalf and turned to account, by the land agent. The

real estate is a tangible asset, an item of material wealth, while the

"good-will" to which in part it owes its magnitude as an item of wealth

is an intangible asset, an item of immaterial wealth.

[9] "Livelihood" is, of course, here taken in a loose sense, not as

denoting the means of subsistence simply or even the means of physical

comfort, but as signifying that the purchases in question are made with

a view to the consumptive use of the goods rather than with a view to

their use for a profit.

[10] The instruments of production so monopolised are, of course,

tangible assets, but the ownership of such means of production in amount

sufficient to enable the owner to monopolise or control the market,

whether for purchase (as of materials or labor) or for sale (as of

marketable goods or services), gives rise to a differential business

advantage which is to be classed as intangible assets.

[11] One writer even goes so far in the endeavor to bring the facts

within the scope of the staple concepts of theory at this point as to

rate the persons concerned in such a case as "capital," after having

satisfied himself that such income-streams are traceable to a personal

source.--See Fisher, _Nature of Capital and Income_, chap. v.

[12] _Cf._ Fisher, _Rate of Interest_, chap. vi.

[13] This conclusion is reached, _e.g._, by Mr. G. P. Watkins (_The

Growth of Large Fortunes_, chap. iii, sec. 10), although through a

curious etymological misapprehension he rejects the term "timeless" as

not available.

[14] Even Mr. Watkins (as cited above), _e.g._, is led by a superficial

generalisation to class these gains as "speculative," and so to excuse

himself from a closer acquaintance with their character and with the

bearings of the class of business enterprise out of which they arise.

[15] _Cf._ _Theory of Business Enterprise_, chap, v, pp. 119-130; chap.

vi, pp. 162-174.

[16] _Cf._ _Theory of Business Enterprise_, footnote on pp. 169-170.

[17] As should be evident from the run of the argument in the earlier

portions of this paper, the use of the words "tax," "deduction,"

"abstraction," in this connection, is not to be taken as implying

approval or disapproval of the phenomena so characterised. The words are

used for want of better terms to indicate the source of business gains,

and objectively to characterise the relation of give-and-take between

industry and ordinary capitalistic business, on the one hand, and

between ordinary business and this business enterprise on the higher

plane, on the other hand.

SOME NEGLECTED POINTS IN THE THEORY OF SOCIALISM[1]

The immediate occasion for the writing of this paper was given by the

publication of Mr. Spencer's essay, "From Freedom to Bondage";[2]

although it is not altogether a criticism of that essay. It is not my

purpose to controvert the position taken by Mr. Spencer as regards the

present feasibility of any socialist scheme. The paper is mainly a

suggestion, offered in the spirit of the disciple, with respect to a

point not adequately covered by Mr. Spencer's discussion, and which has

received but very scanty attention at the hands of any other writer on

either side of the socialist controversy. This main point is as to an

economic ground, as a matter of fact, for the existing unrest that finds

expression in the demands of socialist agitators.

I quote from Mr. Spencer's essay a sentence which does fair justice, so

far as it goes, to the position taken by agitators: "In presence of

obvious improvements, joined with that increase of longevity, which even

alone yields conclusive proof of general amelioration, it is proclaimed,

with increasing vehemence, that things are so bad that society must be

pulled to pieces and reorganised on another plan." The most obtrusive

feature of the change demanded by the advocates of socialism is

governmental control of the industrial activities of society--the

nationalisation of industry. There is also, just at present, a distinct

movement in practice, towards a more extended control of industry by the

government, as Mr. Spencer has pointed out. This movement strengthens

the position of the advocates of a complete nationalisation of industry,

by making it appear that the logic of events is on their side.

In America at least, this movement in the direction of a broader

assertion of the paramount claims of the community, and an extension of

corporate action on part of the community in industrial matters, has not

generally been connected with or based on an adherence to socialistic

dogmas. This is perhaps truer of the recent past than of the immediate

present. The motive of the movement has been, in large part, the

expediency of each particular step taken. Municipal supervision, and,

possibly, complete municipal control, has come to be a necessity in the

case of such industries--mostly of recent growth--as elementary

education, street-lighting, water-supply, etc. Opinions differ widely as

to how far the community should take into its own hands such industries

as concern the common welfare, but the growth of sentiment may fairly be

said to favor a wider scope of governmental control.

But the necessity of some supervision in the interest of the public

extends to industries which are not simply of municipal importance. The

modern development of industry and of the industrial organisation of

society makes it increasingly necessary that certain industries--often

spoken of as "natural monopolies"--should be treated as being of a

semi-public character. And through the action of the same forces a

constantly increasing number of occupations are developing into the form

of "natural monopolies."

The motive of the movement towards corporate action on the part of the

community--State control of industry--has been largely that of

industrial expediency. But another motive has gone with this one, and

has grown more prominent as the popular demands in this direction have

gathered wider support and taken more definite form. The injustice, the

inequality, of the existing system, so far as concerns these natural

monopolies especially, are made much of. There is a distinct unrest

abroad, a discontent with things as they are, and the cry of injustice

is the expression of this more or less widely prevalent discontent. This

discontent is the truly socialistic element in the situation.

It is easy to make too much of this popular unrest. The clamor of the

agitators might be taken to indicate a wider prevalence and a greater

acuteness of popular discontent than actually exists; but after all due

allowance is made for exaggeration on the part of those interested in

the agitation, there can still be no doubt of the presence of a chronic

feeling of dissatisfaction with the working of the existing industrial

system, and a growth of popular sentiment in favor of a leveling policy.

The economic ground of this popular feeling must be found, if we wish to

understand the significance, for our industrial system, of the movement

to which it supplies the motive. If its causes shall appear to be of a

transient character, there is little reason to apprehend a permanent or

radical change of our industrial system as the outcome of the agitation;

while if this popular sentiment is found to be the outgrowth of any of

the essential features of the existing social system, the chances of its

ultimately working a radical change in the system will be much greater.

The explanation offered by Mr. Spencer, that the popular unrest is due

essentially to a feeling of _ennui_--to a desire for a change of posture

on part of the social body, is assuredly not to be summarily rejected;

but the analogy will hardly serve to explain the sentiment away. This

may be a cause, but it can hardly be accepted as a sufficient cause.