Some of the lands of California may be taken as a very good, though perhaps not an extreme, example of such a creation of real estate by spiritual instrumentalities. It is probably well within the mark to say that some of these lands owe not more than one-half their current market value to their current serviceability as an instrument of production or use. The excess may be attributable to illusions touching the chances of future sale, to anticipation of a prospective enhanced usefulness, and the like; but all these are immaterial factors, of the nature of good-will. Like other assets, these lands are capitalised on the basis of the anticipated income from them, part of which income is anticipated from profitable sales to persons who, it is hoped, will be persuaded to take a very sanguine view of the land situation, while part of it may be due to over-sanguine anticipations of usefulness generated by the advertising matter and the efforts of the land agents directed to what is called "developing the country."
To any one preoccupied with the conceit that "capital" means "capital goods" such a conversion of intangible into tangible goods, or such a generation of intangible assets by the productive use of tangible assets, might be something of a puzzle. If "assets" were a physical concept, covering a range of physical things, instead of a pecuniary concept, such conversion of tangible into intangible assets, and conversely, would be a case of transubstantiation. But there is nothing miraculous in the matter. "Assets" are a pecuniary magnitude, and belong among the facts of investment. Except in relation to investment the items of wealth involved are not assets. In other words, assets are a matter of capitalisation, which is a special case of valuation; and the question of tangibility or intangibility as regards a given parcel of assets is a question of what article or class of articles the valuation shall attach to or be imputed to. If, e.g., the fact to which value is imputed in the valuation is the habitual demand for a given article of merchandise, or the habitual resort of a given group of customers to a particular shop or merchant, or a monopolistic control or limitation of price and supply, then the resulting item of assets will be "intangible," since the object to which the capitalised value in question is imputed is an immaterial object. If the fact which is by imputation made the bearer of the capitalised value is a material object, as, e.g., the merchantable goods of which the supply is arbitrarily limited or the price arbitrarily fixed, or if it is the material means of supplying such goods, then the capitalised value in question is a case of tangible assets. The value involved is, like all value, a matter of imputation, and as assets it is a matter of capitalisation; but capitalisation is an appraisement of a pecuniary "income-stream" in terms of the vendible objects to the ownership of which the income is assumed to inure. To what object the capitalised value of the "income-stream" shall be imputed is a question of what object of ownership secures to the owner an effectual claim on this "income-stream "; that is to say, it is a question of what object of ownership the strategic advantages is assumed to attach to, which is a question of the play of business exigencies in the given case.
The "income-stream" in question is a pecuniary income-stream, and is in the last resort traceable to transactions of sale. Within the confines of business—and therefore within the scope of capital, investments, assets, and the like business concepts—transactions of purchase and sale are the final terms of any analysis. But beyond these confines, comprehending and conditioning the business system, lie the material facts of the community's work and livelihood. In the final transaction of sale the merchantable goods are valued by the consumer, not as assets, but as livelihood;[9] and in the last analysis and long run it is to some such transaction that all business imputations of value and capitalistic appraisement of assets must have regard and by which they must finally be checked. Dissociated from the facts of work and livelihood, therefore, assets cease to be assets; but this does not preclude their relation to these facts of work and livelihood being at times somewhat remote and loose.
Without recourse, immediately or remotely, to certain material facts of industrial process and equipment, assets would not yield earnings; that is to say, wholly disjoined from these material facts, they would in effect not be assets. This is true for both tangible and intangible assets, although the relation of the assets to the material facts of industry is not the same in the two cases. The case of tangible assets needs no argument. Intangible assets, such as patent right or monopolistic control, are likewise of no effect except in effectual contact with industrial facts. The patent right becomes effective for the purpose only in the material working of the innovation covered by it; and monopolistic control is a source of gain only in so far as it effectually modifies or divides the supply of goods.
In the light of these considerations it seems feasible to indicate both the congruence and the distinction between the two categories of assets a little more narrowly than was done above. Both are assets,—that is to say, both are values determined by a capitalisation of anticipated income-yielding capacity; both depend for their income-yielding capacity on the preferential use of certain immaterial factors; both depend for their efficiency on the use of certain material objects; both may increase or decrease, as assets, apart from any increase or decrease of the material objects involved. The tangible assets capitalise the preferential use of technological, industrial expedients,—expedients of production, dealing with the facts of brute nature under the laws of physical cause and effect,—this preferential use being secured by the ownership of material articles employed in the processes in which these expedients are put into effect. The intangible assets capitalise the preferential use of certain facts of human nature—habits, propensities, beliefs, aspirations, necessities—to be dealt with under the psychological laws of human motivation; this preferential use being secured by custom, as in the case of old-fashioned good-will, by legal assignment, as in patent or copyright, by ownership of the instruments of production, as in the case of industrial monopolies.[10]
Intangible assets are capital as well as tangible assets; that is to say, they are items of capitalised wealth. Both categories of assets, therefore, represent expected "income-streams" which are of such definite character as to admit of their being rated in set terms per cent. per time unit; although the expected income need not therefore be anticipated to come in an even flow or to be distributed in any equable manner over a period of time. The income-streams to be so rated and capitalised are associated in such a manner with some external fact (impersonal to their claimant), whether material or immaterial, as to permit their being traced or attributed to an income-yielding capacity on the part of this external fact, to which their valuation as a whole may be imputed and which may then be capitalised as an item of wealth yielding this income-stream. Income-streams which do not meet these requirements do not give rise to assets in the accepted sense of the term, and so do not swell the volume of capitalised wealth.
There are income-streams which do not meet the necessary specifications of capitalisable wealth; and in modern business traffic, particularly, there are large and secure sources of income that are in this way not capitalisable and yet yield a legitimate business income. Such are, indeed, to be rated among the most consequential factors in the current business situation. Under the guidance of traditions carried over from a more primitive business situation, it has been usual to speak of income-streams derived in such a manner as "wages of superintendence," or "undertaker's wages," or "entrepreneur's profits," or, latterly, as "profits" simply and specifically. Such phenomena of this class as are of consequence in business are commonly accounted for, theoretically, under this head; and the effort so to account for them is to be taken as, at least, a laudable endeavor to avoid an undue multiplication of technical terms and categories.[11] Yet the most striking phenomena of this class, and the most consequential for modern business and industry, both in respect of their magnitude and in respect of the pecuniary dominion and discretion which they represent, cannot well be accounted undertaker's gains, in the ordinary sense of that term. The great gains of the great industrial financiers or of the great "interests," e.g., do not answer the description of undertaker's gains, in that they do not accrue to the captain of industry on the basis of his "managerial ability" alone, apart from his wealth or out of relation to his wealth; and yet it is not safe to say that such gains (which are over and above ordinary returns on his investments) accrue on the ground of the requisite amount of wealth alone, apart from the exercise of a large business direction on the part of the owner of such wealth, or on the part of his agent to whom discretion has been delegated. Administrative, or strategic, discretion and activity must necessarily be present in the case: otherwise, the income in question would rightly be rated as income from capital simply.
The captain of industry, the pecuniary magnate, is normally in receipt of income in excess of the ordinary rate per cent. on investment; but apart from his large holdings he is not in a position to get these large gains. Dissociated from his large holdings, he is not a large captain of industry; but it is not the size of his holdings alone that determines what the gains of the pecuniary magnate in modern industry shall be. Gains of the kind and magnitude that currently come to this class of business men come only on condition that the owner (or his agent) shall exercise a similarly large discretion and control in the affairs of the business community; but the magnitude of the gains, as well as of the discretion and control exercised, is somewhat definitely conditioned by the magnitude of the wealth which gives effect to this discretion.
The disposition of pecuniary forces in such matters may be well seen in the work and remuneration of any coalition of "interests," such as the modern business community has become familiar with. The "interests" in such a case are of a personal character,—they are "interested parties,"—and the sagacity, experience, and animus of these various interested parties counts in the outcome, both as regards the aggregate gains of the coalition and as regards the distribution of these gains among the several parties in interest; but the weight of any given "interest" in a coalition or "system" is more nearly proportioned to the wealth controlled by the given "interest," and to the strategic position of such wealth, than to any personal talents or proficiency of the "interested party." The talents and proficiency involved are not the main facts. Indeed, the movements of such a "system," and of the several component "interests," are largely a matter of artless routine, in which the greatest ingenuity and initiative engaged in the premises are commonly exercised by the legal counsel working for a fee.
A dispassionate student of the current business traffic, who is not overawed by round numbers, will be more impressed by the ease and simplicity of the manœuvers that lead to large pecuniary results in the higher business finance than by any evidence of preëminent sagacity and initiative among the pecuniary magnates. One need only call to mind the simple and obvious way in which the promoters of the Steel Corporation were magnificently checkmated by the financiers of the Carnegie "interest," when that great and reluctant corporation was floated, or the pettyfogging tactics of Standard Oil in its later career. In extenuation of their visible lack of initiative and insight it may not be ungraceful to call to mind that many of the discretionary heads of the great "interests" are men of advanced years, and that in the nature of the case the pecuniary magnates of the present generation must commonly be men of a somewhat advanced age; and it is only during the present generation that the existing situation has arisen, with its characteristic opportunities and demands. To take their present foremost rank in the new business finance which is here under inquiry, they have had to accumulate the great wealth on which alone their discretionary control of business affairs rests, and their best vigor has been spent in this work of preparation; so that they have commonly attained the requisite strategic position only after they had outlived their "years of discretion."