CHAPTER VI

MODERN BUSINESS CAPITAL

Wuat has been said on the use of loan credit
has anticipated much of what is peculiar in modern
business capital. Such is necessarily the case,
since it is in the extensive use of credit that the
later phases of the management of capital contrast
most strikingly with the corresponding features of
earlier business traffic. To follow the terminologi-
cal precedents set by German writers, the late-
modern scheme of economic life is a “credit
economy,’ as contrasted with the “money econ-
omy” that characterizes early-modern times. The
nature of business capital and its relations to the
industrial process under the later, more fully
developed, credit economy is in some degree
different from what it was before the full and free
use of credit came to occupy its present central
position in business traffic; and more particularly
is it at variance with the theoretical expositions of
the economists of the past generation.

It has been the habit of economists and others
to speak of “ capital” as a stock of the material
means by which industry is carried on, — industrial

133

134 THE THEORY OF BUSINESS ENTERPRISE

equipment, raw materials, and means of subsistence.
This view is carried over from the situation in
which business and industry stood at the time of
Adam Smith and of the generation before Adam
Smith, from whose scheme of life and of thought
he drew the commonplace materials and concep-
tions with which his speculations were occupied.
It further carries over the point of view occupied
by Adam Smith and the generation to whom he
addressed his speculations. That is to say, the
received theoretical formulations regarding business
capital and its relations to mdustry proceed
on the circumstances that prevailed in the days
of the “money economy,” before credit and the
modern corporation methods became of first-class
consequence in economic affairs. They canvass
these matters from the point of view of the
material welfare of the community at large, as
seen from the standpoint of the utilitarian philoso-
phy. In this system of social philosophy the
welfare of the community at large is accepted as
the central and tone-giving interest, about which a
comprehensive, harmonious order of nature circles
and gravitates. These early speculations on busi-
ness traffic turn about the bearing of this traffic
upon the wealth of nations, particularly as the
wealth of nations would stand in a “natural”
scheme of things, in which all things should work
together for the welfare of mankind.

MODERN BUSINESS CAPITAL 135

The theory, or what there is in the way of a
theory, of business capital in the received body of
doctrines is worked out from the point of view and
for the theoretical purposes of the eighteenth-
century scheme of natural liberty, natural rights,
and natural law; and the received theorems con-
cerning the part played by capital and by the
capitalist are substantially of the character of laws
of nature, as that term was understood during the
period to which these theorems owe their genesis.
What these received theorems declare concerning
the nature and normal function of capital and of
the capitalist need not be recited here; their
content is familiar enough to all readers, lay and
learned. Also the merits of such a point of view
for purposes of economic theory, and the adequacy
of the received concept of capital for the purposes
to which it was originally applied, need not detain
the inquiry. Modern business management does
not take that point of view, nor does “capital”
carry such a meaning to the modern business man ;
because the guiding circumstances under which
modern business is carried on are not those sup-
posed to be given by a beneficent order of nature,
‘nor do the controlling purposes of business traffic
include that general well-being which constituted
the final term of Adam Smith’s social philosophy.

As a business proposition, “capital” means a
fund of money values; and since the credit econ-

136 THE THEORY OF BUSINESS ENTERPRISE

omy and corporation finance have come to be the
ruling factors in industrial business, this fund of
money values (taken as an aggregate) bears but a
remote and fluctuating relation to the industrial
equipment and the other items which may (perhaps
properly) be included under the old-fashioned
concept of industrial capital.’

Capital has been spoken of as the capitalized
(aggregated) cost of industrial equipment, etc.,”—
a view which had its significance for economic
theory a hundred years ago; but since corporation
finance has come to pervade the management of

1The distinction between business capital and ‘‘industrial capi-
tal’ or ‘‘ capital goods’’ has been shown by Knies, Geld und Credit,
vol. I. ch. IL. pp. 40-60. Distinctions having a very similar effect in
some bearings are to be found in Rodbertus (‘‘ private capital’? and
‘national capital’), in Bohm-Bawerk (‘‘ acquisitive capital’? and
‘productive capital,” or ‘‘ private capital’? and ‘‘ social capital’), in
Clark (‘‘ capital’? and ‘capital goods’’). Similar distinctions are
made by various writers to help out the incompetency of the received
definition of the term. The merit of these distinctions does not concern
the present inquiry, since they are made for other purposes than that here
aimed at. The distinction made above is not an attempt to recast the
terminology of economic theory, but is simply an expedient for present
use. It amounts to an unqualified acceptance of the concept (more or
sess well defined) which business men habitually attach to the term
‘‘capital.’? Mr. F. A. Fetter has latterly spoken for the restriction
of ‘‘capital,’’ as a technical term, practically to what is here called
‘business capital.”? Mr. Fetter’s “ capital concept,’’ however, should
probably not be taken to cover intangible assets. The practical dis-
tinction is visible in the testimony of various witnesses before the
Industrial Commission, as also in the special report on ‘ Securities,’’
Report, vol. XIII.

2 Even so late and competent a student of corporate capital as
J. von Kérési is bound by this antique preconception, and his work

has suffered in consequence. See Finanzielle Ergebnisse der Actien-
geselischaften, p. 3.

MODERN BUSINESS CAPITAL 137

business this view is no longer of particular use for
a theoretical handling of the facts. To avoid the
tedium of argument it may be conceded that under
the old dispensation, of partnerships and individual
management in business, the basis of capitalization
was the cost of the material equipment owned by
any given concern; and so far as the methods of
partnership and private firms still prevails such
may still be the current method of capitalization,
especially de gure. But in so far as business pro-
cedure and business conceptions have been shaped
in the image of the modern corporation (or limited
liability company), the basis of capitalization has
gradually shifted, until the basis is now no longer
given by the cost of material equipment owned,
but by the earning-capacity of the corporation as a
going concern."

A given corporation’s capital is, of course, de
jure a magnitude fixed in the past by an act of
legislature chartering the company, or by an issu-
ance of stock by the company under the terms of
its charter or of the acts which enable it. But
this de jure capitalization is nominal only, and
there are few, if any, cases in which the effective
capital of a company coincides with its de jure

1 This state of the case is brought out, in a veiled manner, by the
well-known proposition, expounded in varying form by various
writers, that the cost of equipment on which capitalization must, in
theory, take place is the cost of reproduction of all valuable items
included, tangible and intangible.

138 THE THEORY OF BUSINESS ENTERPRISE

capital. Such could be the case only so long as
all the securities which go to make up the com-
pany’s capital were quoted at par on the market.
The effective capitalization of any modern com-
pany, that is to say, the capitalization which is
effective for current business purposes as distinct
from the formal requirements of the charter, is
given by the quotations of the company’s securi-
ties, or by some similar but less overt market
valuation in case the company’s capital is not
quotable on the market. The effective (business)
capitalization, as distinct from the de jure capitali-
zation, is not fixed permanently and inflexibly
by a past act of incorporation or stock issue. It
is fixed for the time being only, by an _ ever
recurring valuation of the company’s properties,
tangible and intangible, on the basis of their
earning-capacity.'

In this capitalization of earning-capacity the
nucleus of the capitalization is not the cost of
the plant, but the concern’s good-will, so called,
as has appeared in the last preceding chapter.’

1‘ Nothing is more illusive and delusive than the idea that if a cor-
poration’s stock be only paid in in money at the outset it is therefore
better off than one that has issued its stock for property that could
not be converted for one cent on the dollar. The question is what
assets the corporation has got at the time of the particular transaction,
and that can be ascertained only by present inquiry.’’ — Testimony
of F. L. Stetson, Report of the Industrial Commission, vol. I. p. 976.
Cf. Meade, Trust Finance, ch. XVI. and XVITI.

2 Harning-capacity is practically accepted as the effective basis of
capitalization for corporate business concerns, particularly for those

MODERN BUSINESS CAPITAL 139

“Good-will”’ is a somewhat extensible term, and
latterly it has a more comprehensive meaning than
it once had. Its meaning has, in fact, been gradu-
ally extended to meet the requirements of modern
business methods. Various items, of very diverse
character, are to be included under the head of
“ good-will”’; but the items included have this
much in common that they are “immaterial
wealth,” “ intangible assets” ; which, it may paren-
thetically be remarked, signifies among other
things that these assets are not serviceable to the
community, but only to their owners. Good-will
taken in its wider meaning comprises such things
as established customary business relations, repu-
tation for upright dealing, franchises and_privi-
leges, trade-marks, brands, patent rights, copyrights,
exclusive use of special processes guarded by
law or by secrecy, exclusive control of particu-
lar sources of materials. All these items give a
differential advantage to their owners, but they

whose securities are quoted on the market. It is in the stock market
that this effective capitalization takes place. But the law does not
recognize such a basis of capitalization; nor are business men generally
ready to adopt it in set form, although they constantly have recourse
to it, in effect, in operations of investment and of credit extension.
Cf. Report of the Industrial Commission, vol. I. pp. 6, 17, 21
(Test. F. B. Thurber) ; p. 967 (Test. F. L. Stetson); pp. 585-587
(Test. H. H. Rogers) ; pp. 110-111, 124 (Test. H. O. Havemeyer) ;
pp. 1021, 1032 (Test. J. W. Gates) ; pp. 1054-1055 (Test. S. Dodd) ;
vol. XIII. pp. 287-288 (Test. H. Burn) ; p. 388 (Test. J. Morris) ;
pp. 107-108 (Test. E. R. Chapman). See Quarterly Journal of
Economics, February 1903, pp. 344-345, ‘‘The Holyoke Water
Case,’’ for an illustrative decision.

140 THE THEORY OF BUSINESS ENTERPRISE

are of no aggregate advantage to the community.’
They are wealth to the individuals concerned —
differential wealth ; but they make no part of the
wealth of nations.”

It is in the industrial corporations that this
capitalization of good-will is seen to the best ad-
vantage — including, under the term “industrial

9

corporations,” railway companies, iron and steel
concerns, mines, etc., as well as what are known
in the stock market specifically as “industrials.”
The corporation is, of course, not the only form of
business concern in the industrial field, but it is the
typical, characteristic form of business organization
for the management of industry in modern times,
and the peculiarities of modern capital are there-
fore best seen im these modern corporations.
Many of these corporations have grown out of
partnerships and firms previously existing, and
such is still the genesis of many of the corpora-
tions that come forward from time to time. In
such a case of conversion from partnership or
firm to corporation the rule is that the new cor-

1 The advantages afforded their owners by these intangible assets
have latterly been discussed by economists under such headings as
‘“*Rent’’ or ‘‘ Quasi-Rent.’? These discussions, it is believed, are of
great theoretical weight. In business practice, however, the items in
question are treated as capital, which must avail as an excuse for
including them here in business capital.

2 Compare Béhm-Bawerk’s and Clark’s distinctions between ‘‘ pri-
vate’? and ‘social’? capital, and between ‘capital’? and “ capital
goods.”

MODERN BUSINESS CAPITAL 14]

poration takes over a body of good-will, under one
form and name or another, previously pertaining
to the partnership which it displaces. Conversely,
when a flourishing partnership or similar private
firm has gained an assured footing of good-will,
in the way of any or all of the items enumerated
under that term above, its lot, as prescribed by
modern business exigencies, is to go up into a cor-
poration, either by simple conversion into the cor-
porate form or through coalition with other firms
into a larger corporate whole. There is in this
matter no hard and fast rule, of course. On the
one hand, the approved methods of corporation
finance may in some measure be resorted to by a
private firm, without formal conversion of the con-
cern into the corporate form; and on the other
hand, an incorporated company may continue to
carry on its business after the manner usual with
privately owned concerns. But taken by and
large, it will be found that with the assumption
of the corporate form is associated a more modern
method of capitalization and a freer use of credit.
The advantages which the corporate form offers in
these respects are commonly not neglected. The
more archaic forms of organization and business
management, in which recourse is commonly not
had to the characteristic methods of corporation
finance, prevail chiefly in those “ backward”’ lines
of industry in which monopoly or other differential

142 THY THEORY OF BUSINESS ENTERPRISE

advantages of an intangible nature are not readily
attainable; such, eg., as farming, fishing, local
merchandising, and the minor mechanical trades
and occupations. In this range of industries
large (corporate) organization has hitherto been
virtually impracticable, and here at the same time
differential advantages, of the nature of good-will
(as indicated above), are relatively scant and pre-
carious. Where extensive differential advantages
of this kind come in, the corporate form of organi-
zation is also likely to come in.

The cases are also frequent where a corporation
starts out full-fledged from the beginning, without
derivation from a previously existing private firm.
Where this happens, the start is commonly made
with some substantial body of immaterial goods on
which to build up the capitalization; it may be
a franchise, as in the case of a railway, telegraph,
telephone, street-car, gas, or water company; or it
may be the control of peculiar sources of material,
as in the case of an oil or natural gas company, or

a salt, coal, iron, or lumber company; or it may be

a special industrial process, patented or secret; or
it may be several of these. When a corporation
begins its life history without such a body of im-
material differential advantages, the endeavors of
its management are early directed to working up a
basis of good-will in the way of trade-marks, clien-
téle, and trade connections which will place it in

MODERN BUSINESS CAPITAL 143

something of a monopoly position, locally or gener-
ally... Should the management not succeed in
these endeavors to gain an assured footing on some
such “immaterial” ground, its chances of success
among rival corporations are precarious, its stand-
ing is insecure, and its managers have not accom-
plished what is looked for at their hands. The
substantial foundation of the industrial corporation
is its immaterial assets.

The typical modern industrial corporation is a
concern of sufficient magnitude to be of something
more than barely local consequence, and extends its
trade relations beyond the range of the personal
contact of its directive officials. Its properties
and its debts are also commonly owned, in part at
least, by persons who stand in no direct personal
relation to the board of managers. In an up-to-
date corporation of this character the typical make-
up of the corporate capital, or capitalization, is
somewhat as follows: The common stock approx-
imately covers the immaterial properties of the
concern, unless these immaterial properties are dis-
proportionately large and valuable; in case of a
relatively small and local corporation the common
stock will ordinarily somewhat more than cover the
value of the immaterial property and comprise
something of the plant; in case of the larger con-
cerns the converse is likely to be true, so that here

1 See Chapter III. above.

144 THE THEORY OF BUSINESS ENTERPRISE

the immaterial property, intangible assets, is made
to serve in some measure as a basis for other secur-
ities as well as for the common stock. The com-
mon stock, typically, represents intangible assets
and is accounted for by valuable trade-marks,
patents, processes, franchises, etc. | Whatever
material properties, tangible assets, are in hand or
to be acquired are covered by preferred stock or
other debentures. The various forms of deben-
tures account for the material equipment and the
working capital (the latter item corresponding
roughly to the economists’ categories of raw mate-
rials, wages fund, and the like). Of these deben-
tures the preferred stock is the most characteristic
modern development. It is, de jure, counted as a
constituent of the concern’s capital and the prin-
cipal is not repayable; in this (legal) respect it is
not an evidence of debt or a credit instrument.
But it has little voice in the direction of the con-
cern’s business policy.” In practice the manage-
ment rests chiefly on the holdings of common stock.
This is due in part to the fact that the preferred
bears a stated rate of dividends and is therefore
taken up by scattered purchasers as an investment
security to a greater extent than the common. In

1 On the books of the corporation it is, of course, carried as an item
of liability; as is the common stock ; but that is a technical expedient
of accountancy, and does not touch the substantial question.

2See testimony of various witnesses on ‘‘ Capitalization ’’ before
the Industrial Commission, vols. I., 1X., XIII.

MODERN BUSINESS CAPITAL 145

this (practical) respect it amounts to a debenture.
Its practical character as a debenture is shown by
the stated rate of dividends, and where it is
“cumulative ” that feature adds a further step of
assimilation to the ordinary class of debentures.
Indeed, in point of practical effect preferred stock
is in some respects commonly a more pronounced
credit instrument than the ordinary mortgage ; it
alienates the control of the property which it rep-
resents more effectually than the ordinary bond or
mortgage loan, in that it may practically be a debt
which, by its own terms, cannot be collected, so
that by its own terms it may convey a credit exten-
sion from the holder to the issuing corporation in
perpetuity. Its effect is to convey the discretion-
ary control of the material properties which it is
held to represent into the hands of the holders of
the common stock of the concern. The discretion-
ary management of the corporate capital is, by this
device, quite as effectually as by the use of ordinary
credit instruments, vested in the common stock,
which is held to represent the corporation’s good-
will. The discretionary disposal of the entire
capital vests in securities representing the intan-
gible assets. In this sense, then, the nucleus of the
modern corporate capitalization is the immaterial
goods covered by the common stock."

1 As one of many illustrative cases, the Rubber Goods Manufactur-
ing Company may be taken as a typical instance of a corporation

146 THE THEORY OF BUSINESS ENTERPRISE

This method of capitalization, therefore, effects a
somewhat thoroughgoing separation between the
management and the ownership of the industrial
equipment. Roughly speaking, under corporate
organization the owners of the industria] material
have no voice in its management, and where pre-
ferred stock is a large constituent of the capital
this alienation of control on the parts of the owners
may be, by so much, irrevocable. Preferred stock
is, practically, a device for placing the property it
represents in perpetual trust with the holders of
the common stock, and, with certain qualifications,
these trustees are not answerable for the adminis-
tration of the property to their trustors. The
property relation of the owners to their property is
at this point attenuated to an extreme degree.
For most business purposes, it should be added, the
capital covered by other forms of debentures is in

organized in a conservative but up-to-date manner for permanent suc-
cess and stable value. Its authorized issue of stock is $25,000,000
7 per cent. cumulative preferred, and $25,000,000 common. The actual
issue in 1901 was about $8,000,000 preferred and $17,000,000 common,
of which the preferred was presumed to cover the value of the tangible
assets. Another coalition organized by the same promoter (Mr. C. R.
Flint), the American Chicle Company, illustrates the same general
feature. The preferred stock of this company ($3,000,000) ‘‘in round
numbers was three times the amount of tangible assets,’? while the
common stock ($6,000,000) represents no tangible assets. The agere-
gate capitalization is about nine times the tangible assets. The wit-
ness says that this corporation has been proved by events to be ‘‘ on
a conservative basis from the fact that the company has paid 8 per cent.
on its common stock,’ which has been selling at 80. —- Report of the
Industrial Commission, vol. XIII. pp. 47, 50.

MODERN BUSINESS CAPITAL 147

much the same position as that covered by the
preferred stock.'

1It may be argued that this identification of the common stock
with the intangible assets holds true in theory only, in the sense that
this is the view held by the business men who occupy themselves with
such matters ; while in point of fact no distinction of this nature be-
tween common and preferred stock is or can practically be maintained
after the stock has once found its way into the market. It might
seem, in other words, that when the stock has once passed the stage
of organization and gone into the hands of the purchasers, each share
represents nothing but an undivided interest in the aggregate capital-
ization of the concern, so that the particular item of wealth repre-
sented by a given share or given form of security can no longer be
identified.

On the face of the situation such appears to be the case, but there
are facts which argue for the view set out above. It is, e.g., well
known that whenever circumstances arise which immediately affect
the yalue of the good-will of a corporation, it is the quotations of the
common stock that first and most decidedly are affected. If the good-
will of the concern makes a great and rapid gain, e.g. through manou-
yres which put it in a position of monopoly or through changes in the
goods market which greatly increase the demand for the concern’s
product, and the like, it is the quotation of the common stock that
measures and registers the advantage which thereby accrues to the
concern, and the market fluctuation of the common stock is likewise
the instrument by means of which manipulations are carried through
that affect these intangible assets. At the same time this rule does
not hold hard and fast, as is seen in case of a liquidation when the
capital of the concern may have shrunk to such dimensions that the
entire capital, including the intangible assets, will no more than satisfy
the claims represented by the debentures. Still, in point of practical
fact, the (theoretical) preconception of business men that the com-
mon stock in some intelligible sense covers the intangible assets is
fairly borne out by everyday experience, taken by and large.

- A curious parallel might be traced between the current endeavors
of the business community to organize and manage the industrial
equipment on the basis of immaterial assets and the medieval business
perplexities and fictions relative to loans on interest. In both cases
the business community has had to face untried exigencies together
with a popular, traditional prejudice that discountenances the expe-
dients by which these exigencies are to be met. The medieval pre-
sumption was that the management of productive goods and the

148 THE THEORY OF BUSINESS ENTERPRISE

The various descriptions of securities which in
this way represent corporate capital are quotable
on the market and are subject to market fluctua-
tions; whereby it comes about that the aggregate
effective magnitude of the corporate capital varies
with the tone of the market, with the manceuvres
of the business men to whom is delegated the
management of the companies, and with the acci-
dents of the seasons and the chances of peace and
war. Accordingly, the amount of the business
capital of a given concern, or of the business com-
munity as a whole, varies in magnitude in great
measure independently of the mechanical facts of
industry, as was noted above in speaking of loan
credit... The market fluctuations m the amount

profits accruing from their use must go to their users. (Cf. Ashley,
Economic History, vol. I. ch. II1., vol. Il. ch. VI.; Endemann, Die
nationaldkonomische Grundsdtze der kanonistischen Lehre.) The
modern presumption is that the management of the equipment and
the gains from such management must vest in the owners. The
modern exigencies decide that the equipment must be managed by
others than the owners and that profits must largely accrue to those
who financially manage the concern. The expedient by which this
result is sought to be reached is the fiction of intangible assets and the
impersonal, irrevocable credit extension covered by the preferred
stock. The effect is to dissociate ownership from management. ‘This
is the necessary outcome of a ‘credit economy ’’ consistently and
fully carried through. The management of the material equipment of
industry is thrown into the hands of those who own the immaterial
wealth ; that is to say, those who own the claim to manage the equip-
ment. The current prejudice which insists on management by the
owners is set aside by feigning that this claim has an industrial value,
and so capitalizing it on the basis of the differential advantage which
accrues to its holders.

‘See also a discussion by E. S. Meade, Quarterly Journal of
Economics, February 1902, pp. 217 et seqg., of how ‘* good-will’? may

MODERN BUSINESS CAPITAL 149

of capital proceed on variations of confidence on
the part of the investors, on current belief as
to the probable policy or tactics of the business
men in control, on forecasts as to the seasons and
the tactics of the guild of politicians, and on the
indeterminable, largely instinctive, shifting move-
ments of public sentiment and apprehension. So
that under modern conditions the magnitude of
the business capital and its mutations from day
to day are in great measure a question of folk
psychology rather than of material fact.

But in this uncertain and shifting relation of
the business capital to the material equipment
there are one or two points which may be set
down as fairly secure. Since the credit instru-
ments involved in modern capitalization may be
used as collateral for a further credit extension,
as noted in the chapter on loan credit,’ the aggre-
gate nominal capital in hand at a given time
is, normally, larger by an appreciable amount
than the aggregate value of the material proper-
ties involved ;* and at the same time the current
value of these material properties is also greater
than it would be in the absence of that credit

vary in magnitude, or even disappear, when a concern enters a larger
coalition ; also, on the same general head, W. F. Willoughby, ‘‘ Inte-
gration of Industry in the United States,’’ ibid., November 1902.

1p. 113 above.

3 cap! = cap + <P> cap, in which cap! is the nominal capital, as

: ca
increased by the credit element <r.

150 THE THEORY OF BUSINESS ENTERPRISE

financiering for which corporate capitalization
affords a_ basis.’

German writers have familiarized economic read-
ers with the terms “credit economy,’ ‘ money
economy” (Geldwirtschaft), and “natural econ-
omy” (Naturalwirtschaft), the later-modern
scheme of economic life being characterized as
a “credit economy.’ What characterizes the
early-modern scheme, the “ money economy,” and
sets it off in contrast with the natural economy
(distribution in kind) that went before it in
West-European culture, is the ubiquitous resort
to the market as a vent for products and a
source of supply of goods. The characteristic
feature of this money economy is the goods mar-

1 mat! = mat + 5(=) > mat, in which mat’ is the current value of

the material equipment, as increased (over mat) by the competitive
demand for equipment due to the credit element <P One of the sub-
stantial secondary benefits to be noted as flowing from these modern
business expedients is the effect of corporation finance upon the aggre-
gate nominal wealth of the community. A given community, possessed
of a given complement of material wealth, is richer in capital if a large
proportion of its industrial equipment is capitalized and managed by
corporation methods, quite apart from any increase in the material
items of which the community is possessed. (Cf. Twelfth Census of
the United States, ‘‘ Manufactures,’’ pt. I. p. xcvi.) Wealth may in
this way be increased (about twofold on an average), inexpensively,
by the simple expedient of incorporating the community’s business
concerns in the form of joint-stock companies. The more highly in-
volved and the more widely extended the corporation financiering is,
the richer, in statistical terms of capital, is the community, other things
equal. Among these other things are the material facts of the case.

MODERN BUSINESS CAPITAL lol

ket. About the goods market business and in-
dustrial interests turn in early modern times ;
and to this early-modern system of industrial
life the current doctrines of political economy are
adapted, as indicated above. ,

The credit economy—the scheme of economic
life of the immediate past and the present — has
made an advance over the money economy in
the respect which chiefly distinguishes the latter.
The goods market, of course, in absolute terms
is still as powerful an economic factor as ever,
but it is no longer the dominant factor in_busi-
ness and industrial traffic, as it once was. The
capital market has taken the first place in this re-
spect. The capital market is the modern economic
feature which makes and identifies the higher
“credit economy” as such. In this credit econ-
omy resort is habitually had to the market as
a vent for accumulated money values and a source
of supply of capital.’

Trading under the old régime was a traffic
in goods; under the new régime there is added,
as the dominant and characteristic trait, trading
in capital. Both in the capital and in the goods
market there are professional traders, as woll as

1 The commodities bought and sold in the goods markot are the
outcome of a process of production and are useful for a material pur-
pose ; those bought and sold in the capital market are the outcome

of a process of valuation and are useful for purposes of pecuniary
gain,

152 THE THEORY OF BUSINESS ENTERPRISE

buyers and sellers who resort to the market to
dispose of their holdings and to supply their needs
of what the market affords. In either class of
trading the ends sought by those engaged in the
business are generically the same. The endeavors
of those who are in the business of trading, who
buy in order to sell and sell in order to buy, are
directed to the pecuniary gain that is to be got
through an advantageous discrepancy between
the price paid and the price obtained; but on
the part of those who resort to the market to
supply their needs the end sought is not the same
in the two cases. The last buyer of goods buys
for consumption, but the last negotiator of capital
buys for the sake of the ulterior profit; im sub-
stance he buys in order to sell again at an
advance. The advance which he has in view
is to come out of the prospective earnings of the
capital for which he negotiates. What he has
in view as his ulterior end in the transaction
is the conversion of the values for which he
negotiates into a larger outcome of money values,
— whatever process of production and the like
may intervene between the inception and the
goal of his traffic.’

The value of any given block of capital, therefore,
turns on its earning-capacity ; or, as the mathemat-
ical expression has it, the value of capital is a func:

1Cf. Marx, Kapital (4th ed.), bk. I. ch. IV.

MODERN BUSINESS CAPITAL 153

tion of its earning-capacity,' not of its prime cost or
of its mechanical efficiency. It is only more re-
motely, and through the mediation of the earning-
capacity, that these last-named factors sensibly affect
the value of the capital. This earning-capacity of
capital depends in its turn, not so much on the me-
chanical efficiency of the valuable items bought and
sold m the capital market, as on the tension of the
market for goods. To recur to an expression already
employed in a similar connection, the question of
earning-capacity of capital relates primarily to its
effectiveness for purposes of vendibility, and only
at the second remove to its effectiveness in the way
of material serviceability. But the earning-capac-
ity which in this way affords ground for the valua-
tion of marketable capital (or for the market
capitalization of the securities bought and sold) is
not its past or actual earning-capacity, but its
presumptive future earning-capacity; so that the

1 Effective capital current market value of nominal capital =
presumptive earning capacity x purchase period, neglecting fortuitous
and incalculable items which may affect any given case.

If nominal capital = cap, effective capital = cap’, presumed annual
earnings = ea’, and the purchase period of capitalized property

1 <

————————__ , we have cap >cap!
interest rate per annum >

(years’ purchase) = yp =

F __ ea!

ce Ad ess nf Ur

int
This equation between cap! and ea/ is disturbed by the presence in
any given case of variable factors which cannot be included in the
equation, but it remains true after all qualification has been made

Ul
that cap! =f (=) :

154 THE THEORY OF BUSINESS ENTERPRISE

fluctuations in the capital market —the varying
market capitalization of securities—turn about
imagined future events. The forecast in the case
may be more or less sagacious, but, however saga-
cious, it retains the character of a forecast based
on other grounds besides the computation of past
results.

All capital which is put on the market is in this
way subjected to an interminable process of valua-
tion and revaluation—vi.e. a capitalization and
recapitalization — on the basis of its presumptive
earning-capacity, whereby it all assumes more or
less of a character of intangibility. But the most
elusive and intangible items of this marketable
capital are, of course, those items which consist of
capitalized good-will, simce these are intangible
goods from start to finish. It is upon this factor
of good-will in capital that a change in presumptive
earning-capacity falls most immediately, and this
factor shows the widest and freest market fluctua-
tions. The variations in the capitalized value of
merchantable good-will are relatively wide and
unstable, as is shown by the quotations of common
stock.

In the capital market the commodity in which
trading is done, then, is the capitalized putative
earning-capacity of the property covered by the
securities bought and sold. This property is in part
tangible, in part intangible, the two categories

MODERN BUSINESS CAPITAL 158

being seldom clearly distinguishable. The items
bought and sold are put into merchantable form
by being standardized in terms of money and sub-
divided into convenient imaginary shares, which
greatly facilitates the traffic. The earning-capac-
ity on which the market capitalization runs and
about which the traffic in merchantable capital
turns is a putative earning-capacity. It follows
that this putative earning-capacity of a given
block of capital, as it takes shape in the surmises
of outside investors, may differ appreciably from
the actual earning-capacity of the capital as known
to its managers; and it may readily be to the
latter’s interest that such a discrepancy between
actual and imputed earning-capacity should arise.’
When, e.g., the putative earning-capacity of the
capital covered by a given line of securities, as
shown by the market quotations, rises appreciably
above what is known to its managers to be its
actual earning-capacity, the latter may find their
advantage in selling out, or even in selling short ;
while in the converse case they will be inclined to
buy. Moreover, putative earning-capacity is the
outcome of many surmises with respect to pros-
pective earnings and the like; and these surmises

1 Something of this kind is the usual ground of the obstinate resist-
ance which most business men oppose to publicity of accounts, In
lines of business, as, e.g., railroading, in which accounts are readily
and effectually sophisticated (‘‘ doctored ’’), the objections to publicity
are commonly less strenvous,

156 THE THEORY OF BUSINESS ENTERPRISE

will vary from one man to the next, since they
proceed on an imperfect, largely conjectural, knowl-
edge of present earning-capacity and on the still
more imperfectly known future course of the goods
market and of corporate policy. Hence sales of
securities are frequent, both because outsiders vary
in their estimates and forecasts, and because the
information of the outsiders does not coincide with
that of the insiders. The consequence is that a
given block of capital, representing, e.g., a con-
trolling imterest in a given industrial enterprise,
may, and in practice it commonly will, change
owners much more frequently than a given indus-
trial plant was wont to change owners under the
old régime, before the fully developed corporation
finance came to occupy the field of industrial
business.’

It follows, further, that under these circum-
stances the men who have the management of such
an industrial enterprise, capitalized and quotable
on the market, will be able to induce a discrepancy
between the putative and the actual earning-capac-
ity, by expedients well known and approved for
the purpose. Partial information, as well as mis-
information, sagaciously given out at a critical
juncture, will go far toward producing a favorable
temporary discrepancy of this kind, and so enabling
the managers to buy or sell the securities of the

'Cf., eg., Eberstadt, Deutsche Kapitalsmarkt,

MODERN BUSINESS CAPITAL 157

concern with advantage to themselves. If they
are shrewd business men, as they commonly are,
they will aim to manage the affairs of the concern
with a view to an advantageous purchase and sale
of its capital rather than with a view to the future
prosperity of the concern, or to the continued ad-
vantageous sale of the output of goods or services
produced by the industrial use of this capital.

That is to say, the interest of the managers of a
modern corporation need not coincide with the
permanent interest of the corporation as a going
concern; neither does it coincide with the interest
which the community at large has in the efficient
management of the concern as an industrial enter-
prise. It is to the interest of the community at
large that the enterprise should be so managed as
to give the best and largest possible output of
goods or services; whereas the interest of the cor-
poration as a going concern is that it be managed
with a view to maintaining its efficiency and selling
as large an output as may be at the best prices
obtainable in the long run; but the interest of the
managers, and of the owners for the time being, is
to so manage the enterprise as to enable them to
buy it up or to sell out as expeditiously and as
advantageously as may be. The interest of the
community at large demands industrial efficiency
and serviceability of the product; while the busi-
ness interest of the concern as such demands ven-

158 THE THEORY OF BUSINESS ENTERPRISE

dibility of the product; and the interest of those
men who have the final discretion in the manage-
ment of these corporate enterprises demands vendi-
bility of the corporate capital. The community’s
interest demands that there should be a favorable
difference between the material cost and the mate-
rial serviceability of the output; the corporation’s
interest demands a favorable pecuniary difference
between expenses and receipts, cost and sale price
of the output; the corporation directorate’s interest
is that there should be a discrepancy, favorable for
purchase or for sale as the case may be, between the
actual and the putative earning-capacity of the cor-
poration’s capital.

It has been noted in an earlier chapter that
there unavoidably results a discrepancy, not uncom-
monly a divergence, between the industrial needs
of the community and the business needs of the
corporations. Under the régime of the old-fash-
ioned “money economy,” with partnership methods
and private ownership of industrial enterprises, the
discretionary control of the industrial processes is
in the hands of men whose interest in the industry
is removed by one degree from the interests of the
community at large. But under the régime of the
more adequately developed “credit economy,” with
vendible corporate capital,’ the interest of the men

1 The capital of any industrial concern under the ‘‘money econ-
omy’? is, of course, also vendible, but with relative difficulty ; while

MODERN BUSINESS CAPITAL 159

who hold the discretion in industrial affairs is
removed by one degree from that of the concerns
under their management, and by two degrees from
the interests of the community at large.

The business interest of the managers demands,
not serviceability of the output, nor even vendi-
bility of the output, but an advantageous discrep-
ancy in the price of the capital which they manage.
The ready vendibility of corporate capital has in
great measure dissociated the business interest of
the directorate from that of the corporation whose
affairs they direct and whose business policy they
dictate, and has led them to centre their endeavors
upon the discrepancy between the actual and the
putative earning-capacity rather than upon the per-
manent efficiency of the concern. Their connection
with the concern is essentially transient ; it can be
terminated speedily and silently whenever their
private fortune demands its severance. Instances
are abundant, more particularly in railway man-
agement, where this discrepancy between the busi-
ness interest of the concern and the private
business interest of the managers for the time
being has led to very picturesque developments,
such as could not occur if the interests of the man-

the readier vendibility of modern corporate capital is so characteristic
and consequential a factor in business and contrasts so broadly with
the old-fashioned business methods that it may fairly be spoken of as
vendibility par excellence. The ‘‘holding company”? is the mature
development of this traffic in vendible capital in industrial business.

160 THE THEORY OF BUSINESS ENTERPRISE

agement were bound up with those of the corpora-
tion in the manner and degree that once prevailed.
The fact is significant that the more frequent and
striking instances of such management of corpo-
rate affairs for private ends have hitherto occurred
in railroading, at the same time that the methods
and expedients of modern corporation finance have
also first and most widely reached a fair degree of
maturity in railroading. It holds out a suggestion
as to what may fairly be looked for when corpora-
tion finance shall have made itself more thoroughly
at home in the “industrials” proper. Indeed, the
field of the “ industrials” is by no means barren of
instances comparable with the maturer and more
sagacious railroad financiering.'

The stock market interest of those men who
have the management of industrial corporations
is a wide and multifarious one. It is not confined

1]t may be noted, by the way, that the question of the turnover
(spoken of on p. 95 above) becomes, under the circumstances of the
modern corporation finance, in great part a question of the interval
between the purchase and sale of the capital engaged in industry on
the one hand, and of the magnitude of the discrepancy between actual
and putative earning-capacity on the other hand, rather than a ques-
tion of the period of the industrial process and the magnitude of the
output and its price. The formula there shown becomes ; —

capital ee earning-capacity
n

turnover =
me

= putative earning-capacity — actual earning-capacity J

in which capital is the amount of the operator’s investment in the
concern’s securities, the time is the interval between purchase and sale
of the securities, and the putative earning-capacity is taken to exceed
the actual earning-capacity by an indeterminate fraction of the latter,

MODERN BUSINESS CAPITAL 161

to the profitable purchase and sale of properties
whose management they may have in hand. They
are also interested in making or marring various
movements of coalition or reorganization, and to
this ulterior end it is Imcumbent on them to “ ma-
nipulate”’ securities with a view to buying and sell-
ing in such a manner as to gain control of certain
lines of securities.’ Hence it is a rule of this class
of business traffic to cultivate appearance, — to
avoid, or sometimes to court, the appearance of sin.
So that under this leadership the course of indus-
trial affairs is, in great measure, if not altogether,
guided with a view to a plausible appearance of
prosperity or of adversity, as the case may be.
Under given circumstances it may as well become
the aim of men in control to make an adverse
showing as a favorable one. The higher exigencies
of the captain of industry’s personal fortunes, as
distinct from those of the corporation controlled by
him, may from time to time be best served by
an apparent, if not an actual, mismanagement of
industrial affairs. A convincing appearance of de-
cline or disaster will lower the putative earning-
capacity of the concern below its real earning-capac-
ity and so will afford an advantageous opportunity
for buying with a view to future advance or with
a view to strategic control. Various other expedi-
ents looking to the like outcome are well known to

1 Cf, Chapter III. above.

162 THE THEORY OF BUSINESS ENTERPRISE

the craft, besides bona fide mismanagement. <A
given line of securities may be temporarily de-
pressed by less heroic tactics; but the pomt in
question here is the fact that under this system of
corporation finance the affairs of the corporation
are in good part managed for tactical ends which
are of interest to the manager rather than to the
corporation as a going concern.

What was said in speaking of credit extension
without a determinate time interval’ applies to
this class of business, with a slight change of
phrase. In this higher development of corporation
finance, in the manipulations of vendible capital,
the interval of the turnover spoken of above be-
comes an indeterminate factor. The gains of the
business come to have but an uncertain and shifty
relation to the lapse of time and cannot well be
calculated per cent. per time-unit. There is, there-
fore, on these higher levels of business management,
properly speaking no ascertainable ordinary rate of
earnings. The capital which may be distinctively
regarded as operative in the business of manipula-
tion, the valuable items specifically employed in the
traffic in vendible corporate capital, is made up of
the operator’s good-will and his financial solvency.
Solvency on a large scale is requisite to carrying
on traffic of this class, but the collateral on which
this extensive solvency constructively rests is to

1Cf. Chapter V. above.

MODERN BUSINESS CAPITAL 163

but a partial extent drawn into the business as a
basis for an actual credit extension. What counts
in the case is the solvency of the operator rather
than an outright resort to the credit extension
which this solvency might afford. The working
capital involved in these transactions is accord-
ingly of a peculiarly elusive character, and the
time element in the use of this capital is hard to
determine, if such a time element can properly be
said to enter into the case at all.

More in detail, the business man in pursuit of
gain along this line must, in the ordinary case, be
possessed of large holdings of property, this being
the basis of the solvency necessary to the business.
These holdings are commonly in the form of securi-
ties in the concern whose vendible capital is the
subject of his traffic, as well as in other corpora-
tions. These securities represent capital, tangible
and intangible, which is already employed in the
ordinary business of the concern by which they
have been issued ; the capital, therefore, is already
in use to the full extent and is presumably yielding
the ordinary rate of earnings. But the solvency
for which the ownership of this capital affords a
basis may further be useful in enabling the owner
to carry on a traffic in vendible corporate capital
without withdrawing any appreciable portion of
his holdings from the lucrative investments in
which they have been placed. In other words, he

164 THE THEORY OF BUSINESS ENTERPRISE

is able, under modern circumstances, to make a
secondary use of his investments for the purpose of
trading in vendible corporate capital; but this
secondary use of investments bears no hard and
fast quantitative relation to the investments in
question, nor does it in any determinate way inter-
fere with the ordinary employment of this invested
capital in the commonplace conduct of the corpora-
tions’ business traffic. The capital employed, as
well as the potential credit extension which it
affords for the purposes of this higher business
traffic, is therefore in a peculiar degree intangible,
and, in respect of its amount, highly elusive.

Much the same is true of the good-will employed
in this traffic. It is also im good part good-will
which already serves the purposes of the common-
place business traffic of the corporations on whose
securities the business man in question rests his
solvency. So that in this higher business traffic
the good-will engaged is also here turned to a
secondary use. The business economies which are
in this way made practicable by a reduplication of
uses and made to inure to the greater business
men’s profit are of great magnitude ; but the mag-
nificent additions which are in this way made to
the business community’s capitalizable forces need
scarcely be dwelt on here.

The elusive and flexuous character of the ele-
ments of wealth engaged, as well as the absence of

MODERN BUSINESS CAPITAL 165

an ascertainable ordinary rate of earnings in this
line of business, has led economists to speak of
this traffic in vendible capital as a “speculative ”
business." The mere buying and selling of stocks
by outsiders for a rise or a decline is of course a
speculative business; it is a typical form of specu-
lative business. But in so far as such buying and
selling is carried on by the managers of the corpo-
rations whose securities are the subject of the traffic,
and especially where the securities are bought and
sold with a view to the control of the corporations
in question and their management for private,
tactical ends, a characterization of the business as
“speculative”? is inadequate and beside the point.
This higher reach of corporation financiering has
little if any more of a speculative character than
what belongs to the commonplace business man-
agement of any industrial enterprise. In all busi-
ness enterprise that stands in relations with the
market and depends on vendibility of its output
there is more or less uncertainty as to the out-
come.” In this sense all industrial business, as well
ascommercial business, has something of a specu-
lative character. But it is little to the purpose on
that account to lump industrial enterprises and

1 Cf. Emery, ‘‘ Place of the Speculator in the Theory of Distribu-
tion,’’ Proceedings of the twelfth annual meeting of the American
Economic Association; also ‘‘ Discussion,’? following Mr, Emery’s

paper.
2 Well shown in Mr. Emery’s paper cited above,

166 THE THEORY OF BUSINESS ENTERPRISE

corporation financiering together as “ speculative
business” and deal with them as if this were their
most salient and consequential bearing. What
speculative risk there is in these lines of business
is incidental, and it neither affords the incentive to
engaging in these pursuits nor does it bound the
scope of their bearing upon economic affairs. The
speculative risk involved is no greater, relatively to
the magnitude of the interests involved, in this
larger traffic that deals in vendible capital than it
is in the ordinary lines of business traffic that deal
in vendible products. In both cases there may be
speculation, but in both cases it is a side issue.
Indeed, as near as one may confidently hold an
opinion on so dark a question, the certainty of
gain, though perhaps not the relative amount of it,
seems rather more assured in the large-scale ma-
nipulation of vendible capital than in business
management with a view to a vendible product.
What may obscure the question is the fact that
the manipulations involved in this traffic in vend-
ible capital commonly impose increased risks upon
the business concerns engaged in industry — the
corporations whose capital is involved, as well as
other firms. The everyday business of the corpo-
rations whose securities are involved, as well as of
other business concerns engaged in rival or related
lines of industry, is rendered more hazardous than
it might be in the absence of this financiering

MODERN BUSINESS CAPITAL 167

traffic in vendible capital. The manipulations carry
risk, not so much to the manipulators as such,
as to the corporations whose properties are the
subject of manipulation; but since the manipula-
tors commonly own but a relatively small propor-
tion of the properties involved or touched by their
manipulations, the risks which arise do not fall
chiefly on them. To this is to be added, as of
prime importance for the whole question, that the
manipulators have the advantage of being able, in
great part, to foresee the nature, magnitude, and
incidence of the risks which they create. Rightly
seen, this, of course, goes to say that the increased
speculative risk due to the traffic in vendible capital
does not fall on that traffic, but on the business
enterprise engaged about the output of vendible
goods. The traffic in vendible capital is not with-
out its speculative risks, but the risks which it
creates fall with relatively greater weight upon the
business men who are not immediately concerned
in this traffic. Indeed, so secure and lucrative is
this class of business, that it is chiefly out of gains
accruing, directly and indirectly, from such traffic
in vendible capital that the great modern fortunes
are being accumulated ; and both the rate and the
magnitude of these accumulations, whether taken
absolutely or relatively to the total increase of
wealth, surpass all recorded phenomena of their
kind. Nothing so effective for the accumulation

168 THE THEORY OF BUSINESS ENTERPRISE

of private wealth is known to the history of
human culture.

The aim and substantial significance of the
“manipulations” of vendible capital here spoken
of is an ever recurring recapitalization of the prop-
erties involved, whereby the effective capitaliza-
tion of the corporations whose securities are the
subject of the traffic is mereased and decreased
from time to time. The fluctuations, or pulsations,
of this effective capitalization are shown by the
market quotations of the securities, as noted above.’
It is out of these variations in capitalization that the
gains of the traffic arise, and it is also through
the means of these variations of capitalization that
the business men engaged in this higher finance
are enabled to control the fortunes of the corpora-
tions and to effect their strategic work of coali-
tion and reorganization of business enterprises.
Hence this traffic in vendible capital is the pivotal
and dominant factor in the modern situation of

business and industry.’

1p. 154.

2 As is true of good-will and credit extensions generally, so with
respect to the good-will and credit strength of these greater busi-
ness men ; it affords a differential advantage and gives a differential
gain. In the trattic of corporation finance this differential gain is
thrown immediately into the form of capital and so is added to the
nominal capitalized wealth of the community. What it gives to its
holders in this capitalized form is a claim to a proportionate share in
the existing wealth. If other things are supposed to remain the same
(which may not be the case), the claim so enforced by the great finan-
ciers on the basis of good-will and credit extension deducts that much
from the wealth held by the rest, the previous holders, as counted in

MODERN BUSINESS CAPITAL 169

It has been noted above that what may be called
the working capital on which this higher corpora-

terms of material wealth; as counted in terms of money value, of
course, the holdings of previous holders do (or need) not suffer, since
the new claims take the form of an addition to the number of capital-
ized value units, although the increased aggregate number of value
units constitutes a claim on the same aggregate mass of wealth as
before. The pro rata reduction of the material magnitude of the
several shares of wealth is not felt as an impoverishment, because it
does not take the form of a reduction of the nominal value of the shares.

This capitalization of the gains arising from a differential advantage
results in a large ‘‘saying’’ and increase of capital. The wealth so
drawn in by the financiers (entrepreneurs) is nearly all held as capital,
very little of it being consumed in current expenses of living. It
has been cogently argued that the profits of the undertakers is the
chief and normal source of capitalized savings in the modern situation,
and the method here indicated seems to be the method by which such
saying is chiefly effected. An extremely suggestive discussion of the
undertaker’s gains in this connection occurs in a paper by L. V. Birck
(‘* Driftsherrens Gevinst’’), read before the Danish Economic Asso-
ciation, December 1901. More immediately to the point still is V.
Schou’s discussion of Mr. Birck’s paper. (See Nationalikonomisk
Tidsskrift, January-February 1902, pp. 76, 78-80.) J. B. Clark, in
lectures hitherto unprinted, follows a line of analysis somewhat closely
parallel with Schou, though not carried to quite the same length.

This process of combined recapitalization and saving may be stated
formally as follows: The initial value of the properties submitted for
coalition and recapitalization, cap, is in the normal case augmented by
the increment A, making the effective value of the properties = cap + A,
in effective units, U,. This augmented effective value of the properties
= U,(cap + A) is capitalized at a nominal value of cap!= Un(cap + A),
in nominal units, U,, nominally equivalent to U,. In the recapitali-
zation the number of units of capitalization is increased by an element
of intangible assets assigned the owners on account of a presumed
increase of earning-capacity due to the coalition. This element of
good-will due to coalition may be calledco. Further there is added
the bonus of the promoter, taken as a block of stock in the new capi-
talization, pro. Hence U,(cap’)+U,(cap + A) =U, (cap + co + pro).
Un (pro) =U, (cap! — cap — co) +U;, (A — co) is evidently a secure gain
to the promoter of U.(A — co), which isa fraction of the effective value
U.(cap + A). This is saved by him in the capitalized form, The ac-
count of the former owners of the properties will then stand as follows :

170 THE THEORY OF BUSINESS ENTERPRISE

tion finance proceeds is made up, chiefly, of two
elements: the solvency (and consequent potential
credit) of the men engaged, and the “ good-will”
of these men. Both of these elements are of a
somewhat intangible and elusive character, resting,
as they do, somewhat indirectly and shiftily on
elements already elsewhere engaged in business
enterprise. The solvency in question rests in large
part on the capital of the corporations whose capi-
talization is subject to the fluctuations induced by
the traffic in vendible capital. It is therefore
necessarily a somewhat indeterminate and unstable
magnitude. To this is to be added the “ floating

U.(cap + A — pro) = U.(cap) according as U, AS Ue(pro). The nomi-
nal gain of the owners, co, may or may not be a real gain according
as the event may prove that the promoter’s bonus has not or has
absorbed the entire effective augmentation of value, A, due to the
coalition ; it is therefore a problematical gain, which may or may not;
in the event, prove to be an effective element of capitalized savings.

The constitution of A will decide what is the ultimate source of the
savings effected by this transaction. If A consists entirely of economies
of production, the capitalized savings held by the promoter and former
owners as a result of the transaction represent new values added to, or
saved to, the aggregate wealth of the community. If A consists entirely
of good-will in the shape of monopoly advantage, the saving is effected
at the cost of the community and for the benefit of the promoter and
owners ; it is then an involuntary or subconscious saving on the part of
the community, whereby a part of the community’s wealth at large
passes into the hands of the recapitalized corporation. Where A is
made up of these two constituents together, the result, as regards the
present point, should be plain without discussion. If, on the other
hand, A = 0, so that cap! = cap, then the promoter’s savings, pro, are
secured at the cost of the former owners; U,(cap! — pro) = U.(cap
+ (A =0) — pro) = U-(cap — pro). Whereas if Ue(pro) = U.(A),
U.(co) = 0, leaving the owners without effective profit or loss in spite
of any nominal increase of the capitalization.

MODERN BUSINESS CAPITAL jyeil

capital’? and banking capital at the disposal of
these men. If a common-sense view be taken of
the business, the good-will engaged must also be
added to the assets. There is involved a very con-
siderable and very valuable body of good-will,
appertaming to the financiers engaged and to the
financing firms associated with them.’ This good-
will and this solvency is capital, for the purpose in
hand, as effectually as the good-will and securities
incorporated in the capitalization of any corpora-
tion engaged in industrial business.

But hitherto this particular category of good-
will has not been formally capitalized. There
may be peculiar difficulties in the way of reducing
this good-will to the form of a fund, expressing it
in terms of a standard unit, and so converting it
into quotable common stock, as has been done with
the corresponding good-will of incorporated indus-
trial enterprises. So also as regards the body of
solvency engaged, — the potential credit, or credit
capacity, of the promoters and financiers. Perhaps
this latter had best also be treated as an element

1 «« Good-will’’ in this field of enterprise most frequently takes the
form of a large ability to help or hinder other financiers and financing
houses in any similar mancuvres in which they may be engaged, or
an ability to put them in the way of lucrative financing transactions.
The guild of financiers is commonly split up into more or less well-
defined factions, each comprising an extensive ramification of financing
houses and financiers furthering one another’s endeavors under more
or less settled working arrangements. These working arrangements
are a large part of the financiers’ ‘‘ good-will.”

172 THE THEORY OF BUSINESS ENTERPRISE

of good-will; it is difficult to handle under any
other, more tangible, conception. It may be dif-
ficult to standardize, fund, and capitalize these
unstable but highly efficient factors of business
enterprise; but the successful capitalization of
good-will and credit extensions in the case of the
modern industrial corporations argues that this
difficulty should not be insurmountable in case an
urgent need, —that is to say, the prospect of a
profitably vendible result,—should press for a
formal capitalization of these peculiar elements of
business wealth. There can be no question, ¢.g.,
but that the good-will and large solvency belong-
ing to such a firm as J. P. Morgan and Company
for the purposes of this class of business enterprise
are an extremely valuable and substantial asset, as
is also, and more unequivocally, the good-will of the
head of that firm. These intangible assets, imma-
terial goods, should, in all consistency, be reduced
to standard units, funded, issued as common stock,
and so added to the statistical aggregate of the
country’s capitalized wealth.

It is safe to affirm that this good-will of the
great reorganizer has in some measure entered in
capitalized form into the common stock of the
United States Steel Corporation, as also into that
of some of the other great combinations that have
latterly been effected. The “good-will” of Mr.
Carnegie and his lieutenants, as well as of many

MODERN BUSINESS CAPITAL £73

other large business men connected with the steel
industry, has also no doubt gone to swell the cap-
italization of the great corporation. But good-will
on this higher level of business enterprise has a
certain character of inexhaustibility, so that its use
and capitalization in one corporation need not, and
indeed does not, hinder or diminish the extent
to which it may be used and capitalized in any
other corporation.’ The case is analogous, though
scarcely similar, to that of the workmanlike or
artistic skill of a handicraftsman, or an artist,
which may be embodied in a given product with-
out abating the degree of skill possessed by the
workman. Like other good-will, though perhaps
in a higher degree of sublimation, it is of a spirit-
ual nature, such that, by virtue of the ubiquity
proper to spiritual bodies, the whole of it may
undividedly be present in every part of the various
structures which it has created. Indeed, the fact
of such good-will having been incorporated in
capitalized form in the stock of any given corpora-
tion seems rather to augment than to diminish the
amount at which it may advantageously be cap-
italized in the stock of the next corporation into
which it enters. It has also the correlative spirit-
ual attribute that it may imperceptibly and inscru-

1 This category of good-will stands in a relation to the creation of
vendible capital similar to that which the corporate good-will of an
industrial business concern bears to the creation of vendible products,

174 THE THEORY OF BUSINESS ENTERPRISE

tably withdraw its animating force from any one
of its creatures without thereby altering the
material circumstances of the corporation which
suffers such an intangible shrinkage of its forces.

There can be no question but that the good-will
of the various great organizers and their financier-
ing houses has repeatedly been capitalized, prob-
ably to its full amount, in the common stock of
the various corporations which they have created ;
but taken in the sense of an asset belonging to
the financing house as a corporation, it is not
known that this item of immaterial wealth has yet
been formally capitalized and offered in quotable
shares on the market or included in the schedules
of personal property.’

The sublimation of business capital that has
been going forward in recent times has grave
consequences for the owners of property as well
as for the conduct of industry. In so far as
invested property 1s managed by the methods of
modern corporation finance, it is evident that the
management is separated from the ownership of

1 Parenthetically it may be remarked that the failure to capitalize
such items of good-will is likely to involve a virtual evasion of the tax
on personal property, and may, therefore, be questionable on moral
grounds.

The case of J. P. Morgan and Company is, of course, not here cited as
being a unique or peculiar instance, but simply as a typical and strik-
ing illustration of what happens and of what might be accomplished
in a number of large and very consequential cases of the same class.

MODERN BUSINESS CAPITAL 15

the property, more and more widely as the scope
of corporation finance widens. The discretion, the
management, lies in the hands of the holders of
the intangible forms of property; and with the
extension of corporation methods it is increasingly
true that this management, again, centres in the
hands of those greater business men who hold
large blocks of these intangible assets. The reach
of a business man’s discretionary control, under
corporation methods, is not proportioned ‘simply to
the amount of his holdings. If his holdings are
relatively small, they give him virtually no discre-
tion. Whereas if they are relatively large, they
may give him a business discretion of much more
than a proportionate reach. The effective reach
of a business man’s discretion might be said to
increase as the square of his holdings; although
this is to be taken as a suggestive characterization
rather than as an exact formula.

Among the holdings of industrial property that
count in this way toward control of the business
situation, the intangible assets (represented by
common stock, good-will, and the like) are chiefly
of consequence. Hence follow these two results:
the fortunes of property owners are in large
measure dependent on the discretion of others —
the owners of intangible property; and the man-
agement of the industrial equipment tends strongly
to centre in the hands of men who do not own the

176 THE THEORY OF BUSINESS ENTERPRISE

industrial equipment, and who have only a remote
interest in the efficient working of this equipment.
The property of those who own less, or who own
only material goods, is administered by those who
own more, especially of immaterial goods; and the
material processes of industry are under the control
of men whose interest centres on an increased
value of the immaterial assets.’

1 This dissociation of the business control from workmanlike effi-
ciency and from immediate contact with or ownership of the industrial
plant gives the existing situation a superficial resemblance to the feudal
system, in so far as touches the immateriality of the captain’s connec-
tions with the everyday life and interests of the community of whose
affairs he is master. It gives a certain plausibility to the attempted

interpretation of latter-day economic developments in feudalistic terms.
—See Ghent, Our Benevolent Feudalism.