stratification into economic classes that is found in the older countries of the world. But such a stratification already appears in the United States and it will show itself more and more clearly as the natural resources of the country come more completely under private ownership, unless the tendency in this direction is successfully opposed by a broad and vigorous social policy. In spite of it there are even in the older countries referred to many individual exceptions to the rule that children remain in the economic class to which they were born. Persons of great native ability rise to positions suited to their capacities despite all obstacles. On the other hand, all advantages seem wasted on other persons who from innate stupidity or perverseness are incapable of deriving benefit from them. These exceptions are of much more significance to the moralist than the more commonplace careers that have alone received attention in the preceding analysis. They justify the familiar assertion that each one's success in life depends mainly upon himself, but they do not alter the more fundamental truth that the sort of self one is depends upon heredity and education and that differences in educational opportunities are a chief cause of the differences in wages which it is the task of economics to explain.

99. Relation between Wages and Other Shares in Distribution. The causes of differences in rates of wages and of their persistence, generation after generation, have been explained in the preceding sections and it remains now to account for the earnings that are enjoyed by marginal workmen, which are the minimum from which all higher earnings are measured. The thesis that we have proposed to defend is that under conditions of free, all-sided competition the earnings of marginal, as of other, workmen will correspond accurately to the contributions which they make to production. To gage this contribution we must pass now to the discussion of interest, the last share in distribution. The different factors in production co

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operate in all productive processes. The product is a joint-product and we can determine the share of it that is economically ascribable to each factor only after we have clearly perceived the basis on which the claims of all of the other factors rest. In the next chapter we have to explain interest and differences in rates of interest by an analysis similar to that we have applied to profits, rent and wages, and then to consider how the comparisons are made by which the proportionate share of each factor is determined.

*

REFERENCES FOR COLLATERAL READING

*Clark, Essentials of Economic Theory, Chap. VIII.; * Seligman, Principles of Economics, Chap. XXVI.; * Fetter, Principles of Economics, Chap. XXIII.; * Carver, The Distribution of Wealth, Chap. IV.; Bullock, Selected Readings in Economics, Chap. XVIII. § 3; Marshall, Principles of Economics, Book VI., Chaps. III.-V.; Taussig, Wages and Capital, Part I.; Schoenhof, The Economy of High Wages, Part I.; * Pierson, Principles of Economics, Part I., Chap. VI.; Thompson, The Theory of Wages and Its Application; * Adam Smith, Wealth of Nations, Book I., Chap. VIII. and Chap. X., Part I.

CHAPTER XII

DISTRIBUTION: INTEREST

100. The Interest Problem and What It Involves.— Interest has already been defined as what is paid for the use of capital. From the point of view of distribution it is the share of income that is assigned to capital goods, or more accurately to the owners of such goods, for the part these play in production. The great variety of capital goods and the diversity of the services they render were discussed in a previous chapter (Section 46). As there explained (Section 42), the creation of capital goods requires, in addition to the factors involved in all production, saving, abstinence and waiting. Those who convert their incomes into capital instead of spending them contribute to production in these ways just as truly as do workmen by their activities. And just as "labor in and for itself is not valuable " but only "because through it valuable goods are produced" (Section 59), so capital goods are only valuable because they too assist production.

The problem of interest, like the problem of wages, is threefold. First, the phenomenon itself must be accounted for, that is, it must be explained why from the gross money returns of industry there is normally assigned to the owners of capital goods, over and above the replacement fund which makes up for any depreciation in value which these goods sustain, the share or income which we have called interest. Second, differences in the proportionate shares, or in the rates of interest, assigned to the owners of different stocks of capital goods must be ac

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counted for. Third, the causes determining the marginal or current rate of interest must be explained.

101. Explanation of the Reasons for the Payment of Interest.—Touching no part of economic theory has there been so much discussion or difference of opinion as touching the reasons for the payment of interest. It would carry us beyond the scope of this work to enter into the subtleties of this controversy. We must content ourselves with trying to formulate an explanation that is logically adequate and that, at the same time, will be helpful in connection with the discussion of practical questions.

A very common and seemingly simple form of the interest problem is presented by the payment of interest on money loans. Why, for example, are savings banks willing, not only to become the unpaid custodians of money deposited with them, but also to return with each deposit an additional sum, $104, say, at the end of a year, in place of the $100 originally received? Everyone knows enough about the business of savings banks to answer this question correctly. They are willing to pay moderate rates of interest because they are able to loan the money received on deposit at higher rates to the business community. Interest on money loans is consequently a derived form of interest.* To explain it fully we must go behind it and explain why business men will pay interest for the use of borrowed money. The answer to this second question is also easy. They do so because they know that by converting the money borrowed into the capital goods appropriate to their businesses they can get back the interest promised and enough more to make the transaction worth while. This brings us then to the essence of the interest problem-to explain how it comes about that capital goods will normally earn something for their owners over and above the replacement fund.

* Interest on money loans is discussed at length in the chapter on Credit and Banking (Sections 135 and 136).

As so often in our discussion of distribution, so now in explaining the phenomenon of interest, we must begin by asking the reader to oppose in his imagination the demands of consumers for consumable goods and the available supplies of the factors that co-operate in the production of such goods. Current methods of production assign a highly important place among these factors to capital goods-tools, machines, buildings and the other produced means to further production. By their aid the fruitfulness of human industry is enormously increased. This is equivalent to saying that any increase in the supply of capital goods that is available will increase the volume of consumable goods that can be produced, as any decrease in the supply will lessen production. And this increase in the output of goods that results from the aid which capital goods render to production includes normally an increase in the aggregate value of such goods. For, although an increase in the supply of any one good may cause such a decrease in its value, because of its diminished marginal utility, that the larger is actually worth less than the smaller supply, this cannot conceivably be the case when the change in question is an increase in the supplies of all goods. To put the argument in terms of prices, increasing the supply of one good, like wheat, might so lower its price as to make the larger worth less than the smaller supply. But if the same influence that affected the supply of wheat affected similarly the supplies of all other goods including that of gold, the good in terms of which prices are expressed, there is no reason for expecting the increase in the supply of wheat to lower its price at all. Except for some unusual circumstance that would not invalidate the argument, the larger supply of wheat would command a proportionately larger aggregate price. And what would be true of wheat would normally under the assumed conditions be true of all other commodities, or the aggregate money re