INCOME AND CAPITAL

These relations are shown in the following scheme inwhich the arrows represent the order of sequence—(1)from capital goods to their future services, that is, in-come; (2) from these services to their value; and (3)from their value back to capital value:

Capital goods--» Flow of services (income)

1

Capital value <- Income value

Not until we know how much income an item of capitalwill probably bring us can we set any valuation on thatcapital at all. It is true that the wheat crop depends onthe land which yields it. But the value of the crop doesnot depend on the value of the land. On the contrary,the value of the land depends on the expected value ofits crops.

The present worth of any article is what buyers arewilling to give for it and sellers are ready to take for it.In order that each man may logically decide what he iswilling to give or take, he must have: (1) some idea ofthe value of the future benefits which that article willyield, and (2) some idea of the rate of interest by whichthese future values may be translated into present valuesby discounting.

§10. Costs, or Negative Income

Cost of production of durable agents or capital goodshas its influence included in the preceding formulation,since any cost is simply a negative item of income. Futurenegative items are to be discounted exactly as futurepositive items. It is to be remembered that at the givenpoint of time when the value is being computed onlyfuture costs can enter into the valuation of any good.

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