actual money cost of new capital goods and the expense of interest on this money cost. Normal interest is the interest on absolutely free capital in the form of loanable fur is.

Land, of course, has no normal price, because it has no expense, of production. This difference is not of mere theoretical importance, but has an important bearing upon many social problems. For example, when we take a long period of time into account, no such thing as an "unearned increment" appears in the value of capital. Productivity has to be imputed to capital because its supply is limited by reason of its expenses of production and by reason of the sacrifices involved in waiting, while productivity is imputed to the better lands simply because the supply of them is limited by nature. When we measure rent as a return per acre (or other unit) of land, and interest as a percentage on the money invested, we recognize this fundamental distinction between rent and interest. That rent may be viewed for some purposes as interest on the money value of the land, and that interest may similarly be viewed (at any given time) as a "quasi-rent" of capital goods, does not alter the fundamental nature of the distinction.

We have seen that the shifting of investment by which the earnings of capital are made to tend toward a normal standard is easier in the case of the more transient forms of capital than in the case of the more durable forms. The more durable a capital good, the more nearly is the income derived from it analogous to the rent of land. As was suggested in the discussion of rent, it is not necessary or advisable to draw a hard and fast line between capital and land. Permanent investments of capital in the form of improvements to land may very properly be regarded as land. The farmer who is contemplating installing a drainage system or an irrigation system for his land views such an investment, at the time, as an investment of capital. But when the capital is definitely incorporated with the land in these permanent forms, there is no reason why it should be called capital rather than land. The total income yielded by the improved acres will, in all essential particulars, be land rent.

The distinction which we have drawn between capital and land is not a mere matter of names. It makes little difference whether we call one group of productive agents "capital" and another group "land or whether we class all of these productive agents together (as many economists do) under the name of "capital." The important thing is that we should see clearly that there is one group of productive agents whose "" rents are determined in the long run by the rate of interest on loanable funds, and that there is another group of productive agents whose earnings are not so determined.

Capital and Consumption Goods. There are also some points of likeness between capital and the more durable forms of consumption goods. The person who buys a piano is not only satisfying his present wants, but expects to get from it a long period of use, extending into the future. The purchase of any durable consumption good is in this way one form of saving for the future. Moreover, such provisions for future wants will not be made unless we feel that present provision for these future wants is important enough to justify us in giving up some possible present satisfaction.

These facts must be taken into account in any full analysis of the valuation of consumption goods, but they do not justify us in obliterating the line between capital and consumption goods. Consumption goods yield directly an income of satisfactions; capital yields a money income. A merchant's stock in trade is capital because it will yield a money income to its possessor; when sold to consumers, the same goods become consumption goods because they yield an income of satisfactions. In short, the distinction between capital and consumption goods is based upon one of the most fundamental things in the existing economic system the fact that the incomes which men receive for the productive services of their capital are money incomes.

Capital and Wages. In most undertakings wages are advanced to workmen engaged in the production of goods before the goods are sold. A farmer, for example, has to pay his harvest hands and other workmen before he receives any money

from the sale of his wheat. Whether he borrows the amount needed for wages, or whether he pays them out of his own savings, interest on the amount advanced has to be counted among the expenses of production, and the wages advanced are, for the time being, an investment of capital. In most manufacturing establishments a more or less lengthy average period of time elapses between the work actually done by the workmen and the sale of the products of their work. In such establishments a considerable amount of capital is invested in wage advances. This does not mean that we are to consider the laborers as being in any sense capital. For the gradual process by which the raw material becomes the finished product is itself a continuous investment of capital. All of the various expenses of production are really different ways of investing money in capital goods. Add to the cost of the raw material all of the expenses (including wages and payments of rent and interest as well) incurred in order to produce the finished product of the establishment, and you have simply the total investment in capital goods in the form of the finished product. A complete inventory of capital goods would include then (in addition to buildings, machinery, etc.) not only raw materials and the finished products that are ready for sale to consumers, but also the products on hand at any one time in a partly finished state. Thus, though the payment of wages is often an investment of capital, it must be remembered that the payment of wages is only one of the ways in which money is invested in concrete, definite, capital goods.

Competitive Investment. Thus far our discussion has run in terms of the investment of money in what we have just called "concrete, definite, capital goods," to be used in the production of other goods. We have pictured entrepreneurs and capitalists as servants of society, as investing money in producing the things people want and are willing to pay for. But in order to portray some of the essential facts of modern business enterprise this picture has to be modified. Business men are primarily interested in acquisition rather than in production, in making money rather than in making goods. From

the point of view of both the entrepreneur and the capitalist, money is invested to yield an income rather than to increase the aggregate output of consumable goods.

In part, and in very large part, it is true, investments yield an income because they further the production of things that satisfy human wants. Such is the case in general with (incomeyielding) investments in agriculture and in other industries where the products of competing establishments cannot be distinguished, one from another, and are sold in a general market where prices are fixed very accurately by general competitive conditions. But there is left a very important field of enterprise in which the entrepreneur may find it worth while to invest large amounts of money in "selling expenses." Put in a very general but roughly accurate way, these expenses are incurred, not in producing things people want, but in inducing people to want the particular things the entrepreneur has for sale. Advertising expenditures are the most obvious form of such investments. Part of the salaries paid to traveling salesmen must also be placed under this head. Sometimes a new establishment will be created, with full knowledge of the fact that it must run at a loss until a demand for its products is developed. Such losses are investments of this type. Two thirds or more of the aggregate expenses of many establishments making patent medicines are selling expenses. And in the manufacture and sale of other products enormous investments are made with the purpose of creating and holding a market for goods marked by particular brands and trade-marks. A noteworthy feature of modern business is the attempt on the part of manufacturers and wholesalers to influence the demand of ultimate consumers through advertising.

From the point of view of the individual competitor such expenses and the expenses of buying or making capital goods are alike "investments." But they are competitive, acquisitive, investments rather than socially productive investments. Their purpose is not to satisfy an existing demand but to shift demand from other channels. So far as such expenditures succeed in gaining trade, the capitalized income-yielding power

of a business undertaking will be greater than the "capital values" that can be imputed to the stock of capital goods on hand. These surplus capital values, embodied only in the preferences of consumers for particular products, may be recorded, like other values, in the actual price paid when the business is sold.

This is not to say that all selling expenses are from the social point of view wasteful. Some of the things for which a market is thus created may be better things, judged by rational standards, than the things which they displace. Moreover, scrupulously truthful advertising is frequently a real help to the consumer, perplexed by the range of alternative choices open to him, and often without knowledge of the qualities of competing goods or of their fitness to serve his purposes. But this is only an incidental and by no means a necessary result of these competitive investments. They may sometimes lead to the education of the consumer, but they may also lead to the exploitation of weakness and ignorance. And in either case they are no part of the social process of the "production of goods."

The Flow of Money Income. - We now come to the heart of our problem, the analysis of the general forces determining the rate of interest. For this purpose we shall find it convenient to examine the general process of the flow of money income. There is a continuous flow of money income through the hands of entrepreneurs, appearing first in the form of the prices that are paid them for their goods, then (neglecting profits) in their own payments for labor, land, and capital, then reappearing in the prices which those who furnish these agents in production pay for other goods, and so on in a continually recurring cycle of income and outgo.

This process is made more complicated, however, by the fact that not all of the entrepreneur's expenses appear directly as rent, wages, or interest. A considerable part, and in many cases (as in mercantile establishments), the largest part of such expenditures is for various concrete forms of capital, — raw

1 Using the word money in its broadest sense, including such transferable credit instruments as are used in making payments.