Conclusion. years of study and preparation. The mere mention of these needs re-enforces what has been said of the present lack of equal educational opportunities. Summing up the results of our analysis, we must conclude that the industrial population consists of various groups of workers whose differences in fortune and in standards of living are reflected in unequal educational opportunities which serve to perpetuate, generation after generation, the differences in wages explained in previous sections. The picture drawn appears somewhat exaggerated for the United States at the present time, because the country is comparatively new and undeveloped. The exploitation of natural resources still offers a wide field for the adventurous and prevents, while it continues, that rigid 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. § 148. 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 Wages. account for the earnings that are enjoyed by marginal work- The Determen, which are the minimum from which all higher earnings mination of Marginal 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 tend to 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 coöperate 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, Principles of Economics, Chaps. XLVII. and XLVIII.; 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. Definition CHAPTER XVI DISTRIBUTION: INTEREST § 149. Interest has already been defined as what is paid of Interest. 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 which they render were discussed in a previous chapter (Section 83). As there explained (Section 78), 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 105), so capital goods are only valuable because they too assist production. Nature of Prelimi nary Explanation. 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 equally valuable stocks of capital goods of different kinds must be accounted for. Third, the causes determining the marginal or current rate. of interest must be explained. § 150. Touching no portion of economic theory has there been so much discussion or difference of opinion as touching the reasons for the payment of interest. Yet the explanation PRELIMINARY EXPLANATION 263 of this payment must follow the same general lines as the explanation of other shares in distribution. A preliminary statement of the theory of interest at this point is designed to clear the way for the consideration of difficulties and complexities to be dealt with later. a Derived Form. A very common and seemingly simple form of the interest Interest on problem is presented by the payment of interest on money Bank Loans 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? Every one 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 a derived form of interest.* To explain it fully the economist must go behind it and explain why business men are willing to pay interest for the use of borrowed money. A superficial answer to this second question is also easy. Business men are willing to pay interest 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 their own replacement fund.) tiveness of Capital. As so often in our discussion of distribution, so now in The Source explaining the phenomenon of interest, we must begin by of Interest asking the reader to oppose in his imagination the demands the Producof consumers for consumable goods and the available supplies of the factors that coöperate 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 * Interest on money loans is discussed at more length in the chapter on Credit and Banking (Section 194). 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, since it applies to the collective national industries and not merely to some particular branch of production, will, as we have seen (Section 99), cause a corresponding increase in the money income to be distributed. The increase in production which is to be credited to capital goods is thus not merely an increase in the volume of commodities but an increase in the aggregate price to be obtained for the larger volume. The demands of consumers for consumable goods causes them to command certain prices. Enterprisers, desirous of making profits by supplying goods at these prices, compete against one another for control of the factors necessary to production. This competition tends to keep their own profits down to a bare wages-of-management and to force them to pass along as the remuneration of the factors which they hire, subject only to this deduction and to a deduction for the replacement fund, the total price which they receive for the things which they sell. Their competition for the factor, capital, presents two aspects. One is their competition for control over the purchasing power which is tied-up in the capital goods they use during the period in which these are performing their productive function. This is their demand for capital proper, which gives rise to interest. The other is their competition for concrete capital goods. In this connection their demand is that of purchasers of the various sorts of commodities they require. As already explained, the prices they must pay for these commodities tend under conditions of free competition to correspond to the expenses which representative firms incur in their production. As buyers of capital goods they pay prices controlled by the same influences that control all prices. As users of capital goods in production they pay interest on the purchasing power tied-up in these goods during the period in which they are rendering their productive service. The explanation of interest to which these |