第15章

Itappears，then，thatintheaffairsoflatterdaybusiness，asshownbymoderncorporationfinance，capitalandcreditextensionarenotalwaysdistinguishableinfact，nordoesthereappeartobeadecisivebusinessreasonwhytheyshouldbedistinguished。“Capital“means“capitalizedputativeearning-capacity，“expressedintermsofvalue，andthiscapitalizationcomprisestheuseofallfeasiblecreditextension。Thebusinesscapitalofamoderncorporationisamagnitudethatfluctuatesfromdaytoday；andinthequotationsofitsdebenturesthemagnitudeofitscreditextensionalsofluctuatesfromdaytodaywiththecourseofthemarket。Theprecisepecuniarymagnitudeofthebusinesscommunity’sinvestedwealth，aswellastheaggregateamountofthecommunity’sindebtedness，dependsfromhourtohouronthequotationsofthestockexchange；anditrarelyhappensthatitremainsnearlythesameintheaggregatefromoneweek’sendtothenext。Bothcapitalandcredit，therefore，varyfromhourtohour。and，withinnarrowlimits，fromplacetoplace。Themagnitudeandfluctuationsofbusinesscapital，-“capital“inthesenseinwhichthattermisusedinbusinessaffairs，-ofcourse，standinnohardandfastrelationtothematerialmagnitudeoftheindustrialequipment；nordovariationsinthemagnitudeofthebusinesscapitalreflectvariationsinthemagnitudeortheefficiencyoftheindustrialequipmentinanybuttheloosestandmostindecisivemanner。Soalso，andforthesamereason，themagnitudeandthevariationsoftheaggregatecreditafloatatagiventimebear，atthemost，butaremote，indirect，andshiftyrelationtotheaggregateofmaterialwealthandthematerialchangestowhichthiswealthissubject。Allthisapplieswithpeculiarcogencywhereverandinsofarasindustryandbusinessarecarriedonhymodernexpedientsandinduecontactwiththemarket。

This，ofcourse，hasnothingtosaytoBohm-Bawerk’stheoryoftheenhancementofproductionthroughlengtheningtheprocessesofindustry。Histheoryofthe“roundaboutmethod“appliestothetechnical，materialefficiencyofthemechanicalprocess；whereasthepointinquestionhereistheintervaloccupiedintheturningoverofagivenbusinesscapital。Bohm-Bawerk’spositionmaybequestionable，however，onothergrounds。

Cf。，e。g。，WernerSombart，“DerStildesmodernenWirthschaftslebens。“Achivfursoz。Gestzg。u。Statistik，vol。

ofDermoderneKapitalismus(Leipzig，1902)。

Cf。，e。g。，Marshall，PrinciplesofEconomics(3ded。)，bkVI，ch。VII，secs。3and4。

Cf。Laughlin，PrinciplesofMoney，p。86。

Theturnoverwillcountformoreingrossearningsatcurrentratesifinsteadofhisowncapitalalonethebusinessmanalsoengageswhateverfundshecanborrowbyusinghiscapitalascollateral。Theturnovercountedoncapital(valueoftheindustrialequipment)pluscredit，atcurrentrates，willbegreaterthanthatcountedonthecapitalaaoneusedwithoutcreditextension。Theturnovermaybeexpressedastheproductofthemassofvaluesemployedmultipliedbythevelocity。Hence，ifcreditbetakenasanindeterminatefraction(capital/n)ofthecapitalusedascollateral，wemaysaythatTurnover=(1/time)(capital+capital/n)，i。e。

Thealgebraicstatementservestobringouttheequivalencebetweenanaccelerationoftherateofturnoverandanincreaseofthevolumeofbusinesscapital。Cf。Jevons，TheoryofPoliticalEconomy，pp。

Sombartismistakeninsaying(Kapitalismus，vol。II。ch。VI，p。74)thattheuseofcreditlengthensthetimeofturnoverofcapital。Creditshortensthetimerelativelytothemagnitudeoftheturnover；i。e。agiveninitialcapitalbythehelpofcreditturnsoveralargerpecuniarymagnitudeinagiventime:

ThelegallyobligatoryreservefortheNationalBanks，forinstance，is25percentofcombinednotecirculationanddepositsincentralreservebanks，15percentinothers——

RevisedStatutes，

Thistakesaccountofadvancemadebyotherlendersthantheregularbankinghouseswhoexcludemortgagesonrealestatefromtheircollateral；such，e。g。，asthelongtimeadvances(investmentsinsecurities)madebysavingbanks，insurancecompanies，minorprivateandmortgagebanks，privatelenders，etc。

Thistruismisfrequentlyoverlookedintheoreticaldiscussions；hence，asthepresentargumentrequiresitsrecognition，itisherestatedinthisexplicitway。

hecashloansmadebydepositorstosavingsbanksintheformofdeposits。

Cf。TwelfthCensusoftheUnitedStates，vol。VII，p。c。

Few，perhaps，wouldinsettermsmaintainanargumentthatthevalueofmoneydoesnotvary，butstillfewerwould，inacredittransaction，proceedonasuppositionatvariancewiththatposition。Astheeconomistsareaccustomedtosay，moneyisthestandardofdeferredpayments。Itisalso，intheunreflectingapprehensionofthosewhohavepracticallytodealwithwealthphenomena，felttobethestandardandinflexiblemeasureofwealth。Thefactthatthisconvertionalusageisembodiedinlawactsactsgreatlytofortifythenaiveacceptanceofmoneyandpriceasthedefinitivetermsofwealth。Seepp。

Theenhancementofthemarketvalueoftheoutputdoesnot，infact，keeppacewiththeinflationofbusinesscapitalduringaperiodofspeculativeadvance。Inorderthatitshoulddoso，andaffordnominalearningsproportionatetotheinflatedcapital，itwouldbenecessarythatincomesshouldincreaseproportionatelytotheinflationofcapital；but，evenifthishappened，theexpensesofproductionwouldtherebybesoincreased(throughtheadvanceofwagesandthelike)astooffsettheentireofvaluesforallconsumptivegoodsandleaveonlytheadvanceinthevaluesofproductivegoodsasanetmarginfromwhichtodrawanincreaseofearnings。Thediscrepancyunderdiscussion，however，isnotdueentirelytothepresenceofcredit，andafullydetailedanalysisofthecausesoutofwhichitarisescan，therefore，notproperlybepresentedinthisplace。

17。Solongastheratingofthecapitalizedpropertyremainsundisturbed，theformualwhichexpressesthecreditors’claimmaintaintheformgivenabove。Itthensignifiesnothingmorethanthatthecreditorsholdaclaimonsuchaproportionoftheaggregatecapitalizedpropertyinvolvedastheiradvancesbeartotheaggreagecapitalization。Butsosoonasareratingofthecapitalizedpropertyenterstheproblemtheformulabecomesloans/(capitalization+deltacapitalization)

orloans/(capitalization-deltacapitalization)，accordingasthereratingofcapitalizationisinthedirectionofenhancementordepreciation:1/(cap+deltacap)or1/(cap-

deltacap)。Duringbrisktimes，whencapitalizationadvances，theclaimrepresentedbyagivenloancoversadecreasingproportionoftheaggregatecapitalizedpropertyinvolved1/(cap+deltacap)；thedenominatorincreasesandtehquotientconsequentlydecreases。Whereas，inaperiodofliquidationtheratioofthecreditors’claimtotheaggregatecapitalizationincreasesbyforceoftheloweredratingofthecapitalizedproperty1/(cap-

deltalcap)。

18。Allthosewho，ataperiodofliquidation，areholdersoffluentfundsorofclaimstofixedsumsofmoneyare，forthepresentpurpose，inthepositionofcreditors。

19。Thisdisregardstheindirecteffectsofaspeculativeadvanceinthewayofheightenedintensityofapplicationandfulleremploymentoftheindustrialplant。

20。SeechapterVI。

21。Thequestionof“stockwatering““overcapitalization“andthelikeisscarcelypertinentinthecaseofalargeindustrialcorporationfinancedasthemodernsituationdemands。Undermoderncircumstancesthecommonstockcanscarcelyfailtobeall“water“，unlessinasmallconcernorunderincompetentmanagement。Nothingbut“water“-underthenameofgood-will-

belongsinthecommonstock；whereasthepreferredstock，whichrepresentsmaterialequipment，isadebenture。

“Overcapitalization，“ontheotherhand，ifitmeansanythingundermodernbusinessconditions，mustmeanovercapitalizationascomparedwithearning-capacity，forthereisnothingelsepertinenttocompareitwith；andearning-capacityfluctuates，whilethebasis(interestrates)onwhichtheearning-capacityistobecapitalizedalsofluctuatesindependently。

Ineffect，theadjustmentofcapitalizationtoearning-capacityistakencareofbythemarketquotationsofstockandothersecurities；andnoothermethodofadjustmentisofanyavail，becausecapitalizationisaquestionofvalue，andmarketquotationsarethelastresortinquestionsofvalue。Thevalueofanystocklistedontheexchange，orotherwisesubjecttopurchaseandsale，fluctuatesfromtimetotime；whichcomestothesamethingassayingthattheeffectualcapitalizationoftheconcern，representedbythesecuritiesquoted，fluctuatesfromtimetotime。Itfluctuatesmoreorless，sometimesveryslowly，butalwaysatleastsomuchastocompensatethelong-periodfluctuationsofdiscountratesinthemoneymarket；

whichmeansthatthepurchasepriceofagivenfractionalinterestinthecorporationasagoingconcernfluctuatessoastoequateitwiththecapitalizedvalueofitsputativeearning-capacity，computedatcurrentratesofdiscountandallowingforrisks。Cf。ReportoftheIndustrialCommission，vol。

I。p。587(TestimonyofRogers)；vol。XIII。pp。106-107

(TestimonyofE。R。Chapman)。SeealsoChapterVIbelow。

22。See，e。g。Emery，SpeculationontheStockandProduceExchangesoftheUnitedStates，ch。IV；Hadley，Economics，ch。

IV。

23。ReportoftheIndustrialCommission，vol。I，(TestimonyofW。H。Moore)pp。960-963，(W。E。Reis)p。949，(Gates)p。1032；

vol。IX。(T。L。Greene)p。491；vol。XIII，p。viii，withcorrespondingtestimony。SeealsoChapterVIbelow。

24。ReportoftheIndustrialCommission，vol。I(TestimonyofDodd)pp。1054-1055，1057，1058-1059，(Gates)pp。1021-1022；vol。

XIII，p。ix，withtestimony。

25。ReportoftheIndustrialCommission，vol。I(TestimonyofDosPassos)p。1179；vol。XIII(C。R。Flint)p。48。TestimonytothesameeffectrecurselsewhereintheReport。Seep。125，n。1

above。

26。SeeChapterVIbelow。

TheTheoryofBusinessEnterprisebyThorsteinVeblen1904

Chapter6

ModernBusinessCapitalWhathasbeensaidontheuseofloancredithasanticipatedmuchofwhatispeculiarinmodernbusinesscapital。Suchisnecessarilythecase，sinceitisintheextensiveuseofcreditthatthelaterphasesofthemanagementofcapitalcontrastmoststrikinglywiththecorrespondingfeaturesofearlierbusinesstraffic。TofollowtheterminologicalprecedentssetbyGermanwriters，thelate-modernschemeofeconomiclifeisa“crediteconomy，“ascontrastedwiththe“moneyeconomy“thatcharacterizesearly-moderntimes。Thenatureofbusinesscapitalanditsrelationstotheindustrialprocessunderthelater，morefullydeveloped，crediteconomyisinsomedegreedifferentfromwhatitwasbeforethefullandfreeuseofcreditcametooccupyitspresentcentralpositioninbusinesstraffic；andmoreparticularlyisitatvariancewiththetheoreticalexpositionsoftheeconomistsofthepastgeneration。

Ithasbeenthehabitofeconomistsandotherstospeakof“capital“asastockofthematerialmeansbywhichindustryiscarriedon，-industrialequipment，rawmaterials，andmeansofsubsistence。ThisviewiscarriedoverfromthesituationinwhichbusinessandindustrystoodatthetimeofAdamSmithandofthegenerationbeforeAdamSmith，fromwhoseschemeoflifeandofthoughthedrewthecommonplacematerialsandconceptionswithwhichhisspeculationswereoccupied。ItfurthercarriesoverthepointofviewoccupiedbyAdamSmithandthegenerationtowhomheaddressedhisspeculations。ThatistoSay，thereceivedtheoreticalformulationsregardingbusinesscapitalanditsrelationstoindustryproceedonthecircumstancesthatprevailedinthedaysofthe“moneyeconomy，“beforecreditandthemoderncorporationmethodsbecameoffirst-classconsequenceineconomicaffairs。Theycanvassthesemattersfromthepointofviewofthematerialwelfareofthecommunityatlarge，asseenfromthestandpointoftheutilitarianphilosophy。Inthissystemofsocialphilosophythewelfareofthecommunityatlargeisacceptedasthecentralandtone-givinginterest，aboutwhichacomprehensive，harmoniousorderofnaturecirclesandgravitates。

Theseearlyspeculationsonbusinesstrafficturnaboutthebearingofthistrafficuponthewealthofnations，particularlyasthewealthofnationswouldstandina“natural“schemeofthings，inwhichallthingsshouldworktogetherforthewelfareofmankind。

Thetheory，orwhatthereisinthewayofatheory，ofbusinesscapitalinthereceivedbodyofdoctrinesisworkedoutfromthepointofviewandforthetheoreticalpurposesoftheeighteenthcenturyschemeofnaturalliberty，naturalrights，andnaturallaw；andthereceivedtheoremsconcerningthepartplayedbycapitalandbythecapitalistaresubstantiallyofthecharacteroflawsofnature，asthattermwasunderstoodduringtheperiodtowhichthesetheoremsowetheirgenesis。Whatthesereceivedtheoremsdeclareconcerningthenatureandnormalfunctionofcapitalandofthecapitalistneednotberecitedhere；theircontentisfamiliarenoughtoallreaders，layandlearned。Alsothemeritsofsuchapointofviewforpurposesofeconomictheory，andtheadequacyofthereceivedconceptofcapitalforthepurposestowhichitwasoriginallyapplied，neednotdetaintheinquiry。Modernbusinessmanagementdoesnottakethatpointofview，nordoes“capital“carrysuchameaningtothemodernbusinessman；becausetheguidingcircumstancesunderwhichmodernbusinessiscarriedonarenotthosesupposedtobegivenbyabeneficentorderofnature，nordothecontrollingpurposesofbusinesstrafficincludethatgeneralwell-beingwhichconstitutedthefinaltermofAdamSmith’ssocialphilosophy。