In spite of this close association be tween them, capital and income have thus far been considered separately. The question now arises: How can we calculate the value of capital from that of income or vice versa? The bridge or link between them is the rate of interest.
Although the rate of interest may be used either for computing from present to future values, or from future to pres ent values, the latter process is far the more important of the two. Account ants, of course, are constantly comput ing in both directions, for they have both sets of problems to deal with; but the problem of time valuation which nature sets us is that of translating the future into the present; that is, the problem of ascertaining the value of capital. The value of capital must be computed from the value of its expected future income. We cannot proceed in the opposite direc tion and derive the value of future in come from the value of present capital.
This statement is at first puzzling, for we think of income as derived from capital, and, in a sense, this is true. Income is derived from capital goods. But the valve of the income is not de rived from the value of those capital goods. On the contrary, the value of the capital is derived from the value of the income.
Not until we know how much income an item of capital will bring us can we set any valuation on that capital at all. It is true that the wheat crop depends on the land which yields it. But the value of the crop does not depend on the value of the land. On the contrary, the value of the land depends on the value of its crop.
The present worth of anything is what men are willing to give for it. In order that each man may decide what he is willing to give, he must have (1) some idea of the value of the future benefits his purchase will bring him, and (2) some idea of the rate of interest by which these future values may be trans lated into present values by discount ing. With these data he may derive the
value of any capital from the value of its income by means of the connecting link between them called the rate of interest. This derivation of capital value from income value is called "cap italizing" income.
Savings in its broadest sense includes more than simply saved money. It in cludes all the net increase in capital value after all income has been detached. It is the net appreciation, or the differ ence between the interest accrued and the income taken out. Savings are therefore still a part of capital. They are the part of capital saved from being taken out for income. They are not a part of income taken out. The indi vidual is always struggling between sav ing more capital and taking out more income. He cannot do both—have his cake and eat it, too.
To recapitulate, in a few words, the nature of capital and income, we may now say that those parts of the material universe which at any time are under the dominion of man, constitute his capi tal wealth; its ownership, his capital property; its value, his capital value. Capital value implies anticipated in come, which consists of a stream of bene fits or its value. When values are con sidered, the causal relation is not from capital to income, but from income to capital; not from present to future, but from future to present. In other words, the value of capital is the discounted value of the expected income.