profits can only disappear if capital ceases to be productive and yield profit.[1]
From these considerations the following conclusions emerge:—
1.—The value of circulating capital is found by discounting, i.e., by deduction of interest from gross income.
2.—If a capital of 100 can after a year be converted into 105, then is a sum of 100, which can only be claimed after a year, of less value than 100. Future goods have, therefore, less value than present goods.
3.—The capital value of a perpetual rental may be found by summing the several instalments, but only after their future value has been reduced to present value by continuous discounting. An abbreviated method for arriving at the same result is that of capitalization, i.e., the multiplication of the yearly rental by a figure, the key to which is derived from the current rate of interest, e.g., if this be 5 per cent., multiply by 20. This abbreviated procedure yields mathematically the same result as the longer method of discounting interest and compound interest.
This gives us, besides, the rule for reckoning the value of land.
4.—The value of fixed capital is reckoned by corresponding combinations, either through discounting or capitalizing, attention being given to the principle of amortization or sinking fund.
IV
Value is, in the first instance, estimated by every one from a personal standpoint as 'value in use.' In the exchange of commodities, however, these individual estimates join issue, and thence arises price or 'value in exchange.' Prof. Sax explains price as the average of individual estimates of value; in the opinion of the other Austrian economists it obeys another law.
The maximum price which the consumer can ever afford to give does not exceed what he, according to his own estimate of money, looks upon as the full equivalent of the value in use which the commodities he is buying will have for him. And if he wishes to buy several items of the same commodity he measures
- ↑ This explanation of interest is valid only in the case of 'producer's capital.' Interest on emergency-loans or on principal lent to the spendthrift require to be otherwise explained. Here we have the debtor, by reason of distress or carelessness, setting more store by the goods of the present than by those of the future, and utterly regardless of any expected net profit; hence his promising for a certain supply of present, a larger supply of future, cash.
