The Theory of Business Enterprise/Chapter 6

What has been said on the use of loan credit has anticipated much of what is peculiar in modern business capital. Such is necessarily the case, since it is in the extensive use of credit that the later phases of the management of capital contrast most strikingly with the corresponding features of earlier business traffic. To follow the terminological precedents set by German writers, the late-modern scheme of economic life is a "credit economy," as contrasted with the "money economy" that characterizes early-modern times. The nature of business capital and its relations to the industrial process under the later, more fully developed, credit economy is in some degree different from what it was before the full and free use of credit came to occupy its present central position in business traffic; and more particularly is it at variance with the theoretical expositions of the economists of the past generation.

It has been the habit of economists and others to speak of "capital" as a stock of the material means by which industry is carried on, - industrial equipment, raw materials, and means of subsistence. This view is carried over from the situation in which business and industry stood at the time of Adam Smith and of the generation before Adam Smith, from whose scheme of life and of thought he drew the commonplace materials and conceptions with which his speculations were occupied. It further carries over the point of view occupied by Adam Smith and the generation to whom he addressed his speculations. That is to Say, the received theoretical formulations regarding business capital and its relations to industry proceed on the circumstances that prevailed in the days of the "money economy," before credit and the modern corporation methods became of first-class consequence in economic affairs. They canvass these matters from the point of view of the material welfare of the community at large, as seen from the standpoint of the utilitarian philosophy. In this system of social philosophy the welfare of the community at large is accepted as the central and tone-giving interest, about which a comprehensive, harmonious order of nature circles and gravitates. These early speculations on business traffic turn about the bearing of this traffic upon the wealth of nations, particularly as the wealth of nations would stand in a "natural" scheme of things, in which all things should work together for the welfare of mankind.

The theory, or what there is in the way of a theory, of business capital in the received body of doctrines is worked out from the point of view and for the theoretical purposes of the eighteenth century scheme of natural liberty, natural rights, and natural law; and the received theorems concerning the part played by capital and by the capitalist are substantially of the character of laws of nature, as that term was understood during the period to which these theorems owe their genesis. What these received theorems declare concerning the nature and normal function of capital and of the capitalist need not be recited here; their content is familiar enough to all readers, lay and learned. Also the merits of such a point of view for purposes of economic theory, and the adequacy of the received concept of capital for the purposes to which it was originally applied, need not detain the inquiry. Modern business management does not take that point of view, nor does "capital" carry such a meaning to the modern business man; because the guiding circumstances under which modern business is carried on are not those supposed to be given by a beneficent order of nature, nor do the controlling purposes of business traffic include that general well-being which constituted the final term of Adam Smith's social philosophy.

As a business proposition, "capital" means a fund of money values; and since the credit economy and corporation finance have come to be the ruling factors in industrial business, this fund of money values (taken as an aggregate) bears but a remote and fluctuating relation to the industrial equipment and the other items which may (perhaps properly) be included under the old-fashioned concept of industrial capital.(1*)

Capital has been spoken of as the capitalized (aggregated) cost of industrial equipment, etc.,(2*) a view which had its significance for economic theory a hundred years ago; but since corporation finance has come to pervade the management of business this view is no longer of particular use for a theoretical handling of the facts. To avoid the tedium of argument it may be conceded that under the old dispensation, of partnerships and individual management in business, the basis of capitalization was the cost of the material equipment owned by any given concern; and so far as the methods of partnership and private firms still prevails such may still be the current method of capitalization, especially de jure. But in so far as business procedure and business conceptions have been shaped in the image of the modern corporation (or limited liability company), the basis of capitalization has gradually shifted, until the basis is now no longer given by the cost of material equipment owned, but by the earning-capacity of the corporation as a going concern.(3*)

A given corporation's capital is, of course, de jure a magnitude fixed in the past by an act of legislature chartering the company, or by an issuance of stock by the company under the terms of its charter or of the acts which enable it. But this de jure capitalization is nominal only, and there are few, if any, cases in which the effective capital of a company coincides with its de jure capital. Such could be the case only so long as all the securities which go to make up the company's capital were quoted at par on the market. The effective capitalization of any modern company, that is to say, the capitalization which is effective for current business purposes as distinct from the formal requirements of the charter, is given by the quotations of the company's securities, or by some similar but less overt market valuation in case the company's capital is not quotable on the market. The effective (business) capitalization, as distinct from the de jure capitalization, is not fixed permanently and inflexibly by a past act of incorporation or stock issue. It is fixed for the time being only, by an ever recurring valuation of the company's properties, tangible and intangible, on the basis of their earning-capacity. (4*)

In this capitalization of earning-capacity the nucleus of the capitalization is. not the cost of the plant, but the concern's good-will, so called, as has appeared in the last preceding chapter.(5*) "Good-will" is a somewhat extensible term, and latterly it has a more comprehensive meaning than it once had. Its meaning has, in fact, been gradually extended to meet the requirements of modern business methods. Various items, of very diverse character, are to be included under the head of "good-will"; but the items included have this much in common that they are "immaterial wealth," "intangible assets"; which, it may parenthetically be remarked, signifies among other things that these assets are not serviceable to the community, but only to their owners. Good-will taken in its wider meaning comprises such things as established customary business relations, reputation for upright dealing, franchises and privileges, trade-marks, brands, patent rights, copyrights, exclusive use of special processes guarded by law or by secrecy, exclusive control of particular sources of materials. All these items give a differential advantage to their owners, but they are of no aggregate advantage to the community.(6*) They are wealth to the individuals concerned differential wealth; but they make no part of the wealth of nations.(7*)

It is in the industrial corporations that this capitalization of good-will is seen to the best advantage - including, under the term "industrial corporations," railway companies, iron and steel concerns, mines, etc., as well as what are known in the stock market specifically as "industrials." The corporation is, of course, not the only form of business concern in the industrial field, but it is the typical, characteristic form of business organization for the management of industry in modern times, and the peculiarities of modern capital are therefore best seen in these modern corporations. Many of these corporations have grown out of partnerships and firms previously existing, and such is still the genesis of many of the corporations that come forward from time to time. In such a case of conversion from partnership or firm to corporation the rule is that the new corporation takes over a body of good-will, under one form and name or another, previously pertaining to the partnership which it displaces. Conversely, when a flourishing partnership or similar private firm has gained an assured footing of good-will, in the way of any or all of the items enumerated under that term above, its lot, as prescribed by modern business exigencies, is to go up into a corporation, either by simple conversion into the corporate form or through coalition with other firms into a larger corporate whole. There is in this matter no hard and fast rule, of course. On the one hand, the approved methods of corporation finance may in some measure be resorted to by a private firm, Without formal conversion of the concern into the corporate form; and on the other hand, an incorporated company may continue to carry on its business after the manner usual with privately owned concerns. But taken by and large, it will be found that with the assumption of the corporate form is associated a more modern method of capitalization and a freer use of credit. The advantages which the corporate form offers in these respects are commonly not neglected. The more archaic forms of organization and business management, in which recourse is commonly not had to the characteristic methods of corporation finance, prevail chiefly in those "backward" lines of industry in which monopoly or other differential advantages of an intangible nature are not readily attainable; such, e.g., as farming, fishing, local merchandising, and the minor mechanical trades and occupations. In this range of industries large (corporate) organization has hitherto been virtually impracticable, and here at the same time differential advantages, of the nature of good-will (as indicated above), are relatively scant and precarious. Where extensive differential advantages of this kind come in, the corporate form of organization is also likely to come in.

The cases are also frequent where a corporation starts out full-fledged from the beginning, without derivation from a previously existing private firm. Where this happens, the start is commonly made with some substantial body of immaterial goods on which to build up the capitalization; it may be a franchise, as in the case of a railway, telegraph, telephone, street-car, gas, or water company; or it may be the control of peculiar sources of material, as in the case of an oil or natural gas company, or a salt, coal, iron, or lumber company; or it may be a special industrial process, patented or secret; or it may be several of these. When a corporation begins its life history without such a body of immaterial differential advantages, the endeavors of its management are early directed to working up a basis of good-will in the way of trade-marks, clientele, and trade connections which will place it in something of a monopoly position, locally or generally (8*) Should the management not succeed in these endeavors to gain an assured footing on some such "immaterial" ground, its chances of success among rival corporations are precarious, its standing is insecure, and its managers have not accomplished what is looked for at their hands. The substantial foundation of the industrial corporation is its immaterial assets.

The typical modern industrial corporation is a concern of sufficient magnitude to be of something more than barely local consequence, and extends its trade relations beyond the range of the personal contact of its directive officials. Its properties and its debts are also commonly owned, in part at least, by persons who stand in no direct personal relation to the board of managers. In an up-to-date corporation of this character the typical make-up of the corporate capital, or capitalization, is somewhat as follows: The common stock approximately covers the immaterial properties of the concern, unless these immaterial properties are disproportionately large and valuable; in case of a relatively small and local corporation the common stock will ordinarily somewhat more than cover the value of the immaterial property and comprise something of the plant; in case of the larger concerns the converse is likely to be true, so that here the immaterial property, intangible assets, is made to serve in some measure as a basis for other securities as well as for the common stock. The common stock, typically, represents intangible assets and is accounted for by valuable trade-marks, patents, processes, franchises, etc. Whatever material properties, tangible assets, are in hand or to be acquired are covered by preferred stock or other debentures. The various forms of debentures account for the material equipment and the working capital (the latter item corresponding roughly to the economists' categories of raw materials, wages fund, and the like). Of these debentures the preferred stock is the most characteristic modern development. It is, de jure, counted as a constituent of the concern's capital and the principal is not repayable; in this (legal) respect it is not an evidence of debt or a credit instrument.(9*) But it has little voice in the direction of the concern's business policy.(10*) In practice the management rests chiefly on the holdings of common stock. This is due in part to the fact that the preferred bears a stated rate of dividends and is therefore taken up by scattered purchasers as an investment security to a greater extent than the common. In this (practical) respect it amounts to a debenture. Its practical character as a debenture is shown by the stated rate of dividends, and where it is "cumulative" that feature adds a further step of assimilation to the ordinary class of debentures. Indeed, in point of practical effect preferred stock is in some respects commonly a more pronounced credit instrument than the ordinary mortgage; it alienates the control of the property which it represents more effectually than the ordinary bond or mortgage loan, in that it may practically be a debt which, by its own terms, cannot be collected, so that by its own terms it may convey a credit extension from the holder to the issuing corporation in perpetuity. Its effect is to convey the discretionary control of the material properties which it is held to represent into the hands of the holders of the common stock of the concern. The discretionary management of the corporate capital is, by this device, quite as effectually as by the use of ordinary credit instruments, vested in the common stock, which is held to represent the corporation's goodwill. The discretionary disposal of the entire capital vests in securities representing the intangible assets. In this sense, then, the nucleus of the modern corporate capitalization is the immaterial goods covered by the common stock.(11*)

This method of capitalization, therefore, effects a somewhat thoroughgoing separation between the management and the ownership of the industrial equipment. Roughly speaking, under corporate organization the owners of the industrial material have no voice in its management, and where preferred stock is a large constituent of the capital this alienation of control on the parts of the owners may be, by so much, irrevocable. Preferred stock is, practically, a device for placing the property it represents in perpetual trust with the holders of the common stock, and, with certain qualifications, these trustees are not answerable for the administration of the property to their trustors. The property relation of the owners to their property is at this point attenuated to an extreme degree. For most business purposes, it should be added, the capital covered by other forms of debentures is in much the same position as that covered by the preferred stock.(12*)

The various descriptions of securities which in this way represent corporate capital are quotable on the market and are subject to market fluctuations; whereby it comes about that the aggregate effective magnitude of the corporate capital varies with the tone of the market, with the manoeuvres of the business men to whom is delegated the management of the companies, and with the accidents of the seasons and the chances of peace and war. Accordingly, the amount of the business capital of a given concern, or of the business community as a whole, varies in magnitude in great measure independently of the mechanical facts of industry, as was noted above in speaking of loan credit.(13*) The market fluctuations in the amount of capital proceed on variations of confidence on the part of the investors, on current belief as to the probable policy or tactics of the business men in control, on forecasts as to the seasons and the tactics of the guild of politicians, and on the indeterminable, largely instinctive, shifting movements of public sentiment and apprehension. So that under modern conditions the magnitude of the business capital and its mutations from day to day are in great measure a question of folk psychology rather than of material fact.

But in this uncertain and shifting relation of the business capital to the material equipment there are one or two points which may be set down as fairly secure. Since the credit instruments involved in modern capitalization may be used as collateral for a further credit extension, as noted in the chapter on loan credit,(14*) the aggregate nominal capital in hand at a given time is, normally, larger by an appreciable amount than the aggregate value of the material properties involved;(15*) 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.(16*)

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.(17*)

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.(18*)

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, (19*) 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.(20*) 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.(21*)

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 has in the efficient management of the concern as an industrial enterprise. It is to the interest of the community at large that the enterprise should be so managed as to give the best and largest possible output of goods or services; whereas the interest of the corporation as a going concern is that it be managed with a view to maintaining its efficiency and selling as large an output as may be at the best prices obtainable in the long run; but the interest of the managers, and of the owners for the time being, is to so manage the enterprise as to enable them to buy it up or to sell out as expeditiously and as advantageously as may be. The interest of the community at large demands industrial efficiency and serviceability of the product; while the business interest of the concern as such demands vendibility of the product; and the interest of those men who have the final discretion in the management of these corporate enterprises demands vendibility of the corporate capital. The community's interest demands that there should be a favorable difference between the material cost and the material serviceability of the output; the corporation's interest demands a favorable pecuniary difference between expenses and receipts, cost and sale price of the output; the corporation directorate's interest is that there should be a discrepancy, favorable for purchase or for sale as the case may be, between the actual and the putative earning-capacity of the corporation's capital.

It has been noted in an earlier chapter that there unavoidably results a discrepancy, not uncommonly a divergence, between the industrial needs of the community and the business needs of the corporations. Under the regime of the old-fashioned "money economy," with partnership methods and private ownership of industrial enterprises, the discretionary control of the industrial processes is in the hands of men whose interest in the industry is removed by one degree from the interests of the community at large. But under the regime of the more adequately developed "credit economy," with vendible corporate capital,(22*) the interest of the men who hold the discretion in industrial affairs is removed by one degree from that of the concerns under their management, and by two degrees from the interests of the community at large.

The business interest of the managers demands, not serviceability of the output, nor even vendibility of the output, but an advantageous discrepancy in the price of the capital which they manage. The ready vendibility of corporate capital has in great measure dissociated the business interest of the directorate from that of the corporation whose affairs they direct and whose business policy they dictate, and has led them to centre their endeavors upon the discrepancy between the actual and the putative earning-capacity rather than upon the permanent efficiency of the concern. Their connection with the concern is essentially transient; it can be terminated speedily and silently whenever their private fortune demands its severance. Instances are abundant, more particularly in railway management, where this discrepancy between the business interest of the concern and the private business interest of the managers for the time being has led to very picturesque developments, such as could not occur if the interests of the management were bound up with those of the corporation in the manner and degree that once prevailed. The fact is significant that the more frequent and striking instances of such management of corporate affairs for private ends have hitherto occurred in railroading, at the same time that the methods and expedients of modern corporation finance have also first and most widely reached a fair degree of maturity in railroading. It holds out a suggestion as to what may fairly be looked for when corporation finance shall have made itself more thoroughly at home in the "industrials" proper. Indeed, the field of the "industrials" is by no means barren of instances comparable with the maturer and more sagacious railroad financiering.(23*)

The stock market interest of those men who have the management of industrial corporations is a wide and multifarious one. It is not confined to the profitable purchase and sale of properties whose management they may have in hand. They are also interested in making or marring various movements of coalition or reorganization, and to this ulterior end it is incumbent on them to "manipulate" securities with a view to buying and selling in such a manner as to gain control of certain lines of securities.(24*) Hence it is a rule of this class of business traffic to cultivate appearance, - to avoid, or sometimes to court, the appearance of sin. So that under this leadership the course of industrial affairs is, in great measure, if not altogether, guided with a view to a plausible appearance of prosperity or of adversity, as the case may be. Under given circumstances it may as well become the aim of men in control to make an adverse showing as a favorable one. The higher exigencies of the captain of industry's personal fortunes, as distinct from those of the corporation controlled by him, may from time to time be best sewed by an apparent, if not an actual, mismanagement of industrial affairs. A convincing appearance of decline or disaster will lower the putative earning-capacity of the concern below its real earning-capacity and so will afford an advantageous opportunity for buying with a view to future advance or with a view to strategic control. Various other expedients looking to the like outcome are well known to the craft, besides bona fide mismanagement. A given line of securities may be temporarily depressed by less heroic tactics; but the point in question here is the fact that under this system of corporation finance the affairs of the corporation are in good part managed for tactical ends which are of interest to the manager rather than to the corporation as a going concern.

What was said in speaking of credit extension without a determinate time interval (25*) applies to this class of business, with a slight change of phrase. In this higher development of corporation finance, in the manipulations of vendible capital, the interval of the turnover spoken of above becomes an indeterminate factor. The gains of the business come to have but an uncertain and shifty relation to the lapse of time and cannot well be calculated per cent. per time-unit. There is, therefore, on these higher levels of business management, properly speaking no ascertainable ordinary rate of earnings. The capital which may be distinctively regarded as operative in the business of manipulation, the valuable items specifically employed in the traffic in vendible corporate capital, is made up of the operator's good-will and his financial solvency. Solvency on a large scale is requisite to carrying on traffic of this class, but the collateral on which this extensive solvency constructively rests is to but a partial extent drawn into the business as a basis for an actual credit extension. What counts in the case is the solvency of the operator rather than an outright resort to the credit extension which this solvency might afford. The working capital involved in these transactions is accordingly of a peculiarly elusive character, and the time element in the use of this capital is hard to determine, if such a time element can properly be said to enter into the case at all.

More in detail, the business man in pursuit of gain along this line must, in the ordinary case, be possessed of large holdings of property, this being the basis of the solvency necessary to the business. These holdings are commonly in the form of securities in the concern whose vendible capital is the subject of his traffic, as well as in other corporations. These securities represent capital, tangible and intangible, which is already employed in the ordinary business of the concern by which they have been issued; the capital, therefore, is already in use to the full extent and is presumably yielding the ordinary rate of earnings. But the solvency for which the ownership of this capital affords a basis may further be useful in enabling the owner to carry on a traffic in vendible corporate capital without withdrawing any appreciable portion of his holdings from the lucrative investments in which they have been placed. In other words, he is able, under modern circumstances, to make a secondary use of his investments for the purpose of trading in vendible corporate capital; but this secondary use of investments bears no hard and fast quantitative relation to the investments in question, nor does it in any determinate way interfere with the ordinary employment of this invested capital in the commonplace conduct of the corporations' business traffic. The capital employed, as well as the potential credit extension which it affords for the purposes of this higher business traffic, is therefore in a peculiar degree intangible, and, in respect of its amount, highly elusive.

Much the same is true of the good-will employed in this traffic. It is also in good part good-will which already serves the purposes of the commonplace business traffic of the corporations on whose securities the business man in question rests his solvency. So that in this higher business traffic the good-will engaged is also here turned to a secondary use. The business economies which are in this way made practicable by a reduplication of uses and made to inure to the greater business men's profit are of great magnitude; but the magnificent additions which are in this way made to the business community's capitalizable forces need scarcely be dwelt on here.

The elusive and flexuous character of the elements of wealth engaged, as well as the absence of an ascertainable ordinary rate of earnings in this line of business, has led economists to speak of this traffic in vendible capital as a "speculative" business.(26*) The mere buying and selling of stocks by outsiders for a rise or a decline is of course a speculative business; it is a typical form of speculative business. But in so far as such buying and selling is carried on by the managers of the corporations whose securities are the subject of the traffic, and especially where the securities are bought and sold with a view to the control of the corporations in question and their management for private, tactical ends, a characterization of the business as "speculative" is inadequate and beside the point. This higher reach of corporation financiering has little if any more of a speculative character than what belongs to the commonplace business management of any industrial enterprise. In all business enterprise that stands in relations with the market and depends on vendibility of its output there is more or less uncertainty as to the outcome.(27*) In this sense all industrial business, as well as commercial business, has something of a speculative character. But it is little to the purpose on that account to lump industrial enterprises and corporation financiering together as "speculative business" and deal with them as if this were their most salient and consequential bearing. What speculative risk there is in these lines of business is incidental, and it neither affords the incentive to engaging in these pursuits nor does it bound the scope of their bearing upon economic affairs. The speculative risk involved is no greater, relatively to the magnitude of the interests involved, in this larger traffic that deals in vendible capital than it is in the ordinary lines of business traffic that deal in vendible products. In both cases there may be speculation, but in both cases it is a side issue. Indeed, as near as one may confidently hold an opinion on so dark a question, the certainty of gain, though perhaps not the relative amount of it, seems rather more assured in the large-scale manipulation of vendible capital than in business management with a view to a vendible product.

What may obscure the question is the fact that the manipulations involved in this traffic in vendible capital commonly impose increased risks upon the business concerns engaged in industry - the corporations whose capital is involved, as well as other firms. The everyday business of the corporations whose securities are involved, as well as of other business concerns engaged in rival or related lines of industry, is rendered more hazardous than it might be in the absence of this financiering traffic in vendible capital. The manipulations carry risk, not so much to the manipulators as such, as to the corporations whose properties are the subject of manipulation; but since the manipulators commonly own but a relatively small proportion of the properties involved or touched by their manipulations, the risks which arise do not fall chiefly on them. To this is to be added, as of prime importance for the whole question, that the manipulators have the advantage of being able, in great part, to foresee the nature, magnitude, and incidence of the risks which they create. Rightly seen, this, of course, goes to say that the increased speculative risk due to the traffic in vendible capital does not fall on that traffic, but on the business enterprise engaged about the output of vendible goods. The traffic in vendible capital is not without its speculative risks, but the risks which it creates fall with relatively greater weight upon the business men who are not immediately concerned in this traffic. Indeed, so secure and lucrative is this class of business, that it is chiefly out of gains accruing, directly and indirectly, from such traffic in vendible capital that the great modern fortunes are being accumulated; and both the rate and the magnitude of these accumulations, whether taken absolutely or relatively to the total increase of wealth, surpass all recorded phenomena of their kind. Nothing so effective for the accumulation of private wealth is known to the history of human culture.

The aim and substantial significance of the "manipulations" of vendible capital here spoken of is an ever recurring recapitalization of the properties involved, whereby the effective capitalization of the corporations whose securities are the subject of the traffic is increased and decreased from time to time. The fluctuations, or pulsations, of this effective capitalization are shown by the market quotations of the securities, as noted above.(28*) It is out of these variations in capitalization that the gains of the traffic arise, and it is also through the means of these variations of capitalization that the business men engaged in this higher finance are enabled to control the fortunes of the corporations and to effect their strategic work of coalition and reorganization of business enterprises. Hence this traffic in vendible capital is the pivotal and dominant factor in the modern situation of business and industry.(29*) It has been noted above that what may be called the working capital on which this higher corporation finance proceeds is made up, chiefly, of two elements: the solvency (and consequent potential credit) of the men engaged, and the "good-will" of these men. Both of these elements are of a somewhat intangible and elusive character, resting, as they do, somewhat indirectly and shiftily on elements already elsewhere engaged in business enterprise. The solvency in question rests in large part on the capital of the corporations whose capitalization is subject to the fluctuations induced by the traffic in vendible capital. It is therefore necessarily a somewhat indeterminate and unstable magnitude. To this is to be added the "floating capital" and banking capital at the disposal of these men. If a common-sense view be taken of the business, the good-will engaged must also be added to the assets. There is involved a very considerable and very valuable body of good-will, appertaining to the financiers engaged and to the financing firms associated with them.(30*) This goodwill and this solvency is capital, for the purpose in hand, as effectually as the good-will and securities incorporated in the capitalization of any corporation engaged in industrial business.

But hitherto this particular category of goodwill has not been formally capitalized. There may be peculiar difficulties in the way of reducing this good-will to the form of a fund, expressing it in terms of a standard unit, and so converting it into quotable common stock, as has been done with the corresponding good-will of incorporated industrial enterprises. So also as regards the body of solvency engaged, - the potential credit, or credit capacity, of the promoters and financiers. Perhaps this latter had best also be treated as an element of good-will; it is difficult to handle under any other, more tangible, conception. It may be difficult to standardize, fund, and capitalize these unstable but highly efficient factors of business enterprise; but the successful capitalization of good-will and credit extensions in the case of the modern industrial corporations argues that this difficulty should not be insurmountable in case an urgent need, - that is to say, the prospect of a profitably vendible result, - should press for a formal capitalization of these peculiar elements of business wealth. There can be no question, e.g., but that the good-will and large solvency belonging to such a firm as J.P. Morgan and Company for the purposes of this class of business enterprise are an extremely valuable and substantial asset, as is also, and more unequivocally, the good-will of the head of that firm. These intangible assets, immaterial goods, should, in all consistency, be reduced to standard units, funded, issued as common stock, and so added to the statistical aggregate of the country's capitalized wealth.

It is safe to affirm that this good-will of the great reorganizer has in some measure entered in capitalized form into the common stock of the United States Steel Corporation, as also into that of some of the other great combinations that have latterly been effected. The "good-will" of Mr Carnegie and his lieutenants, as well as of many other large business men connected with the steel industry, has also no doubt gone to swell the capitalization of the great corporation. But good-will on this higher level of business enterprise has a certain character of inexhaustibility, so that its use and capitalization in one corporation need not, and indeed does not, hinder or diminish the extent to which it may be used and capitalized in any other corporation.(31*) The case is analogous, though scarcely similar, to that of the workmanlike or artistic skill of a handicraftsman, or an artist, which may be embodied in a given product without abating the degree of skill possessed by the workman. Like other good-will, though perhaps in a higher degree of sublimation, it is of a spiritual nature, such that, by virtue of the ubiquity proper to spiritual bodies, the whole of it may undividedly be present in every part of the various structures which it has created. Indeed, the fact of such good-will having been incorporated in capitalized form in the stock of any given corporation seems rather to augment than to diminish the amount at which it may advantageously be capitalized in the stock of the next corporation into which it enters. It has also the correlative spiritual attribute that it may imperceptibly and inscrutably withdraw its animating force from any one of its creatures without thereby altering the material circumstances of the corporation which suffers such an intangible shrinkage of its forces.

There can be no question but that the good-will of the various great organizers and their financiering houses has repeatedly been capitalized, probably to its full amount, in the common stock of the various corporations which they have created; but taken in the sense of an asset belonging to the financing house as a corporation, it is not known that this item of immaterial wealth has yet been formally capitalized and offered in quotable shares on the market or included in the schedules of personal property.(32*)

The sublimation of business capital that has been going forward in recent times has grave consequences for the owners of property as well as for the conduct of industry. In so far as invested property is managed by the methods of modern corporation finance, it is evident that the management is separated from the ownership of the property, more and more widely as the scope of corporation finance widens. The discretion, the management, lies in the hands of the holders of the intangible forms of property; and with the extension of corporation methods it is increasingly true that this management, again, centres in the hands of those greater business men who hold large blocks of these intangible assets. The reach of a business man's discretionary control, under corporation methods, is not proportioned simply to the amount of his holdings. If his holdings are relatively small, they give him virtually no discretion. Whereas if they are relatively large, they may give him a business discretion of much more than a proportionate reach. The effective reach of a business man's discretion might be said to increase as the square of his holdings; although this is to be taken as a suggestive characterization rather than as an exact formula.

Among the holdings of industrial property that count in this way toward control of the business situation, the intangible assets (represented by common stock, good-will, and the like) are chiefly of consequence. Hence follow these two results: the fortunes of property owners are in large measure dependent on the discretion of others the owners of intangible property; and the management of the industrial equipment tends strongly to centre in the hands of men who do not own the industrial equipment, and who have only a remote interest in the efficient working of this equipment. The property of those who own less, or who own only material goods, is administered by those who own more, especially of immaterial goods; and the material processes of industry are under the control of men whose interest centres on an increased value of the immaterial assets.(33*)

NOTES:

1. The distinction between business capital and "industrial capital" or "capital goods" has been shown by Knies, Geld und Credit, vol. I. ch. II. pp. 40-60. Distinctions having a very similar erect in some bearings are to be found in Rodbertus ("private capital" and "national capital"), in Bohm-Bawerk ("acquisitive capital" and "productive capital," or "private capital" and "social capital"), in Clark ("capital" and "capital goods"). Similar distinctions are made by various writers to help out the incompetency of the received definition of the term. The merit of these distinctions does not concern the present inquiry, since they are made for other purposes than that here aimed at. The distinction made above is not an attempt to recast the terminology of economic theory, but is simply an expedient for present use. It amounts to an unqualified acceptance of the concept (more or less well defined) which business men habitually attach to the term "capital." Mr F.A. Fetter has latterly spoken for the restriction of "capital," as a technical term, practically to what is here called "business capital." Mr Fetter's "capital concept," however, should probably not be taken to cover intangible assets. The practical distinction is visible in the testimony of various witnesses before the Industrial Commission, as also in the special report on "Securities," Report, vol. XIII.

2. Even so late and competent a student of corporate capital as J. von Korosi is bound by this antique preconception, and his work has suffered in consequence. See Finanzielle Ergebnisse der Actiengesellschaften, p. 3.

3. This state of the case is brought out, in a veiled manner, by the well-known proposition, expounded in varying form by various writers, that the cost of equipment on which capitalization must, in theory, take place is the cost of reproduction of all valuable items included, tangible and intangible.

4. "Nothing is more illusive and delusive than the idea that if a corporation's stock be only paid in in money at the outset it is therefore better off than one that has issued its stock for property that could not be converted for one cent on the dollar. The question is what assets the corporation has got at the time of the particular transaction, and that can be ascertained only by present inquiry." - Testimony of F.L. Stetson, Report of the Industrial Commission, vol. I. p. 976. Cf. Meade, Trust Finance, ch. XVI and XVIII.

5. Earning-capacity is practically accepted as the effective basis of capitalization for corporate business concerns, particularly for those whose securities are quoted on the market. It is in the stock market that this effective capitalization takes place. But the law does not recognize such a basis of capitalization; nor are business men generally ready to adopt it in set form, although they constantly have recourse to it, in effect, in operations of investment and of credit extension. Cf. Report of the Industrial Commission, vol. I. pp. 6, 17, 21 (Test. F.B. Thurber); p. 967 (Test. F.L. Stetson); pp. 585-587 (Test. H.H. Rogers); pp. 110-111, 124 (Test. H.O. Havemeyer); pp. 1021, 1032 (Test. J.W. Gates); pp. 1054-1055 (Test S. Dodd); vol. XIII. pp. 287-288 (Test. H. Burn); p. 388 (Test. J. Morris); pp. 107-108 (Test. E.R. Chapman). See Quarterly Journal of Economics, February 1903, pp. 344-345, "The Holyoke Water Case," for an illustrative decision.

6. The advantages afforded their owners by these intangible assets have latterly been discussed by economists under such headings as "Rent" or "Quasi-Rent." These discussions, it is believed, are of great theoretical weight. In business practice, however, the items in question are treated as capital, which must avail as an excuse for including them here in business Capital.

7. Compare Bohm-Bawerk's and Clark's distinctions between "private" and "social" capital, and between "capital" and "capital goods."

8. See Chapter III above.

9. On the books of the corporation it is, of course, carried as an item of liability; as is the common stock; but that is a technical expedient of accountancy, and does not touch the substantial question.

10. See testimony of various witnesses on "Capitalization" before the Industrial Commission, vols. I, IX, XIII.

11. As one of many illustrative cases, the Rubber Goods Manufacturing Company may be taken as a typical instance of a corporation organized in a conservative but up-to-date manner for permanent success and stable value. Its authorized issue of stock is $25,000,000 7 per cent cumulative preferred, and $25,000,000 common. The actual issue in 1901 was about $8,000,000 preferred and $17,000,000 common, of which the preferred was presumed to cover the value of the tangible assets. Another coalition organized by the same promoter (Mr C.R. Flint), the American Chicle Company, illustrates the same general feature. The preferred stock of this company ($3,000,000) "in round numbers was three times the amount of tangible assets," while the common stock ($6,000,000) represents no tangible assets. The aggregate capitalization is about nine times the tangible assets. The witness says that this corporation has been proved by events to be "on a conservative basis from the fact that the company has paid 8 per cent on its common stock," which has been selling at 80. - Report of the Industrial Commission, vol. XIII. pp. 47, 50.

12. It may be argued that this identification of the common stock with the intangible assets holds true in theory only, in the sense that this is the view held by the business men who occupy themselves with such matters; while in point of fact no distinction of this nature between common and preferred stock is or can practically be maintained after the stock has once found its way into the market. It might seem, in other words, that when the stock has once passed the stage of organization and gone into the hands of the purchasers, each share represents nothing but an undivided interest in the aggregate capitalization of the concern, so that the particular item of wealth represented by a given share or given form of security can no longer be identified.

On the face of the situation such appears to be the case, but there are facts which argue for the view set out above. It is, e.g., well known that whenever circumstances arise which immediately affect the value of the good-will of a corporation, it is the quotations of the common stock that first and most decidedly are affected. If the goodwill of the concern makes a great and rapid gain, e.g. through manoeuvres which put it in a position of monopoly or through changes in the goods market which greatly increase the demand for the concern's product, and the like, it is the quotation of the common stock that measures and registers the advantage which thereby accrues to the concern, and the market fluctuation of the common stock is likewise the instrument by means of which manipulations are carried through that affect these intangible assets. At the same time this rule does not hold hard and fast, as is seen in case of a liquidation when the capital of the concern may have shrunk to such dimensions that the entire capital, including the intangible assets, will no more than satisfy the claims represented by the debentures. Still, in point of practical fact, the (theoretical) preconception of businessmen that the common stock in some intelligible sense covers the intangible assets is fairly borne out by everyday experience, taken by and large.

A curious parallel might be traced between the current endeavors of the business community to organize and manage the industrial equipment on the basis of immaterial assets and the medieval business perplexities and actions relative to loans on interest. In both cases the business community has had to face untried exigencies together with a popular, traditional prejudice that discountenances the expedients by which these exigencies are to be met. The medieval presumption was that the management of productive goods and the profits accruing from their use must go to their users. (Cf. Ashley, Economic History, vol. I. ch. III, vol. II ch. VI; Endemann, Die nationalokonomische Grundsatze der kanonistischen Lehre.) The modern presumption is that the management of the equipment and the gains from such management must vest in the owner. The modern exigencies decide that the equipment must be managed by others than the owners and that profits must largely accrue to those who financially manage the concern. The expedient by which this result is sought to be reached is the fiction of intangible assets and the impersonal, irrevocable credit extension covered by the preferred stock. The effect is to dissociate ownership from management. This is the necessary outcome of a "credit economy" consistently and fully carried through. The management of the material equipment of industry is thrown into the hands of those who own the immaterial wealth; that is to say, those who own the claim to manage the equipment. The current prejudice which insists on management by the owners is set aside by feigning that this claim has an industrial value, and so capitalizing it on the basis of the differential advantage which accrues to its holders.

13. See also a discussion by E.S. Meade, Quarterly Journal of Economics, February 1902, pp. 217 et seq., of how "good-will" may vary in magnitude, or even disappear, when a concern eaters a larger coalition; also, on the same general head, W.F. Willoughby," Integration of Industry in the United States," ibid., November 1902.

14. p. 113 above.

15. cap' = cap + cap/n > cap, in which cap' is the nominal capital, as increased by the credit element cap/n.

16. mat' = mat + (1/n)(cap/n) > mat, in which mat' is the current value of the material equipment,as increased (over mat) by the competitive demand for equipment due to the credit element cap/n. One of the substantial secondary benefits to be noted as flowing from these modern business expedients is the effect of corporation finance upon the aggregate nominal wealth of the community. A given community, possessed of a given complement of material wealth, is richer in capital if a large proportion of its industrial equipment is capitalized and managed by corporation methods, quite apart from any increase in the material items of which the community is possessed. (Cf. Twelfth Census of the United States, "Manufactures," pt. I. p. xcvi) Wealth may in this way be increased (about twofold on an average), inexpensively, by the simple expedient of incorporating the community's business concerns in the form of joint-stock companies. The more highly involved and the more widely extended the corporation financiering is, the richer, in statistical terms of capital, is the community, other things equal. Among these other things are the material facts of the case.

17. The commodities bought and sold in the goods market are the outcome of a process of production and are useful for a material purpose; those bought and sold in the capital market are the outcome of a process of valuation and are useful for purposes of pecuniary gain.

18. Cf. Marx, Kapital (4th ed.) bk. I, ch. IV.

19. Effective capital = current market value of nominal capital = presumptive earning capacity x purchase period, neglecting fortuitous and incalculable items which may affect any given case.

If nominal capital = cap, effective capital = cap', presumed annual earnings = ea', and the purchase period of capitalized property (years' purchase) = yp = 1/interest rate per annum, we have cap <> cap' = ea' x yp = ea'/int.

This equation between cap' and ea' is disturbed by the presence in any given case of variable factors which cannot be included in the equation, but it remains true after all qualification has been made that cap' = f(ea'/int).

20. Something of this kind is the usual ground of the obstinate resistance which most business men oppose to publicity of accounts. In lines of business, as, e.g. railroading, in which accounts are readily and effectually sophisticated ("doctored"), the objections to publicity are commonly less strenuous.

21. Cf., e.g., Eberstadt, Deutsche Kapitalismarkt.

22. The capital of any industrial concern under the "money economy" is, of course, also vendible, but with relative difficulty; while the readier vendibility of modern corporate capital is so characteristic and consequential a factor in business and contrasts so broadly with the old-fashioned business methods that it may fairly be spoken of as vendibility par excellence. The "holding company" is the mature development of this traffic in vendible capital in industrial business.

23. It may be noted, by the way, that the question of the turnover (spoken of on p. 95 above) becomes, under the circumstances of the modern corporation finance, in great part a question of the interval between the purchase and sale of the capital engaged in industry on the one hand, and of the magnitude of the discrepancy between actual and putative earning-capacity on the other hand, rather than a question of the period of the industrial process and the magnitude of the output and its price. The formula there shown becomes: --


 * turnover = capital/time (actual earning capacity/n = putative earning capacity - actual earning capacity)

in which capital is the amount of the operator's investment in the concern's securities, the time is the interval between purchase and sale of the securities, and the putative earning capacity is taken to exceed the actual earning capacity by an indeterminate fraction of the latter.

24. Cf. Chapter III above.

25, Cf. Chapter V above.

26. Cf. Emery, "Place of the Speculator in the Theory of Distribution." Proceedings of the twelfth annual meeting of the American Economic Association; also "Discussion" following Mr Emery's paper.

27. Well shown in Mr Emery's paper cited above.

28. p. 154.

29. As is true of good-will and credit extensions generally, so with respect to the good-will and credit strength of these greater business men ; it affords a differential advantage and gives a differential gain. In the traffic of corporation finance this differential gain is thrown immediately into the form of capital and so is added to the nominal capitalized wealth of the community. What it gives to its holders in this capitalized form is a claim to a proportionate share in the existing wealth. If other things are supposed to remain the same (which may not be the case), the claim so enforced by the great financiers on the basis of good-will and credit extension deducts that much from the wealth held by the rest, the previous holders, as counted in terms of material wealth; as counted in term of money value, of course, the holdings of previous holders do (or need) not suffer, since the new claim take the form of an edition to the number of capitalized value units, although the increased aggregate number of value units constitutes a claim on the same aggregate mass of wealth as before. The pro rata reduction of the material magnitude of the several shares of wealth is not felt as an impoverishment, because it does not take the form of a reduction of the nominal value of the shares.

This capitalization of the gains arising from a differential advantage results in a large "saving" and increase of capital. The wealth so drawn in by the financiers (entrepreneurs) is nearly all held as capital, very little of it being consumed in current expenses of living. It has been cogently argued that the profits of the undertakers is the chief and normal source of capitalized savings in the modern situation, and the method here indicated seem to be the method by which such saving is chiefly effected. An extremely suggestive discussion of the undertaker's gains in this connection occurs in a paper by L.V. Birck ("Driftsherrens Geviust"), read before the Danish Economic Association, December 1901. More immediately to the point still is V. Schou's discussion of Mr Birck's paper. (See Nationalokonomisk Tidsskrift, January-February 1902, pp. 76, 78-80) J.B. Clark, in lectures hitherto unprinted, follows a line of analysis somewhat closely parallel with Schou, though not carried to quite the same length.

This process of combined recapitalization and saving may be stated formally as follows: The initial value of the properties submitted for coalition and recapitalization, cap, is in the normal case augmented by the increment delta, making the effective value of the properties = cap + delta, in effective units, Uc. This augmented effective value of the properties = Uc(cap + delta) is capitalized at a nominal value of cap' = Un(cap + delta), in nominal units, Un, nominally equivalent to Uc. In the recapitalization the number of units of capitalization is increased by an element of intangible assets assigned the owners on account of a presumed increase of earning-capacity due to the coalition. This element of good-will due to coalition may be called co. Further there is added the bonus of the promoter, taken as a block of stock in the new capitalization, pro. Hence Un(cap') = Un(cap + delta) = Un(cap + co + pro). Un (pro) = Un (cap' - cap - co) = Un (delta - co) is evidently a secure gain to the promoter of Uc(delta - co), which is a fraction of the effective value Uc(cap + delta). This is saved by him in the capitalized form. The account of the former owners of the properties will then stand as follows: Uc(cap + delta - pro) <> Uc(cap) according as Uc delta <> Uc(pro). The nominal gain of the owners, co, may or may not be a real gain according as the event may prove that the promoter's bonus has not or has absorbed the entire effective augmentation of value, delta, due to the coalition ; it is therefore a problematical gain, which may or may not, in the event, prove to be an effective element of capitalized savings.

The constitution of delta will decide what is the ultimate source of the savings effected by this transaction. If delta consists entirely of economies of production, the capitalized savings held by the promoter and former owners as a result of the transaction represent new values added to, or saved to, the aggregate wealth of the community. If delta consists entirely of good-will in the shape of monopoly advantage, the saving is effected at the cost of the community and for the benefit of the promoter and owners; it is then an involuntary or subconscious saving on the part of the community, whereby a part of the community's wealth at large passes into the hands of the recapitalized corporation. Where delta is made up of these two constituents together, the result, as regards the present point, should be plain without discussion. If, on the other hand, delta = 0, so that cap' = cap, then the promoter's savings; pro, are secured at the cost of the former owners; Uc(cap' - pro) = Uc(cap + (delta = 0) - pro) = Uc(cap - pro). Whereas if Uc(pro) = Uc(delta), Uc(co) = 0, leaving the owners without effective profit or loss in spite of any nominal increase of the capitalization.

30. "Good-will" in this field of enterprise most frequently takes the form of a large ability to help or hinder other financiers and financing houses in any similar manoeuvres in which they may be engaged, or an ability to put them in the way of lucrative financing transactions. The guild of financiers is commonly split up into more or less well-defined factions, each comprising an extensive ramification of financing houses and financiers furthering one another's endeavors under more or less settled working arrangements. These working arrangements are a large part of the financiers' "good-will."

31. This category of good-will stands in a relation to the creation of vendible capital similar to that which the corporate good-will of an industrial business concern bears to the creation of vendible products.

32. Parenthetically it may be remarked that the failure to capitalize such items of good-will is likely to involve a virtual evasion of the tax on personal property, and may, therefore, be questionable on moral grounds.

The case of J.P. Morgan and Company is, of course, not here cited as being a unique or peculiar instance, but simply as a typical and striking illustration of what happens and of what might be accomplished in a number of large and very consequential cases of the same class.

33. This dissociation of the business control from workmanlike efficiency and from immediate contact with or ownership of the industrial plant gives the existing situation a superficial resemblance to the feudal system, in so far as touches the immateriality of the captain's connections with the everyday life and interests of the community of whose affairs he is master. It gives a certain plausibility to the attempted interpretation of latter-day economic developments in feudalistic terms. - See Ghent, Our Benevolent Feudalism.