between tangible assets and intangible, even if the distinction is somewhat uncertain in detail; and such a distinction is convenient, so long as too sharp a contrast between the two is not insisted on.
The earning-capacity of the tangible assets is presumed to represent the productive capacity of the plant, considered as a mechanical apparatus engaged in an industrial process for the production of goods or services; it is presumed to rest on the market value of the mechanical output of the plant. The plant is a productive factor because and in so far as it turns to practical account the state of the industrial arts now in use, -- the community's joint stock of technological knowledge. So soon, or so far, as the plant and its management falls short of meeting the ordinary requirements of this current state of the industrial arts, and fails to make use of such technological knowledge as is commonly employed, the whole works ceases by that much to be a productive factor. The productive efficiency, and the productive value, of any given item of industrial equipment is measured by its effective use of the technological knowledge current in the community for the time being. So also, the productive value of any given body of natural resources land, raw materials, motive power -- is strictly dependent on the degree in which it fits into the industrial system as it runs.
This dependence of productive value on conformity to and use of the state of the industrial arts is constantly shown in the case of land and similar natural resources, by the fluctuation of rental values. Land and other resources will be more valuable the more suitable they are for present and prospective use. The like is true for the mechanical equipment, perhaps in a more pronounced degree. Industrial plant, e.g., is always liable to depreciation by obsolescence in case the state of the industrial arts changes in such a way that the method of work embodied in the particular article of equipment is displaced by new and more suitable methods, more suitable under the altered circumstances.
In such a case, which is of very frequent occurrence under the new order of industry, any given plant, machine, or similar contrivance may lose all its value as a means of production. And so also, on the other hand, a given plant, as, for instance, a given railway system or dock, may acquire additional productive value through changes in the industrial system which make it more suitable for present use.
Evidently the chief, or at least the indispensable, element of productive efficiency in any item of industrial equipment or resources is the use which it makes of the available technological knowledge; and evidently, too, its earning-capacity as a productive factor depends strictly on the same fact, -- the usufruct of the state of the industrial arts. And all the while the state of the industrial arts, which the industrial equipment so turns to account for the benefit of its owner, continues to be a joint stock of industrial knowledge and proficiency accumulated, held, exercised, increased and transmitted by the community at large; and all the while the owner of the equipment is some person who has contributed no more than his per-capita quota to this state of the industrial arts out of which his earnings arise. Indeed the chances are that the owner has contributed less than his per-capita quota, if anything, to that common fund of knowledge on the product of which he draws by virtue of his ownership, because he is likely to be fully occupied with other things, -- such things as lucrative business transactions, e.g., or the decent consumption of superfluities.
And at this point the difference between tangible assets and intangible comes in sight, or at least the ground of the habitual distinction between the two. Tangible assets, it appears, are such assets as represent the earning-capacity of any mechanically productive property; whereas intangible assets represent assured income which can not be assigned to any specific material factor as its productive source. Intangible assets are the capitalised value of income not otherwise accounted for. Such income arises out of business relations rather than out of industry; it is derived from advantages of salesmanship, rather than from productive work; it represents no contribution to the output of goods and services, but only an effectual claim to a share in the "annual dividend," -- on grounds which appear to be legally honest, but which can not be stated in terms of mechanical cause and effect, or of productive efficiency, or indeed in any terms that involve notions of physical dimensions or of mechanical action.
When the theoreticians explain and justify these returns that go to adroit salesmanship, or "managerial ability," as it is also called, it invariably turns but that the grounds assigned for it are of the nature of figures of speech -- metaphor or analogy.
Not that these standard theoretical explanations are to be set aside as faulty, inadequate or incomplete; their great volume and sincerity forbids that. It is rather that they are to be accepted as a faithful account of an insubstantial fact in insubstantial terms. And they are probably as good an account of the equitable distribution of free income as the principles of the modern point of view will tolerate.
But while intangible assets represent income which accrues out of certain immaterial relations between their owners and the industrial system, and while this income is accordingly not a return for mechanically productive work done, it still remains true, of course, that such income is drawn from the annual product of industry, and that its productive source is therefore the same as that of the returns on tangible assets. The material source of both is the same; and it is only that the basis on which the income is claimed is not the same for both. It is not a difference in respect of the ways and means by which they are created, but only in respect of the ways and means by which these two classes of income are intercepted and secured by the beneficiaries to whom they accrue. The returns on tangible assets are assumed to be a return for the productive use of the plant; returns on intangible assets are a return for the exercise of certain immaterial relations involved in the ownership and control of industry and trade.
Best known by name among intangible assets is the ancient rubric of "good-will," technically so called; which has stood over from before the coming of the new order in business enterprise. This has long been considered the original type-form of intangible assets as a class. By ancient usage the term denotes a customary preferential advantage in trade; it is not designed to describe a body of benevolent sentiments. Good-will has long been known, discussed and allowed for as a legitimate, ordinary and valuable immaterial possession of men engaged in mercantile enterprise of all kinds. It has been held to be a product of exemplary courtesy and fair dealing with customers, due to turning out goods or services of an invariably sound quality and honest measure, and indeed due to the conspicuous practice of the ordinary Christian virtues, but chiefly to common honesty. Similarly valuable, and of a similarly immaterial nature, is the possession of a trade-secret, a trade-mark, a patent-right, a franchise, any statutory monopoly, or a monopoly secured by effectually cornering the supply or the market for any given line of goods or services. From any one of these a profitable advantage may be derived, and they have therefore a market value. They afford their possessor a preferential gain, as against his competitors or as against the general body of customers which the state of the industrial arts and the organisation of business throws in his way. After the analogy of good-will, it has been usual to trace any such special run of free income to the profitable use of a special advantage in the market, which is then appraised as a valuable means of gain and comes to figure as an asset of its possessor. But all this goes to explain how these benefits go to these beneficiaries; it does not account for the fact that there is produced a net output of product available for free distribution to these persons.
These supernumerary and preferential gains, "excess profits," or whatever words may best describe this class of free income, may be well deserved by these beneficiaries, or they may not. The income in question is, in any case, not created by the good deserts of the beneficiaries, however meritorious their conduct may be. Honesty may conceivably be the best policy in mercantile pursuits, and it may also greatly serve the convenience of any community in which an honest merchant is found; yet honest dealing, strictly speaking, is an agency of conservation rather than of creation. A trade-secret may also be profitable to the concern which has the use of it, and the special process which it covers may be especially productive; but the same article of technological knowledge would doubtless contribute more to the total productivity of industry if it were shared freely by the industrial community at large. Such technological knowledge is an agency
