§12. Double Entry Bookkeeping

We began this chapter with the enjoyment income received by a person and then travelled back, by way of real income, cost of living, and money income to capital value, which simply embodies the capitalization or anticipation of income. This was going upstream, as it were, from the enjoyer of income to its source. We may now reverse our point of view and look downstream. We then Edition: current; Page: [19] think of the income stream not so much as flowing to its enjoyers as flowing from its various sources.7

Capital value is income capitalized and nothing else. Income flows from, or is produced by, capital goods and human beings, so that the capital value is also the value of capital goods. The income is credited to (and outgo or cost debited to) these goods and (or including) human beings.

As every bookkeeper knows, most of the items of income (positive or negative) take the form of money payments. (These are not a stock of money, which is always capital but a flow of money.) Some are operations paid for—events in the productive process, such as grinding, spinning, weaving, hoisting, hauling, plowing; others are events of consumption, such as eating food, wearing clothes, hearing music, or seeing a play at the theatre; while still others are within the human mind, such as enjoyments or their opposite, labor effort or discomfort.

It might seem that in sorting and combining such a Edition: current; Page: [20] miscellany of income items we could never avoid confusion and double counting and that the sum total would far exceed the true psychic or enjoyment income. But the fact is that almost as many negative items as positive items are included here and that, in fact, except for enjoyment income and labor pain, every positive item is also negative, according to its relation to the capital source. Thus when Smith pays Jones $100 (no matter where it came from), Jones receives an item of income of $100 while Smith suffers an item of outgo of the same amount; and when a coupon of $100 is cut from a bond and deposited, the bond is credited with yielding $100 and the bank account is debited with the same sum. The same principle is applicable to the final big coupon called the principal of the bond. The same item is thus entered twice, once on one side of somebody's books and the other time on the other side of somebody's books.

The bookkeeping implications of such couples of items were discovered by accountants long ago and are the basis of their double entry bookkeeping, though its economic significance has been largely overlooked. One important significance is that this double entry prevents double counting; when we take the sum total of all income items for society, including psychic as well as physical items, this double entry results in cancelling out everything except the psychic items of enjoyment and labor pain.

Every operation of production, transportation, exchange, or consumption—every process, in fact, except final enjoyment—is double faced, or two items in one. I have called such an operation an "interaction" because it is income to be credited to the capital which yields it, while it is outgo to be debited to the capital which receives Edition: current; Page: [21] it. Thus, in any complete bookkeeping, $100 worth of plowing, on the one hand, is credited jointly to the plow, the plowman, and the team, or motor, which do the plowing; that is, which yield or bestow the service. On the other hand, it is debited to the land which is plowed, that is, which receives the service.

If the plow is owned by one person and the land by another, the latter paying $100 to the former, then the service of plowing, though a self-cancelling interaction for the two persons taken together, evidently cannot be ignored by either separately. If $100 is paid for this service of plowing, the $100 item is an expense to the land-owner to be subtracted from his gross income. It is no concern of his that this self-same service of plowing is counted as income by the plow-owner. So this item of $100 worth of plowing affects our accounts quite differently according to the point of view. It may be a plus item from the point of view of one person and a minus item from that of another. When, however, the two accounts are combined and the plus and minus items are added, their algebraic sum is zero. For society as a whole, therefore, no positive income results from plowing until the land has yielded its crop and the crop has been finally consumed.

Thus, simply by the mechanical, clerical processes of making bookkeepers' entries, we reach again, in the opposite order, the various stages originally described in the opening pages of this chapter. That is, the sum total of income flowing from a group of capital sources is naturally different according to which capital sources are included. There are certain cancellations within any group of capital goods which have an uncancelled fringe, and this may itself in turn disappear by cancellation if Edition: current; Page: [22] the group is enlarged by including other capital items with interactions between the new and old members. Henry Ford's mines yield a net income, the difference between certain credits and debits. If we include the railway which transports the product to the factory, certain credits to the mines from turning their product over to the railroad now disappear, being debits to the railway. If the circle be still further enlarged, say to include the Ford factories, other items likewise disappear as parts of interactions within the enlarged circle, and so on.

We must, of course, include all services as income. A dwelling renders income to the owner who dwells in it himself just as truly as when he lets it to another. In the first case, his income is shelter; in the second, his income is rent payments in money. All wealth existing at any moment is capital and yields income in some form. As a business man said to me, his pleasure yacht is capital and gives him dividends every Saturday afternoon.