Capital, Interest, and Rent: Essays in the Theory of Distribution

Fetter, Frank A.
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Murray N. Rothbard, ed.
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Kansas City: Sheed Andrews and McMeel, Inc.
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Collected essays, 1897-1937. First published as a collection in 1977.
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Part 1, Essay 8
Are Savings Income?—Discussion

Reprinted from American Economic Association, Papers and Discussions of the Twentieth Annual Meeting 9 (April 1908). These remarks refer to and follow an article by Irving Fisher entitled "Are Savings Income?" (ibid., pp. 21-47). In his discussion Fetter criticizes Fisher's figure 2 (see ibid., pp. 40-41) for confusing pyschic and nominal income by measuring them on the same axis. Other discussants were Winthrop M. Daniels (ibid., pp. 48-51), A. W. Flux (ibid., pp. 55-56), John Franklin Crowell (ibid., p. 57) and Maurice H. Robinson (ibid., p. 57-58).


We are discussing a question of terminology but not a question "merely" of terminology. In "the bright lexicon" of the newer economic criticism there is no such word as "merely" in application to questions of terminology. Against such a word the literature of economic thought gives many warnings in the fallacies resulting from ambiguity of terms. "Merely" terminological differences soon appear in the form of real and practical differences when ambiguous terms are applied in the discussion of practical questions. Even in this case Professor Fisher has promptly deduced from his peculiar concept of income some peculiar conclusions as to the justice of certain forms of taxation; and at a time when economic theory and financial practice alike are leading to the taxation of the unearned increment on land held for speculation, Professor Fisher is led to condemn both this theory and this practice.


Professor Fisher confesses that his conception is opposed to the usual view of economists, of business men, and of accountants, and that therefore the burden of proof rests upon him. More than that, his denial that additions to capital are money income is a paradox of the sort that economics is now generally rejecting. It is just such a paradox as that "rent does not enter into price," or that "savings are at once consumed," or that "demand for commodities is not demand for labor"—such paradoxes, once considered to be the quintessence of economic wisdom, are now, by economic criticism, being relegated to the lumber room.


The very title of Professor Fisher's paper presents a terminological question, and is misleading. The subject is not so much "Are savings income?" as, Is an increment in the value of capital in a given period to be considered money income? Whether or not that increment of capital, when it is at the disposal of the owner, will be saved or spent is a later question and not involved in our present inquiry. Our question and our attention may be confined to the period within which the income accrues and matures. Professor Fisher's critics contend for the almost universal business usage of the term income as an increment of business power expressed in money value. What is the kind of income here under discussion? The term "income," rightly or wrongly, is applied to two (indeed, several) different things. We contend that the question here is of money income, whereas Professor Fisher has his attention fixed upon a different kind, namely, psychic income. He apparently agrees that capital as a business concept is the anticipated value or present worth of future psychic incomes. And he therefore concludes that in the period of its acquisition this capital is not money income to its owner. This is a non-sequitur.


In Professor Fisher's paper is meant by income evidently psychic income or value of the gratification. He presents us with a diagram which depicts the larger part of the argument in his paper. But what do those lines mean? In themselves they are but chalk marks. The lines a, b, c, d, and e in his diagram represent the income when it is detached and converted into enjoyment, when, in so far, the capital ceases to be capital, and is converted into a present realized psychic result. At that moment the line does not represent a monetary income, but a monetary outgo. He is looking at the end and ultimate goal of the valuation process, whereas the business man is estimating the objective income, the money value accruing in the period, regardless of whether that money will in the next period be saved or consumptively spent.


The chief reliance of Professor Fisher in his rejection of common practice and common judgment is undoubtedly his belief that the increments of capital value of future periods are not discounted from the present moment as is the psychic income. It may be said that the question is not as to the discounting of future incomes, but as to the view to be taken and the term to be used in reference to past and present increments of value. He says that the increment of value up to date is not income. We say that it is, and, of course, if it is saved, not spent, and is added to capital, it will continue to contribute its portion to the subsequent increments of capital. It is this estimate up to date in any accumulative period that is in question here. Treating the past increments of capital as income simply recognizes the increments that have accrued to the moment.


But the capital sums of an accumulating capital, taken at different points of time, are the actuarial equivalent one of another, when viewed from the present moment. The money income at the moment it occurs is the actuarial equivalent of a later larger money income that will result from the saving of the present monetary income. With this thought in mind it is evident that the incomes a, b, c, d, e of the diagram can be treated as Prof. Fisher treats them only on condition that they be consumptively used; in other words, that they be converted at that moment into psychic income. If they are kept by the owner and used normally and rationally, they accumulate in the hands of the owner. If Professor Fisher transfers them to another capital account at that moment, it is simply concealing beneath a new bookkeeping entry a source of additional income for the future. If, therefore, incomes e, d, etc., are not detached from the owner's capital, but merely given another entry in the accounts, the curve N n would be extended toward the right and upward. The money income of the earlier periods, being saved and added to the capital sum, become themselves the source of new increments of value in the succeeding period. And this shows again that the detached incomes of which Professor Fisher speaks, must be not money incomes, but money outgoes, consumptive expenditure of a part of the capital value.


Indeed, there is here seen a difference between Professor Fisher's mode of conceiving of the problem of income and the mode in business calculations. Professor Fisher is thinking of the income as subjective; business deals with income as objective or as objectively expressed. Professor Fisher thinks of the income as occurring only when it is detached from the capital, a conception true at the moment of monetary expenditure and psychic income. Business thinks of the income for the most part as occurring when it is attached to the owner's capital, a conception true of the monetary income. These two conceptions have perhaps the relation that Professor Fisher elsewhere calls an interaction. Business practice, the logic of which we are defending, treats the income as occurring within the given period in which it either attaches or is enjoyed as usufruct. When a portion of the capital is spent for gratification, that much money value is detached and becomes psychic income.


It must be recognized that the capitalistic estimate and expression of incomes is not an ultimate psychological analysis of the problem of value. It is an estimate of income in objective terms, but an estimate at once logical in its place and indispensable in practice,—a statement probably true of the whole "cost of production" conception when rightly limited and understood. Professor Fisher's use of terms flies in the face of usage. While thinking of the income as detached value, he ignores the significance of the present and past attached value. Once a disbeliever in psychic income, he now, with the zeal of an apostate, becomes intolerant of any other conception even when monetary income is the subject under discussion. Is a thousand dollars in money received as a gift not an income when it is received? Is a ten-thousand-dollar estate received by legacy not an income to the beneficiary? Is a hundred dollars earned within this month by personal service not income because it is not yet enjoyment? Is the hundred dollars interest received from a mortgage or the hundred dollars rental received from a farm not income? To all these receipts Professor Fisher must deny the name of income for the same reason he has denied it in his discussion and in his book. He does so deny, defending a conclusion out of harmony with common usage and theoretical expediency, a conclusion only to be accounted for by his ambiguous use of the word income as both monetary and psychic.

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