§5. Altering Income by Sale

But borrowing and lending are not the only ways in which one's income stream may be modified. Exactly the same result may, theoretically, be accomplished simply by buying and selling property; for, since property rights are merely rights to income streams, their exchange replaces one such stream by another of equal present value but differing in time shape, composition, or uncertainty. This method of modifying one's income stream, which we shall call the method of sale, really includes the former, or method of loans, for a loan contract is, as Böhm Edition: current; Page: [113] Bawerk has so well said, at bottom a sale, that is, it is the exchange of the right to present or immediately ensuing income for the right to future or more remote income. A borrower is simply a seller of a note of which the lender is the buyer. A man who buys a bond, for example, may be regarded indifferently as a lender or as a buyer of property.

The concept of a loan may therefore now be dispensed with by being merged in the concept of a sale. Every sale transfers property rights; that is, it transfers the title to income of some kind. By selling some property rights and buying others it is possible to transform one's income stream at will into any desired time shape. Thus, if a man buys an orchard, he is providing himself with future income in the form of apples. If, instead, he buys apples, he is providing himself with similar but more immediate income. If he buys securities, he is providing himself with future money, convertible, when received, into apples or other real income. Inasmuch as the productive life of a mine is shorter generally than that of a railway, if his security is a share in a mine, his income stream is less lasting than if the security is stock in a railway, though at first it should be larger, relatively to the sum paid for it.

Purchasing the right to remote enjoyable income, as was explained in Chapter I, is called investing; while purchasing more immediate enjoyable income is spending. These, however, are purely relative concepts; for remote and immediate are relative terms. Buying an automobile is investing as contrasted with spending the money for food and drink, but may be called spending as contrasted with investing in real estate. And yet the antithesis between spending money and investing is important; Edition: current; Page: [114] it is the antithesis between immediate and remote income. The adjustment between the two determines the time shape of one's income stream. Spending increases immediate real income but robs the future, whereas investing provides for the future to the detriment of the present. There is often misconception in reasoning about spending and investing. For example, Henry Ford's remark has been widely reported: "No successful boy ever saved any money. They spent it as fast as they got it for things to improve themselves." In this remark Mr. Ford drew no hard and fast line between spending for personal enjoyment and investment for improvement. And there is no hard and fast line. Spending merely means expending money primarily for more or less immediate enjoyment. Saving or investing is expending money for more or less deferred enjoyment. Consequently, much of what is called spending might legitimately be called investment. Even the money we spend for food, clothing and shelter is in a sense really partly invested, since our lives and capacity to work can be preserved only by means of these necessaries. Just so with a set of books, or any other durable good which increases the efficiency and hence the earning power of the purchaser; it is an example, not of spending for consumption merely, but of saving through investment. Mr. Ford cites the example of Thomas Edison as spending his early earnings as fast as he made them. But Edison did this, not for food and display, but for experimentation that resulted in time and labor saving inventions which have benefited everybody. His outlays were in a way investments.

Popular usage has devised many other terms and phrases in this field, most of which, like spending and investing, while containing meanings of importance, include Edition: current; Page: [115] also the alloy of misconception. Thus, the phrase "capital seeking investment" means that capitalists have property for which they desire, by exchange, to substitute other property, the income from which is more remote. It does not mean that there is any hard and fast line between invested and uninvested capital, much less does it mean that the inanimate capital has of itself any power to seek investment. Again, the phrase "saving capital out of income" means not spending—reserving money which would otherwise be spent for immediate enjoyable income in order to exchange it or invest it for remoter income; it does not mean the creation of new capital, though it may lead to that. Many needless controversies have centered about the phenomenon of saving chiefly because neither saving nor income was clearly defined.52

From what has been said it is clear that by buying and selling property an individual may change the conformation of his income stream precisely as though he were specifically lending or borrowing. Thus, suppose a man's original income stream is $1000 this year and $1500 next year, and suppose that he sells the title to this income stream, and, with the proceeds buys the title to another income stream yielding $1100 this year and $1395 next year. Although this man has not, nominally, borrowed $100 and repaid $105, he has done what amounts to the same thing; he has increased his income stream of this year by $100 and decreased that of next year by $105. The very same diagrams which were used Edition: current; Page: [116] before may equally well represent these operations. A man sells the income stream ABCD (Chart 5) and with the proceeds buys the stream EBD. The X' and X'' are, as before, $100 and $105, but now appear explicitly as differences in the value of two income streams, instead of appearing as direct loans and payments.