INTEREST. Interest is commonly defined as the return for the use of capital. It is made to include not only that which is paid by the borrower to the lender for the use of borrowed capital, but also that which the owner receives as a return for his own capital when he uses it in his own business. Even though the business man does not in his own thought divide his in come up into parts, there seem to be excellent reasons for holding to this definition. That which he takes out of his business as income may all look alike to him, but if he is an econ omist he will pay some attention to the sources from which different parts are derived. If lie puts in all or a part of his own time in his business, he will see that a part of his income is the earnings of his own labor. His income would certainly he less if he had to hire some one else to do this work which he himself does.
If he owns a valuable building site, he will see that a part of his income is the rent of his land. His income would clearly be less if he had to rent the land from some one else. If he owns his own equipment free from debt he will see that a part of his income is interest on the capi tal invested. If he had borrowed the capital and paid interest to some one else, his income would obviously be less. Again, if he owns patents, possesses trade secrets or is in any way situated so as to benefit through special advantages, he will see that a part of his income is profits. Thus, his income would be divided into four parts, wages, rent, interest and profits.
The question of the source and cause of interest has been the subject of more contro versy than any other single question in eco nomics. The Socialists generally follow Karl Marx who contended that interest was the result of the cheating of the laborer, that if the laborers were paid the full value of their work there would be nothing left for the capitalist in the way of interest. Economists without exception reject this view, but they are divided among themselves as to the real explanation. Some are disposed to deny that capithl is pro ductive, but no one would deny that tools and equipment are useful. Since capital consists
of nothing in the world except tools and equip ment, capital is evidently useful. So far as any one has ever been able to explain, it is use ful only in production. In short, the industrial community can produce somewhat more when it has an adequate supply of tools and equip ment, that is, capital, than when it has not.
There is no industrial community to-day which could not advantageously use more cap ital than it has. So long as a community needs more of anything than it has, it will be willing to pay a price for it, or a reward to the per son who supplies it. This applies to capital as well as to anything else of which a community had less than it needs.
Capital comes into existence, partly because some one spends money to buy tools and equip ment. To be sure, the tools and equipment are made by labor and enterprise, but there would he no inducement to produce them unless some one were willing to buy them. When one buys tools rather than articles of consumption one may be said to postpone consumption, or to save. A farmer might, for example, buy a pleasure automobile or a farm tractor. If he decides to buy the farm tractor he postpones his enjoyment of an automobile which he may not be able to buy until the tractor has at least paid for itself. At the same time he has in creased his power to produce food and that is a good thing for the rest of the community. It is better for the community that he should buy the tractor than a pleasure automobile, while, for a year or two, he will have less pleasure.
If the farm tractor merely paid for itself and nothing more, he will gain no advantage from its purchase. He will not be able to buy a better automobile later on than he might have bought at once. Meanwhile he will have lost a year or two of pleasure. If, however, the tractor will return him more than its cost, he will gain something by waiting to help com pensate for the year or two of postponed enjoy went. He may buy a better automobile, or buy something else in addition to an automobile.