It is frequently asserted, on the basis of this reasoning, that even rent is not a factor in determining price. In discussions of this topic two distinct questions have been stated, and the disputants have not always had the same question in mind. One question is, Would prices be any lower if landlords would remit rent? The rather obvious answer is No, but rent is not annihilated when landowners remit it. The rent still exists, but the tenants get it (or someone else); and there is no reason why the prices should be lower when one set of men gets rent than they would be if the rent went to another set of men. If the owner of a farm were to make a gift of it to his tenant, it is not probable that the tenant would sell his products any cheaper; and if all owners made gifts to all tenants, there is no reason to think that the tenants would voluntarily reduce prices or that the market conditions would be so changed as to compel them to reduce prices.

Quite a different question, however, is, Would prices be the same if conditions were such that land yielded no rent? If there were so much land of the best grade as to enable the community to supply its needs without making use of secondgrade or third-grade land, obviously the conditions of production would be more favorable than when it is compelled to make use of poorer grades. A given quantity of labor and capital when applied to land of the best grade will produce more than when it is divided among the second, third, and fourth grades. Products would then be more abundant and the price of farm products in terms of other goods would probably be lower.

CHAPTER XXXVIII

THE DESIRABILITY OF CAPITAL AND ITS RELATION TO INTEREST

What is interest? One of the most difficult and elusive of all problems in economics is that of the interest of capital. Interest may be defined as the income which goes to the owner of capital, whether he uses it in his own business or lends it to somebody else. This income may take any one of several forms. The most common and clearly understood form occurs where a definite sum of value, represented usually by money, is lent by the owner to someone else. The borrower, in return for the loan, eventually pays back not only the principal but a stated sum or percentage of the principal year by year. The transfer of purchasing power from the lender to the borrower, however, does not necessarily take the form of money. It may be rather a claim upon some credit institution for money, as when the lender gives the borrower a check on a bank. The borrower then deposits this check in his own bank and proceeds to draw his own checks against this deposit. In a case of this kind no tangible money is personally transferred, and the borrower may not even see or handle any money. Nevertheless, there has been transferred to the borrower purchasing power in the form of a claim upon the bank for money. But the purpose of the borrower was not ultimately to secure money. Money is to him only a means of purchasing something which he really wants, and if he can make the purchase without actually handling the money-by handling credit instruments instead, or claims upon a bank for money-his purpose is answered just as well. Aristotle pointed out long ago that money serves merely as a claim upon society for a share of the general

fund of wealth in its possession. A credit instrument is only a more highly evolved claim of the same kind.

In the second place, the capitalist may transfer to the borrower not purchasing power but the material goods which the borrower desires and which he would buy if he were given the purchasing power; that is, the capitalist may transfer to the borrower specific pieces of capital, such as buildings and machinery, allowing the borrower the use of these pieces of capital for a definite period of time. At the end of the time they are of course to be returned to the lender. Meanwhile a definite sum is to be paid at stated periods for their use. This sum is in popular language frequently called rent rather than interest. The chief reason for calling it rent is that the sum which is paid in the form of money for the use of a group of material objects cannot be called a percentage of those objects, at least not until they are evaluated and their quantities stated in terms of value. Suppose that the agreement was to pay five thousand dollars a year for a certain group of buildings and a mass of tools and equipment. The five thousand dollars a year is not a percentage of the group of buildings. If, however, the buildings are appraised and their value is stated as one hundred thousand dollars, then it is possible to reduce the annual payment for their use to a percentage basis. It might then be said that the borrower was paying 5 per cent on the sum borrowed. Unless the transaction takes this form it is more convenient to say that he is paying five thousand dollars rent than that he is paying 5 per cent interest. The chief reason for calling it interest is that economists have formed the habit (and there are reasons for this habit) of speaking of rent as that which is paid for the use of land, and of interest as that which is paid for the use of capital. Since the buildings and the equipment are capital rather than land, that which is paid for their use would have to be called interest, unless we change the definition of interest.

Distinction between rent and interest. There seem to be some very important reasons for distinguishing between rent and in

terest in this way. Land is a natural resource; it is not the product of human foresight or of human industry. Buildings, tools, equipment, etc. are the products of foresight, enterprise, and industry. That which the landowner receives as rent for his land he receives because he has come into the possession of a natural agent which neither he nor anyone else produced; that which the owner receives for the use of buildings, tools, and equipment he receives for something which he either produced or paid someone else for producing. There seems, therefore, to be a wider difference between that which is paid for the use of buildings, tools, and equipment and that which is paid for the use of land than there is between that which is paid for borrowed money and that which is paid for buildings, tools, and equipment. In this discussion, therefore, we shall adhere to the distinction between rent and interest which nearly all standard books on economics have followed.

Distinction between interest and profits. The income of the capitalist may be secured from the use of capital in his own. business. This, however, is sometimes difficult to distinguish from profits. Economists generally distinguish between interest and profits in this way: the business man who has his own capital invested in his business is allowed the current rate of interest on that investment; if he labors or puts in his time supervising the business, he is also allowed a salary or wages of superintendence; if he has anything left over after allowing himself interest and wages, this surplus is called profit or profits. If he has not been particularly successful the profits may be negative; in other words, he may incur a loss. That means that his total income may not be as great as it would have been if he had gone out of business, lent his capital at interest, and hired himself out at a salary as a superintendent.

Interest, therefore, as it is generally defined, includes, first, that which the owner receives for the use of a fund of purchasing power which he transfers to a borrower; second, that which he receives for the use of a mass of material goods-buildings, tools, equipment, etc.—which he permits the borrower to use

for a stated period; and, third, that which he receives in return for the capital which he owns and which he uses or has invested in his own business. Care must be taken, in considering these various forms of interest, not to include too much. That which the lender of a fund of purchasing power receives in excess of the amount necessary to preserve the fund intact is interest, and that alone. If any insurance is involved, this must be deducted from the total amount received. Some very hazardous investments appear to pay very high rates of interest. This may be called gross interest, only a part of it being net interest, the remainder being payments for risk and akin to profits rather than interest. Again, when equipment itself is lent, rather than a fund of purchasing power, allowance must be made for deterioration. Unless the capitalist maintains the quantity of his capital intact and receives a surplus in addition to this he has not received interest. It might easily happen that a part of the five thousand dollars received for the buildings, tools, and equipment in the above illustration was necessary to keep the buildings in repair and to recoup the owner for the necessary deterioration. In short, interest is the amount which the owner of capital receives over and above the sum necessary to maintain the original quantity of his capital.

Why is interest paid? The problem of interest thus defined divides itself into two parts: first, why is interest paid? second, what determines the rate of interest? One answer to the first question is that capital is productive. This could apply only to what we have defined as productive as opposed to acquisitive capital. That any kind of capital is productive has sometimes been called in question. Something depends upon the meaning of the word "productive." No one has challenged the proposition that tools are useful. Those who assert that capital is productive mean absolutely nothing more than this. Those who deny the productivity of capital invariably have some other definition of the word "productive" in mind, and there is not much to be gained by quibbling over the use of words.