involved;94 and at the same time the current value of these material properties is also greater than it would be in the absence of that credit financiering for which corporate capitalization affords a basis.95
German writers have familiarized economic readers with the terms "credit economy," "money economy" (Geldwirtschaft), and "natural economy" (Naturalwirtschaft), the later-modern scheme of economic life being characterized as a "credit economy." What characterizes the early-modern scheme, the "money economy," and sets it off in contrast with the natural economy (distribution in kind) that went before it in West-European culture, is the ubiquitous resort to the market as a vent for products and a source of supply of goods. The characteristic feature of this money economy is the goods market. About the goods market business and industrial interests turn in early modern times; and to this early-modern system of industrial life the current doctrines of political economy are adapted, as indicated above.
The credit economy - the scheme of economic life of the immediate past and the present - has made an advance over the money economy in the respect which chiefly distinguishes the latter. The goods market, of course, in absolute terms is still as powerful an economic factor as ever, but it is no longer the dominant factor in business and industrial traffic, as it once was. The capital market has taken the first place in this respect. The capital market is the modern economic feature which makes and identifies the higher "credit economy" as such. In this credit economy resort is habitually had to the market as a vent for accumulated money values and a source of supply of capital.96
Trading under the old regime was a traffic in goods; under the new regime there is added, as the dominant and characteristic trait, trading in capital. Both in the capital and in the goods market there are professional traders, as well as buyers and sellers who resort to the market to dispose of their holdings and to supply their needs of what the market affords. In either class of trading the ends sought by those engaged in the business are generically the same. The endeavors of those who are in the business of trading, who buy in order to sell and sell in order to buy, are directed to the pecuniary gain that is to be got through an advantageous discrepancy between the price paid and the price obtained; but on the part of those who resort to the market to supply their needs the end sought is not the same in the two cases. The last buyer of goods buys for consumption, but the last negotiator of capital buys for the sake of the ulterior profit; in substance he buys in order to sell again at an advance. The advance which he has in view is to come out of the prospective earnings of the capital for which he negotiates. What he has in view as his ulterior end in the transaction is the conversion of the values for which he negotiates into a larger outcome of money values, - whatever process of production and the like may intervene between the inception and the goal of his traffic.97
The value of any given block of capital, therefore, turns on its earning-capacity; or, as the mathematical expression has it, the value of capital is a function of its earning-capacity, 98 not of its prime cost or of its mechanical efficiency. It is only more remotely, and through the mediation of the earning-capacity, that these last-named factors sensibly affect the value of the capital. This earning-capacity of capital depends in its turn, not so much on the mechanical efficiency of the valuable items bought and sold in the capital market, as on the tension of the market for goods. To recur to an expression already employed in a similar connection, the question of earning-capacity of capital relates primarily to its effectiveness for purposes of vendibility, and only at the second remove to its effectiveness in the way of material serviceability. But the earning-capacity which in this way affords ground for the valuation of marketable capital (or for the market capitalization of the securities bought and sold) is not its past or actual earning-capacity, but its presumptive future earning-capacity; so that the fluctuations in the capital market -the varying market capitalization of securities - turn about imagined future events. The forecast in the case may be more or less sagacious, but, however sagacious, it retains the character of a forecast based on other grounds besides the computation of past results.
All capital which is put on the market is in this way subjected to an interminable process of valuation and revaluation - i.e. a capitalization and recapitalization - on the basis of its presumptive earning-capacity, whereby it all assumes more or less of a character of intangibility. But the most elusive and intangible items of this marketable capital are, of course, those items which consist of capitalized good-will, since these are intangible goods from start to finish. It is upon this factor of good-will in capital that a change in presumptive earning-capacity falls most immediately, and this factor shows the widest and freest market fluctuations. The variations in the capitalized value of merchantable good-will are relatively wide and unstable, as is shown by the quotations of common stock.
In the capital market the commodity in which trading is done, then, is the capitalized putative earning-capacity of the property covered by the securities bought and sold. This property is in part tangible, in part intangible, the two categories being seldom clearly distinguishable. The items bought and sold are put into merchantable form by being standardized in terms of money and subdivided into convenient imaginary shares, which greatly facilitates the traffic. The earning-capacity on which the market capitalization runs and about which the traffic in merchantable capital turns is a putative earning-capacity. It follows that this putative earning-capacity of a given block of capital, as it takes shape in the surmises of outside investors, may differ appreciably from the actual earning-capacity of the capital as known to its managers; and it may readily be to the latter's interest that such a discrepancy between actual and imputed earning-capacity should arise.99 When, e.g., the putative earning-capacity of the capital covered by a given line of securities, as shown by the market quotations, rises appreciably above what is known to its managers to be its actual earning-capacity, the latter may find their advantage in selling out, or even in selling short; while in the converse case they will be inclined to buy. Moreover, putative earning-capacity is the outcome of many surmises with respect to prospective earnings and the like; and these surmises will vary from one man to the next, since they proceed on an imperfect, largely conjectural, knowledge of present earning-capacity and on the still more imperfectly known future course of the goods market and of corporate policy. Hence sales of securities are frequent, both because outsiders vary in their estimates and forecasts, and because the information of the outsiders does not coincide with that of the insiders. The consequence is that a given block of capital, representing, e.g., a controlling interest in a given industrial enterprise, may, and in practice it commonly will, change owners much more frequently than a given industrial plant was wont to change owners under the old regime, before the fully developed corporation finance came to occupy the field of industrial business.100
It follows, further, that under these circumstances the men who have the management of such an industrial enterprise, capitalized and quotable on the market, will be able to induce a discrepancy between the putative and the actual earning-capacity, by expedients well known and approved for the purpose. Partial information, as well as misinformation, sagaciously given out at a critical juncture, will go far toward producing a favorable temporary discrepancy of this kind, and so enabling the managers to buy or sell the securities of the concern with advantage to themselves. If they are shrewd business men, as they commonly are, they will aim to manage the affairs of the concern with a view to an advantageous purchase and sale of its capital rather than with a view to the future prosperity of the concern, or to the continued advantageous sale of the output of goods or services produced by the industrial use of this capital.
That is to say, the interest of the managers of a modern corporation need not coincide with the permanent interest of the corporation as a going concern; neither does it coincide with the interest which the community at large
