This statement of the case rests upon a discrimination between profit and profit. Profit is a coat of many colors. Some profit promotes welfare; some profit subverts welfare. Changing institutions, changing codes of ethics, changing trade customs, changing market rules, changing concepts of professional conduct, changing personnel in the leadership of industry, all of these factors tend to make profit more promotive and less subversive of welfare. This is the line of evolution in profit behavior. This is the direction of progress.

Conclusion. The foregoing discussion is not to be taken as a defense of capitalism. It is not conceived in a spirit of defense of any particular form of economic society. Nor is it offered as in any way a refutation of the attacks of socialism. It is unsafe even to claim that one is scientific in method when such broad generalizations are being dealt with. But it is safe, and scientific as well, to apply a purely objective analysis to modes of behavior. Behavior with respect to the profit motive is an objective phenomenon. Viewing such an objective fact in light of what we know of psychology, history, and anthropology, we are bound to face the evolutionary character of profit behavior. The modes of behavior can and do change. This declaration above all others we can make bold to emphasize. This objective view of the processes of history in the field of profit making is indispensable to a realistic analysis of all propositions set forth by reformers and conservatives. It is the nugget of fact which underlies heresies as well as orthodoxies. No matter what opinions, creeds, and dogmas one may be drawn towards, this evolutionary aspect of profit behavior should be held in the forefront of reflection.

BIBLIOGRAPHY

EPSTEIN, R. C., System, October, 1924, p. 420 ff., and November, 1924, p. 565 ff.

FOSTER, W. T., Profit.

KING, W. I., Employment, Hours, and Earnings in Prosperity and Depression. KNIGHT, F. H., Risk, Uncertainty and Profit.

MARSHALL, ALFRED, Principles of Economics, edition of 1898, p. 397 ff.

NATIONAL BUREAU OF ECONOMIC RESEARCH, Income in the United States, Volumes I-II.

SEAGER, H. R., Principles of Economics, Chapters XI, XII.

SECRIST, H. L., Northwestern University Studies of Retail Clothing, especially Series II, Bulletin No. 9.

TAYLOR, F. M., Principles of Economics, Chapter XXXI.

VEBLEN, T., The Engineers and the Price System.

- The Theory of Business Enterprise.

CHAPTER XIV

PRINCIPLES OF CAPITAL AND INTEREST

Some Definitions and Distinctions.-Capital refers to that part of production which is not currently consumed. This excess of production over consumption accumulates over the years, and in spite of losses, wastage and depreciation, forms a growing stock of wealth. One form of capital is producers' goods, which includes all goods used in the production of further wealth, as for example, tools, machinery, buildings, railroads, raw materials. Another form of capital is durable consumers' goods, which includes all goods designed for consumption but which yield their uses to consumers only over a prolonged period of time, as for example, houses, automobiles, furniture. The economic system is characterized by a large equipment both of producers' goods and of durable consumers' goods, and it is this equipment which makes up the national stock of capital.

Interest is the price paid for the use of capital. Although interest is commonly quoted as a per cent or rate, this custom should not obscure the fact that interest is a price. As a price, interest is subject to certain influences of supply and demand, and under these market influences undergoes fluctuations and shows trends and movements in the same manner as any other price. Discount is a special form of interest, the chief distinction being that discount is interest deducted from the principal of the loan in advance, whereas interest proper is added to the principal at maturity.

In the everyday thought of the business man, capital is synonymous with money. The business man borrows money, figures interest as a rate on money, considers money "easy" when rates are low on the "money market" and "tight" when rates are high, and finally thinks of the borrowed money or credit as his business "capital." On second thought, however, it must be obvious that the real motive of the loan is not the money as an end in itself, but the money as a means of purchasing power over goods or property to be used in the conduct of business. What is actually borrowed is purchasing power over capital goods, and the amount of the money loan is gauged according to the amount of goods, services, and property which the business man requires for the furtherance of his productive enterprise. Clearly, then, if the money supply of a country were doubled, but there were no increase in the supply of those forms of property which are classed as capital, the mere money increase would not signify at all a capital increase. Much

confusion of thought can be avoided by keeping steadily in mind the distinction between dollars and capital goods.

Capital may be further classified as fixed and circulating. Fixed capital includes goods which are in more or less permanent forms, such as machinery, buildings, railroads. They are represented in the investment market by bonds, stocks, or mortgages. They require long-time loans and investments, and it is the banking function particularly of savings banks, insurance companies, and investment banks to accumulate the savings of the people seeking long-term investments. Within recent years the commercial banks themselves have stepped outside their strictly short-term commercial credit field and have directed a considerable part of their funds toward the investment market. Circulating capital differs from fixed capital. Circulating capital includes goods which are still in the process of production or distribution. It refers to raw materials, goods in the process of manufacture, consumers' goods which are in the hands of dealers. The whole mass of current materials in process of being mined, or transported, or manufactured, or marketed belongs to circulating capital. Loans to give purchasing power over such current capital come chiefly through the commercial banks of the country. Other terms often applied to this form of capital are "floating capital, "working capital," "liquid capital," and "commercial capital." Commercial loans are short-term loans, thirty, sixty, or ninety-day advances and three to six-months loans being common.

A manufacturer borrows funds to buy certain raw materials and finance the operation of his factory. At the end of three months he has sold the finished product to a dealer, and the payment from the dealer supplies him with funds wherewith to meet his loan at the bank. The dealer, we will assume, borrows from his bank in order to pay for the goods. As soon as he can sell to retailers and collect, he has funds wherewith to retire his loan at the bank. The retailers, we will assume, borrow from their banks in order to pay for the goods, but as soon as they can sell to consumers and collect, they have funds wherewith to retire their loans at their banks. Short-term loans, goods being rapidly turned over, loans being liquidated, renewed and reliquidated all down the line from mine, farm, and factory to retail dealer, such is the picture of circulating capital.

Corresponding with varieties of capital are varieties of interest rates. There is not one interest rate in the market, but many rates. The call rate is that on demand loans, used chiefly in the United States for speculation on the Wall Street Stock Exchange. The rates on short-term commercial paper differ because of differences in security or in length. of term. The forms of commercial paper include banker's acceptances, trade acceptances, bills of exchange and promissory notes. Rates on different grades of bonds, preferred stocks and common stocks differ widely. Different capital markets have different interest rates, but although there are unique conditions of supply and demand controlling each rate there is at the same time a rough and general correspondence

between all rates, so that a general trend high or low is likely to be reflected in the course of time throughout all interest rates. There are individual deviations and fluctuations, but underneath these, a fundamental unity. The general movement of all rates is as important to study as the peculiarity of a particular rate.

Development of a Theory of Interest.-How to justify interest has been a most baffling problem in the development of economic theory. Aristotle wrote of interest, or "usury," as an attempt to cause the "birth of money from money," a scheme most unnatural and unjust from his viewpoint, for money by its very nature could not "breed an increase." The Church during the Middle Ages, seeing usurers and pawnbrokers exact cruel terms on loans to the poor, condemned all interest as a sin against God, and a violation of the word of the Scriptures. Interest was prohibited, as being a parasitical charge due to fraud and force, without any service rendered. It was declared a price paid for time, a good common to all, and therefore a price without justice or warrant. However, in spite of theories and laws of condemnation, interest nevertheless flourished, and wherever markets and trade grew up, the merchants practiced the giving and taking of interest. With the expansion of commerce after the Middle Ages, there was a similar expansion of lending and interest taking. Gradually the force of practice and of commercial fact battered down the hostile theories, and the great thinkers of the classical economy built up a set of theories in vigorous defense of the necessity of interest. Modern business accepts interest as a matter of course, and discussion of the ultimate necessity or ethical soundness of interest is somewhat remote from the everyday point of view of the business world.

Various writers have stressed particular phases of interest theory. The productivity theory of capital emphasizes that interest is paid because capital produces new wealth. Labor working with tools and machinery can produce more than labor working without these aids. The difference between the productive capacity of labor unassisted and labor assisted by capital is, therefore, due to capital, and its owner is entitled to payment for this service. The payment takes the form of interest. This theory is limited as an explanation of interest since it does not explain why the value of the finished product is greater than the value of the original capital consumed in making it. To answer this question and arrive at the real nature of "productivity," economists have evolved the theories described in later parts of this section.

In spite of this limitation, the emphasis upon the aid of capital in production has had the great beneficial influence of placing attention upon the vital importance of capital in modern industrial progress. The use of capital has enabled labor to increase the production of the industrial nations, and by so doing, has raised the standard of living for the laboring classes as well as for the owning classes. Böhm-Bawerk, in his classical analysis of interest and capital, termed the capital process of production "roundabout production," since if a person desires a

certain good, it is best to "make first another good, and then, with its assistance, the good he wishes." That is to say, the most efficient method of making shoes is first to make tools and machines for the manufacturing of shoes, and then to use these capital instruments for the making of shoes. Such roundabout methods lengthen the time factor in production. By the time factor is meant not merely the time required to make the shoes after the machinery is constructed and ready for operation. The time factor begins with the construction of the tools and machinery, the production of the hides for leather, the erection of the factory building; and ends only when the shoes are in the hands of the ultimate consumers. The lengthening of the time factor from the beginning of the making of the capital goods to the end of the process of distributing the finished product, has lengthened the period of waiting required of capitalists, but it has greatly increased the nation's total productive capacity. By this method, with the same expenditure of energy, more or better goods can be produced. In considering ways and means of increasing wages in the future, we shall need always to bear in mind that fundamentally such an increase depends upon an increase in the volume of production by improved and enlarged uses of capital. Not less capital, but more capital and more and more effective forms of capital, give the sources of future progress for labor and for all other groups.

Many economists who have not found the productivity theory fully satisfying have been attracted by the reward for abstinence theory. Senior, for instance, stressed the universal temptation to consume immediately all the goods in a person's income. To abstain from this immediate enjoyment, the person must be offered some ulterior reward, and interest furnishes such a reward. This "postponement of consumption" enables business men to devote the unconsumed product to production during the period of waiting. Every man's impatience to consume his entire income as quickly as possible is said to be held in check by the prospect that in the future his saving will return to him not merely the amount originally saved but something over and above the original amount,-interest. Interest came therefore to be looked upon as a price paid for abstinence. Unfortunately the word "abstinence" had the connotation of some superior moral virtue. Indeed abstinence finally came to be vaunted as a splendid ethical or spiritual trait, and everybody who abstained in the hope of drawing interest came to be praised and lauded as a citizen who had rendered strenuous and sacrificial service to society. This viewpoint of capitalist society was not checked even though there were sharp logical attacks upon it by the Socialists, and such brilliant sarcasms against it as Lassalle's dubbing of the Rothschilds as the chief abstainers of Europe. If we abandon the term "abstinence," and use the term "waiting," the inference of any moral virtue is avoided. Waiting is scarce, and as in the case of any article showing scarcity of supply, a certain price is necessary to induce adequacy of supply. It is the scarcity of waiting and not any possible