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at the root of it all； but rather by the eminently unyielding
stability and sufficiency of these principles under new
conditions。 It is not due to any inherent weakness or shiftiness
in these principles of law and custom； which have faithfully
remained the same as ever； and which all men admit were good and
sound at the period of their installation。 But it is beginning to
appear now； after the event； that the inclusion of unrestricted
ownership among those rights and perquisites which were allowed
to stand over when the transition was made to the modern point of
view is likely to prove inexpedient in the further course of
growth and change。
Unrestricted ownership of property； with inheritance； free
contract； and self…help； is believed to have been highly
expedient as well as eminently equitable under the circumstances
which conditioned civilised life at the period when the civilised
world made up its mind to that effect。 And the discrepancy which
has come in evidence in this later time is traceable to the fact
that other things have not remained the same。 The odious outcome
has been made by disturbing causes； not by these enlightened
principles of honest living。 Security and unlimited discretion in
the rights of ownership were once rightly made much of as a
simple and obvious safeguard of self…direction and self…help for
the common man； whereas； in the event； under a new order of
circumstances； it all promises to be nothing better than a means
of assured defeat and vexation for the common man。
Chapter 4
Free Income
Industry of the modern sort mechanical； specialised；
standardised； drawn on a large scale is highly productive。
When this industrial system of the new order is not hindered by
outside control it will yield a very large net return of output
over cost； counting cost in terms of man power and necessary
consumption； so large； indeed； that the cost of what is
necessarily consumed in productive work； in the way of materials；
mechanical appliances； and subsistence of the workmen； is
inconsiderable by comparison。 The same thing may be described by
saying that the necessary consumption of subsistence and
industrial plant amounts to but an inconsiderable deduction from
the gross output of industry at any time。 So inordinately
productive is this familiar new order of industry that in
ordinary times it is forever in danger of running into excesses
and turning out an output in excess of what the market that is
to say the business situation will tolerate。 There is constant
danger of 〃overproduction；〃 So that there is commonly a large
volume of man power unemployed and an appreciable proportion of
the industrial plant lying idle or half idle。 It is quite
unusual； perhaps altogether out of the question； to let all or
nearly all the available plant and man power run at full capacity
even for a limited time。
It is； of course； impossible to say how large the net
aggregate product over cost would be counting the product in
percentages of the necessary cost in case this industrial
system were allowed to work at full capacity and with free use of
all the available technological knowledge。 There is no safe
ground for an estimate； for such a thing has never been tried；
and no near approach to such a state of things is to be looked
for under the existing circumstances of ownership and control。
Even under the most favorable conditions of brisk times the
business situation will not permit it。 There will at least always
be an indefinitely large allowance to be reckoned for work and
substance expended on salesmanship； advertising； and competitive
management designed to increase sales。 This line of expenditures
is a necessary part of businesslike management； although it
contributes nothing to the output of goods； and in that sense it
is to be counted as a necessary deduction from the net productive
capacity of the industrial system as it runs。 It would also be
extremely difficult to make allowance for this deduction； since
much of it is not recognised as such by the men in charge and
does not appear on their books under any special descriptive
heading。 In one way and another； and for divers and various
reasons； the net production of goods serviceable for human use
falls considerably short of the gross output； and the gross
output is always short of the productive capacity of the
available plant and man power。
Still； taken as it goes； with whatever handicap of these
various kinds is to be allowed for； it remains patently true that
the net product greatly exceeds the cost。 So much so that
whatever is required for the replacement of the material
equipment consumed in production； plus 〃reasonable returns〃 on
this equipment； commonly amounts to no more than a fraction of
the total output。 The resulting margin of excess product over
cost plus reasonable returns on the material equipment is due to
the high productive efficiency of the current state of the
industrial arts and is the source of that free income which gives
rise to intangible assets。 The distinction between tangible
assets and intangible is not a hard and fast one； of course； but
the difference is sufficiently broad and sufficiently well
understood for use in the present connection； so long as no pains
is taken to confuse these terms with needless technical verbiage。
To avoid debate and digression； it may be remarked that
〃reasonable returns〃 is also here used in the ordinary sense of
the expression； without further definition； as being sufficiently
understood and precise enough for the argument。 The play of
motives and transactions by which a rough common measure of
reasonable returns has been arrived at is taken for granted。 A
detailed examination of all that matter would involve an extended
digression； and nothing would be gained for the argument。
According to the traditional view； which was handed on from the
period before the coming of corporation finance； and which still
stands over as an article of common belief in the certified
economic theories； 〃capital〃 represents the material equipment；
valued at its cost； together with funds in hand required as a
〃working capital〃 to provide materials and a labor force。 On this
view； corporation securities are taken to cover ownership of the
plant and the needed working capital； and there has been a
slow…dying prejudice against admitting that anything less
tangible than these items should properly be included in the
corporate capitalisation and made a basis on which to issue
corporate securities。 Hence that stubborn popular prejudice
against 〃watered stock〃 which corporation finance had to contend
with all through the latter half of the nineteenth century。
〃Watered stock〃 is now virtually a forgotten issue。 Corporation
finance has disposed of the quarrel by discontinuing the relevant
facts。
There is still a recognised distinction between tangible
assets and intangible； but it has come to be recognised in
corporation practice that the only reasonable basis of
capitalisation for a