4. Originary Interest in the Changing Economy

So far we have dealt with the problem of originary interest under certain assumptions: that the turnover of goods is effected by the employment of neutral money; that saving, capital accumulation, and the determination of interest rates are not hampered by institutional obstacles; and that the whole economic process goes on in the frame of an evenly rotating economy. We shall drop the first two of these assumptions in the following chapter. Now we want to deal with originary interest in a changing economy.

He who wants to provide for the satisfaction of future needs must correctly anticipate these needs. If he fails in this understanding of the future, his provision will prove less satisfactory or totally futile. There is no such thing as an abstract saving that could provide for all classes of want-satisfaction and would be neutral with regard to changes occurring in conditions and valuations. Originary interest can therefore in the changing economy never appear in a pure unalloyed form. It is only in the imaginary construction of the evenly rotating economy that the mere passing of time matures originary interest; in the passage of time and with the progress of the process of production more and more value accrues, as it were, to the complementary factors of production; with the termination of the process of production the lapse of time has generated in the price of the product the full quota of originary interest. In the changing economy during the period of production there also arise synchronously other changes in valuations. Some goods are valued higher than previously, some lower. These alterations are the source from which entrepreneurial profits and losses stem. Only those entrepreneurs who in their planning have correctly anticipated the future state of the market are in a position to reap, in selling the products, an excess over the costs of production (inclusive of net originary interest) expended. An entrepreneur [p. 535] who has failed in his speculative understanding of the future can sell his products, if at all, only at prices which do not cover completely his expenditures plus originary interest on the capital invested.

Like entrepreneurial profit and loss, interest is not a price, but a magnitude which is to be disengaged by a particular mode of computation from the price of the products of successful business operations. The gross difference between the price at which a commodity is sold and the costs expended in its production (exclusive of interest on the capital invested) was called profit in the terminology of British classical economics.5  Modern economics conceives this magnitude as a complex of catallactically disparate items. The excess of gross receipts over expenditures which the classical economists called profit includes the price for the entrepreneur’s own labor employed in the process of production, interest on the capital invested, and finally entrepreneurial profit proper. If such an excess has not been reaped at all in the sale of the products, the entrepreneur not only fails to get profit proper, he receives neither an equivalent for the market value of the labor he has contributed nor interest on the capital invested.

The breaking down of gross profit (in the classical sense of the term) into managerial wages, interest, and entrepreneurial profit is not merely a device of economic theory. It developed, with progressing perfection in business practices of accountancy and calculation, in the field of commercial routine independently of the reasoning of the economists. The judicious and sensible businessman does not attach practical significance to the confused and garbled concept of profit as employed by the classical economists. His notion of costs of production includes the potential market price of his own services contributed, the interest paid on capital borrowed, and the potential interest he could earn, according to the conditions of the market, on his own capital invested in the enterprise by lending it to other people. Only the excess of proceeds over the costs so calculated is in his eyes entrepreneurial profit.6

The precipitation of entrepreneurial wages from the complex of all the other items included in the profit concept of classical economics presents no particular problem. It is more difficult to sunder entrepreneurial profit from originary interest. In the changing economy [p. 536] interest stipulated in loan contracts is always a gross magnitude out of which the pure rate of originary interest must be computed by a particular process of computation and analytical repartition. It has been shown already that in every act of lending, even apart from the problem of changes in the monetary unit’s purchasing power, there is an element of entrepreneurial venture. The granting of credit is necessarily always an entrepreneurial speculation which can possibly result in failure and the loss of a part or of the total amount lent. Every interest stipulated and paid in loans includes not only originary interest but also entrepreneurial profit.

This fact for a long time misled the attempts to construct a satisfactory theory of interest. It was only the elaboration of the imaginary construction of the evenly rotating economy that made it possible to distinguish precisely between originary interest and entrepreneurial profit and loss.

• 5Cf. R. Whatley, Elements of Logic (9th ed. London, 1848), pp. 354 ff.; E. Cannan, A History of the Theories of Production and Distribution in English Political Economy from 1776 to 1848 (3d ed. London, 1924), pp. 189 ff.
• 6But, of course, the present-day intentional confusion of all economic concepts is conducive to obscuring this distinction. Thus, in the United States, in dealing with the dividends paid by corporations people speak of “profits.”