To cases that appear puzzling to classify this test may be easily applied. In whom is the legal title of a use or of a service vested at the instant it is yielded? To him belongs, in first instance, the economic income, subject to the claims of others who must look to him for their pay. Thus the owner of the factory owns the product altho he may have to pay rent to a landlord and wages to his workmen.
People thus are pf two classes as regards the mode of re ceiving income: self-employed, earning economic labor-in comes; and employed, receiving (contractual) wages from active capitalists. Capitalists are of two classes: the active capitalists, risk-takers, getting non-contractual capital-in comes, whom we shall call enterprisers; and the passive cap italists, risk-limiters, getting contractual incomes from active capitalists. The self-employed laborer is in every case to some alight degree an active capitalist. The neediest fisherman must have title to the string of fish before he sells it to change it for a money income. Every economic product that endures an instant, rests in the hands of an active capitalist.
§ 3. From small shop to large factory. Some examples applying these terms may make the matter clearer. A fur niture-maker (a joiner) in a village owns his little shop, the land on which it stands, his tools, some lumber, and a few pieces of finished goods. From day to day he sells the ready furniture, or takes orders for which he receives money or Iwber or articles of food and other supplies for his own household use. If with his money and goods he can pay for the materials he needs and have left a living for himself, his income of goods is the combined result of his labor and of his capital (that is, of his right to the uses of his shop, tools, and stock of goods). He is enterpriser, manager, and laborer, all in one, and gets one non-contractual income, which as to its value is imputable to several different economic sources. Now this man takes an apprentice or two, hires two or three workmen to keep up with the increasing orders, hires another shop next door for which he pays rent, and borrows some money to buy new tools and more materials so that he can keep a larger stock of ready goods. Less of his time is given to handwork and more to meeting customers, making new designs and patterns, hiring and directing his assistants, buying materials, and keeping his accounts. As the business grows he finds he must employ salesmen to meet customers, a foreman to direct the workmen in the shop, a bookkeeper to relieve him of the mere clerical labors, perhaps finally a special artistic designer and pattern maker. At length there remain for him to do only the larger planning of the business as a whole, the hiring of his subordinates, and the general oversight and criticism of all departments so that everything may be kept smoothly working.
§ 4. The residual share. From the moment the first ap prentice was hired or the first dollar was borrowed, the busi ness became the source of a contractual income to some one, and, at last, of many contractual incomes, besides the one non-contractual income of the active enterpriser. These con tractual incomes have the familiar price-names of wages (and in special cases, salaries), rents, and interest. The non-con tractual income let us call profits, postponing for a time the more exact definition of the term. Before the owner can count his profits at the end of the year he must pay the agreed price of services and usances, wages to his apprentices, work men, salesmen, bookkeepers, foremen, designers, etc., rent to the owner of the building or of hired machinery, interest to the lender of money or to the seller of lumber, supplies, etc.
The contractual incomes of these other persons are prices, ex pressed in money-terms and paid by the enterpriser; his non contractual income is what money and other good he has taken out for his own use in that period, plus the net capital re maining that has accrued within the year. In the rare case where the business is bought at the beginning of the year, and is sold at the end, at a definite price, the difference (plus the amount meantime taken out) would exactly ex press the money income. But in a growing business the ac tive capitalist's income can only be estimated, by taking care ful invoices of all property at the beginning and at the end of the year, making allowances for needed repairs and for depreciation, counting outstanding debts and credits, amounts taken out for the owner's use, etc., and finding the resulting net excess of capital-value at the end of the year. This bal ance, if there be any, is the composite income of the owner, who is at the same time manager, and it contains whatever is to be attributed to his own services and to his invested capital of whatever sort. Viewing all the incomes in a legal light, this is the one residual income—it is what remains to the owner after paying all claims against the business. As a mat ter of bookkeeping also this is the one residual income, being the arithmetic remainder after subtracting from the total value of the products added in the course of the year to the capital, the total outlay (attributable to that year) which in cludes all of the contractual incomes due.' I It must not be thought, however, that viewed as a value-problem, as a question of logic, this share is a mere residual. That is, it must not be thought that all the other contractual shares (wages, rents, etc.) are determined prior to, and independent of, this share of the active capitalist, who takes what is left without having had any choice in the matter. That would be so if he could do nothing whatever about readjusting and rearranging his investments. The various contractual incomes are determined in an economic equilibrium of which the pros pect of active capitalists getting a more or less definitely estimated minimum return is an essential part. The expectation of income has guided the enterpriser's choice of a business just as it guides the laborers (see ch. 18, sec. 3). For this particular year and business § 5. The typical owner-manager. This union of the func tion of business manager with that of active investor was at one time well-nigh universal, and it is still common in smaller enterprises. As applied to a small business this organization has the advantage of uniting in one person the one who is most concerned as to the financial outcome and the one whose judgment, energy, and care most largely determines the re sult. It unites responsibility and power. This plan still ob tains generally in agriculture. In the United States in 1910 there were 6,300,000 farms of which 62 per cent were culti vated by the owners, 1 per cent by managers, and 37 per cent by tenants (which implies nearly always a large measure of oversight by the owner). A large proportion of the smaller factories are run in this way by an owner who started the busi ness, or who has succeeded his father, or who, beginning as an apprentice, has advanced step by step in an older factory, getting first a share, and at last becoming head of the estab lishment. This plan prevails also in the great majority of retail stores and in many wholesale stores. A boy, going into a store, works up to a clerkship, and winning promotion step by step, gets a larger and larger share of the ownership and becomes the chief executive in the business.