But the simple and well-known fact is that increasing applications of labor and capital to the same land do not yield constant returns, much less increasing returns. Instead of 200 units of labor yielding 2000 units of product on Grade A, and 300 units of labor yielding 3000 units of product, it is more likely that 200 units of labor would yield 1800 units of product, and 300 units of labor 2400 units of product, or some such quantity. If that were the case, it would be better to take Grades B and C into cultivation rather than to put all the increasing labor supply onto Grade A. Unless something like this rate of diminution in the returns should result, the inferior grades would never come into use at all.

The value of land to the community. Thus far we have been considering the differences in the productivity of different grades of land as the reason why rent is paid and the factor which determines how much rent is paid for land of a given grade. Another way of viewing it, which leads to the same result, is to consider how much better off the community is when a given piece of land is in cultivation than when it is not. If there is an abundance of uncultivated land in every way as good, location and everything considered, as the piece of land in question, the only result of withdrawing it from cultivation would be to bring into cultivation an equal quantity of other land. In such a case the community loses nothing when it is withdrawn from cultivation, nor would it gain anything if it were brought back into cultivation. There being more land of this grade than can be cultivated, some labor must be withdrawn from other land when this piece of land is cultivated.

If, however, there is a scarcity of land of the grade of the piece of land in question, there is certain to be a decrease in the total production of the community if it is withdrawn from cultivation, and an increase when it is brought back into cultivation. If it is withdrawn from cultivation, the labor and tools which were used in cultivating it must now find employment

on other land. If it goes onto poorer land, such as has been hitherto uncultivated, its product will be less. The production of the community is decreased by the amount of the difference between the product on the piece of land in question and the product on the poorer land. If the labor and tools go onto land which is already under cultivation, it merely adds to the number of laborers and tools already on that land, and carries the margin of cultivation a little farther. It will add something to the product from that land, but not an amount equal to the total product formerly produced on the land which is now thrown out of cultivation. The difference between the total amount produced on the land now thrown out of cultivation and the amount which the labor and tools could add to the product from other land measures the loss to the community when the piece of land in question is thrown out of cultivation, and the corresponding gain when it is brought back into cultivation. This difference, however, corresponds to the rent of the land.

The law of rent. The rent of a piece of land, therefore, is determined by the difference between what can normally be produced upon it and what an equal amount of labor and capital can produce in less advantageous positions still open to them. These less advantageous positions may be found either by going onto the inferior lands still uncultivated or by crowding onto land already cultivated.

CHAPTER XXXV

THE SOURCE OF 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 is where a definite sum of value, represented usually by money, is loaned 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 the 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 money is 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 purchases 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 lender 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 commonly called rent rather than interest, and there are some reasons for this custom. In the first place, the sum which is paid in the form of money for the use of a group of material objects cannot be reduced to a percentage basis until those objects 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 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 to say that he is paying 5 per cent interest.. The chief reason for calling it interest is that economists have formed the 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 interest 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.

In the third place, 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, loaned his capital at interest, and hired out at a salary as a superintendent.

Interest, therefore, as it is generally defined, includes that which the owner receives for the use of a fund of purchasing power which he transfers to a borrower; that which he receives for the use of a mass of material goods, buildings, tools, equipments, etc. which he permits the borrower to use for a stated period; and that which he receives in return for the capital