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INDUSTRY of the modern sort- mechanical, specialised, standardised, drawn on a large scale - is highly productive. When this industrial system of the new order is not hindered by outside control it will yield a very large net return of output over cost, counting cost in terms of man power and necessary consumption; so large, indeed, that the cost of what is necessarily consumed in productive work, in the way of materials, mechanical appliances, and subsistence of the workmen, is inconsiderable by comparison. The same thing may be described by saying that the necessary consumption of subsistence. and industrial plant amounts to but an inconsiderable deduction from the gross output of industry at any time. So inordinately productive is this familiar new order of industry that in ordinary times it is forever in danger of running into excesses and turning out an output in excess of what the market that is to say the business situation will tolerate. There is constant danger of " overproduction." So that there is commonly a large volume of man power unemployed and an appreciable proportion of the industrial plant lying idle or half idle. It is quite unusual, perhaps altogether out of the question, to let all or nearly all the available

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plant and man power run at full capacity even for a limited time.

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It is, of course, impossible to say how large the net aggregate product over cost would be-counting the product in percentages of the necessary cost in case this industrial system were allowed to work at full capacity and with free use of all the available technological knowledge. There is no safe ground for an estimate, for such a thing has never been tried, and no near approach to such a state of things is to be looked for under the existing circumstances of ownership and control. Even under the most favorable conditions of brisk times the business situation will not permit it. There will at least always be an indefinitely large allowance to be reckoned for work and substance expended on salesmanship, advertising, and competitive management designed to increase sales. This line of expenditures is a necessary part of businesslike management, although it contributes nothing to the output of goods, and in that sense it is to be counted as a necessary deduction from the net productive capacity of the industrial system as it runs. It would also be extremely difficult to make allowance for this deduction, since much of it is not recognised as such by the men in charge and does not appear on their books under any special descriptive heading. In one way and another, and for divers and various reasons, the net production of goods serviceable for human use falls considerably short of the gross output, and the gross output is always short of the productive capacity of the available plant and man power.

Still, taken as it goes, with whatever handicap of these various kinds is to be allowed for, it remains patently true that the net product greatly exceeds the cost. So much so that whatever is required for the replacement of the material equipment consumed in production, plus "reasonable returns " on this equipment, commonly amounts to no more than a fraction of the total output. The resulting margin of excess product over cost plus reasonable returns on the material equipment is due to the high productive efficiency of the current state of the industrial arts and is the source of that free income which gives rise to intangible assets. The distinction between tangible assets and intangible is not a hard and fast one, of course, but the difference is sufficiently broad and sufficiently well understood for use in the present connection, so long as no pains is taken to confuse these terms with needless technical verbiage.

To avoid debate and digression, it may be remarked that "reasonable returns" is also here used in the ordinary sense of the expression, without further definition, as being sufficiently understood and precise enough for the argument. The play of motives and transactions by which a rough common measure of reasonable returns has been arrived at is taken for granted. A detailed examination of all that matter would involve an extended digression, and nothing would be gained for the argument.

According to the traditional view, which was handed on from the period before the coming of corporation finance, and which still stands over as an article of common belief in the certified economic

theories, "capital" represents the material equipment, valued at its cost, together with funds in hand required as a "working capital" to provide materials and a labor force. On this view, corporation securities are taken to cover ownership of the plant and the needed working capital; and there has been a slow-dying prejudice against admitting that anything less tangible than these items should properly be included in the corporate capitalisation and made a basis on which to issue corporate securities. Hence that stubborn popular prejudice against "watered stock" which corporation finance had to contend with all through the latter half of the nineteenth century. "Watered stock" is now virtually a forgotten issue. Corporation finance has disposed of the quarrel by discontinuing the relevant facts.

There is still a recognised distinction between tangible assets and intangible; but it has come to be recognised in corporation practice that the only reasonable basis of capitalisation for any assets, tangible or intangible, is the earning-capacity which they represent. And the amount of capital is a question of capitalisation of the available assets. So that, if the material equipment, e. g., is duly capitalised on its earning-capacity, any question as to its being "watered" is no longer worth pursuing; since stock can be said to be "watered" only by comparison with the cost of the assets which it covers, not in relation to its earning-capacity. The latter point is taken care of by the stock quotations of the market. On the other hand, intangible assets neither have now nor ever have had any other basis than capitali

sation of earning capacity, and any question of water" in their case is consequently quite idle. Intangible assets will not hold water.

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Corporation finance is one of the outgrowths of the New Order. And one of the effects wrought by corporation finance is a blurring of the distinction between tangible assets and intangible; inasmuch as both are now habitually determined by a capitalisation of earning-capacity, rather than by their ascertained cost, and it is difficult, if not impossible, to draw a hard and fast line between that part of a concern's earning-capacity which is properly to be assigned to its plant and that which is due to its control of the market. Still, an intelligible distinction is maintained in common usage, between tangible assets and intangible, even if the distinction is somewhat uncertain in detail; and such a distinction is convenient, so long as too sharp a contrast between the two is not insisted on.

The earning-capacity of the tangible assets is presumed to represent the productive capacity of the plant, considered as a mechanical apparatus engaged in an industrial process for the production of goods or services; it is presumed to rest on the market value of the mechanical output of the plant. The plant is a productive factor because and in so far as it turns to practical account the state of the industrial arts now in use, the community's joint stock of technological knowledge. So soon, or so far, as the plant and its management falls short of meeting the ordinary requirements of this current state of the industrial arts, and fails to make use of such technological knowledge as is commonly em

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