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The next step in industrial progress was to make this individual surplus serve as a means of social progress. This was accomplished by the development of free competition. By encouraging a man who had accumulated or inherited resources to use them in a far-sighted manner, society gained the fullest advantage from those resources. Even if such an individual made a large profit the gain which accrued to him as an individual was but a small fraction of that which accrued to society as a whole. If society would have the gain, it was forced to allow the profit. Any departure from traditional methods involved large risks to him who first attempted it; and society could not expect the capitalist to take large risks without the chance of considerable profits. The man whose land improvements had turned out well was allowed by our system of land tenure a monopoly of the location which he had developed. The man whose methods had turned out well was allowed by our system of patent right a monopoly of the process he had exploited. The profit in either case accrued to him as a capitalist. history of land tenure makes this point extremely clear. In the passage from the twelfth to the sixteenth century in England, we can trace the change from a feudal rent paid to a political authority for security, to an economic rent paid to a capitalist for permanent improvements. The amount of rent in the particular case might not, and did not always, correspond to the cost of the improvements; but the system of industrial rent was developed for the sake of those improvements, and rent in the aggregate may fairly be regarded as the price paid for the improvements as a whole.

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We have thus far traced the effect of private property as a stimulus for the saving of capital, and of profits or rent as a stimulus for its utilization. But we have not yet touched upon the causes which led to the recognition of interest. If the view of this paper is correct it was developed not as a stimulus for the saving or the investment of capital, so much as for promoting the natural selection of the fittest employers

and the best processes. And this system of natural selection constitutes the third and last step in the development of the modern industrial order.

In any large investment there are two classes of interests, represented roughly, by the stockholders and the bondholders of a railroad. The former class wants control; it is willing to take risks and pay for them for the sake of contingent profits. The latter class wants security and fixity of returns; for the sake of this it is willing to delegate control and to abandon possible chances of large gain. The modern system of interest is nothing more than the recognition of these two classes of investors and their mutual relations. Interest results from a contract between two capitalists uniting in a common enterprise. It is a sum paid by one investor to another investor-out of capital, if necessity shall require. If the borrower has not capital enough to cover such contingent necessity, the contract is one of insurance or of fraud-more commonly the latter. This is exemplified in those cases where railroad stock is nearly all water, or where a merchant uses his credit in operations whose risk is beyond the amount of his own personal possessions.

It is a further essential of interest, as a system, that lender and borrower shall invest their resources. Where interest is offered in connection with other objects than investment, as in the case of a pawnbroker's shop, the transaction does not command public approval and is stigmatized as usury. was because medieval interest transactions were for purposes other than investment that they were discountenanced by public opinion and prohibited by canon law. When there was a demand for capital for investment, it did not take long for the canonists to invent theories of lucrum cessans which made their traditional prohibitions nearly void.

If this view is correct interest from the standpoint of the borrower is the price paid for the control of industry. Capital gives its possessor the right to direct the productive forces of society and take the speculative risks in so doing.

When some of those who unite in an investment are anxious to do this, and others are not, the former stand ready to offer the latter a price for such rights of control and speculation. Such a price, let it be repeated, cannot be offered by the man without capital to the capitalist. A man must have some capital to be able to furnish the guarantee of repayment. It is paid by one capitalist for the sake of controlling another man's capital. It enables the enterprising men to get the direction of a larger amount of productive power than would otherwise be possible. If their methods are good it contributes to the more speedy adoption of these methods; if they are bad it contributes to the more speedy elimination from the ranks of the capitalists of the men who make such mistakes. The institution of interest is like that of jointstock companies in giving men control of larger capital than they themselves own; while, unlike a joint-stock company, it automatically eliminates men from control when they make serious mistakes. At any rate that is theoretically true. In practice it too often happens that the money is borrowed by men who cannot really furnish the security and are handling other people's capital with little risk to themselves. In such cases the institution of interest is extremely bad. The bondholder in a railroad whose stock is heavily watered, often takes the real risks, with none of the rights of control possessed by a stockholder. The board of directors under such circumstances has every temptation to misuse its powers; and when the directors have made all the money possible at the expense of those who have trusted them, they withdraw with their profits to repeat the same operations in another field. Unless law and public sentiment are in some respects better than we find them in America to-day, the system of interest may tend to the aggrandizement rather than the elimination of those who waste society's capital.

Interest, from the standpoint of the man who offers it, is a payment for control-for the right to speculate, if we can dissociate this term from the odium which attaches to it—

countenanced by society as a means of getting its capital progressively managed. But what of the man who receives interest? Interest from his standpoint is commuted profits, or even commuted rent-using these words as Adam Smith did, in their concrete commercial sense, rather than their abstract economic one. Let me repeat the phrase, for it represents a conception rather unfamiliar to modern economics. Interest in one of its most important phases is commuted rent. A group of investors develop a farm or mine, build a factory or a railroad. They expect the average value of the annual output to be in excess of its current cost. This excess is rent or profits in the sense used by Adam Smith. The two terms are not clearly distinguishable, but rent is in general the permanent return due to foresight in an investment, and profit the more temporary return due to skill in its management. Now some of the investors prefer to take the chances of what that rent or profit will be; others prefer to commute those chances for a fixed annual payment. The latter receive interest; the former pay it. Society wishes to encourage both classes of investors and therefore allows such payments. It not merely gives the investor control of industries but allows him to dispose of such control, with its attendant chances, for the sake of a commuted return of fixed amount.

What is it that fixes the amount of this return and determines the rate at which profits shall be commuted? It was in answering this question that Ricardo introduced his chief modifications of Adam Smith's views, and developed an important truth to a further limit than the facts perhaps warranted.

Ricardo saw the fallacy in Smith's assumption of a "current rate of rent" as an element in the price of products. He saw that ground-rent was in large measure a consequence rather than a cause of price; that the land bears rent because of the price of wheat, instead of wheat bearing a price because of the rent of land. He separated what Smith had called. rent into two parts, rent proper, and interest; one of which

was a consequence of price, the other a cause of it. The same analysis which Ricardo applied to rent has been applied by modern economists to profits also. The current economic thought of the day regards cost as composed of two elements, wages and interest. The price of a product, it is said, must cover these two things; in cases when it more than covers them, it leaves a surplus in the form of rent or profits. Neither rent nor profit represents a current rate of payment for anything but a differential gain.

This is true enough of rent and profit; but we doubt whether the distinction between these elements and the element of interest is anywhere nearly so sharp as many economists are disposed to make it. Why, it may be asked, do we regard interest as a necessary part of the cost of production while rent or profit is not? Partly because capital represents stored-up labor in distinction from natural resources or abilities, so that the use of capital in production may be regarded as labor-cost indirectly applied; partly because capital is competitive and can find profitable employment in any one of a variety of lines, while land or natural abilities have a monopoly under some circumstances, and no use whatever under others. The last distinction is much the more important one; indeed, under current theories of value, the only one of any special account. Under this view, interest differs from profits because a man with capital can get a return in any one of an indefinite number of lines, while a man with land or brains must use them for what they are specially adapted. We may conceive the orthodox economist to say, "Grant, if you please, that interest is commuted rent; nevertheless, the amount of rent is fixed by the circumstances of the particular industry or locality, while the rate of commutation is fixed by conditions affecting all industries and all localities. Interest is fixed by the demand and supply of loans. The demand is doubtless due to expected profits or expected rent in particular lines; but the supply is limited only by general conditions, which establish

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