SOME COMMON PITFALLS

sight of in the naive productivity fallacy, is that thevalue of the orchard is not independent of the value ofits crops; and, in this dependence, lurks implicitly therate of interest itself.

The statement that “capital produces income” is trueonly in the physical sense; it is not true in the valuesense. That is to say, capital value does not produce in-come value. On the contrary, income value produces capi-tal value. It is not because the orchard is worth $100,000that the annual crop will be worth $5000, but it is be-cause the annual crop is worth $5000 net that the orchardwill be worth $100,000, if the rate of interest is 5 percent. The $100,000 is the discounted value of the expectedincome of $5000 net per annum; and in the process ofdiscounting, a rate of interest of 5 per cent is alreadyimplied. In general, it is not because a man has $100,000worth of property that he will get $5000 a year, but it isbecause he will get that $5000 a year that his property isworth $100,000—if the pre-existing rate of interest re-mains unchanged.

In short, we are forced back to the confession thatwhen we are dealing with the values of capital and in-come, their causal connection is the reverse of that whichholds true when we are dealing with their quantities.The orchard is the source of the apples; but the value ofthe apples is the source of the value of the orchard. Inthe same way, a dwelling is the source of the shelter ityields; but the value of that shelter is the source of thevalue of the dwelling. In the same way a machine, a fac-tory, or any other species of capital instrument is thesource of the services it renders but the value of theseservices is the source of the value of the instrument whichrenders them.

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